As the deadline for input nears, stakeholders on both sides of the issue filed comments weighing in on the Consumer Financial Protection Bureau’s (CFPB or the Bureau) proposal on arbitration.
What happened
In May, the Bureau released a proposed rule that would prohibit the inclusion of mandatory arbitration clauses in new contracts that foreclose class action lawsuits, although arbitration clauses could be used if the provision explicitly states that consumers are not prevented from taking part in class action litigation. The CFPB opened the proposal for public comment and received input from both ends of the spectrum.
A coalition of 18 state Attorneys General—including the AGs of California, Massachusetts, and New York—sent a letter to the CFPB in support of the proposal. In addition to urging the Bureau to promulgate a final rule, the Attorneys General took the proposal one step further to suggest that “consumers will be best served by the total prohibition of mandatory, pre-dispute arbitration clauses in consumer financial contracts and we encourage the Bureau to consider regulations to that effect.”
As drafted, the proposal still provides “a substantial benefit” to consumers, the AGs wrote, as it “will restore significant and much-needed consumer protections that have been eroded through the inclusion by financial services companies of mandatory arbitration clauses in their contracts with consumers.” Mandatory arbitration clauses have become ubiquitous, the Attorneys General argued, often presented in a manner that prevents consumers from understanding the impact on their rights.
The use of mandatory arbitration clauses waiving class proceedings has resulted in “consumers simply foregoing their rights to pursue claims for small amounts under financial services contracts,” according to the letter. Alternatively, class action litigation “is capable of providing real and meaningful benefits to harmed consumers.” The AGs cited examples such as a challenge to banking overdraft fees that resulted in a court ordering one bank to pay over $200 million in restitution in overdraft charges.
Such cases demonstrate that “restoring the right of consumers with common claims to pursue redress through class actions will provide a valuable check against corporate misconduct,” Massachusetts Attorney General Maura Healey wrote for the group. “The current legal landscape allows financial institutions to use arbitration clauses to suppress consumer claims.”
“The presence of mandatory pre-dispute arbitration clauses in contracts means that many serious violations of law will go undetected, undeterred, and unremedied, either because arbitrations will never be brought or because the evidence presented and decisions rendered in the private arbitration proceedings are not made public, have no binding precedential effect, and do little to discourage others from committing similar violations,” the AGs concluded.
On the other end of the spectrum, industry groups filed a joint letter arguing that the proposal is not in the public interest, will not protect consumers, and is not consistent with the CFPB’s empirical study of arbitration.
Instead, the proposed rule “would inflict serious financial harm,” the American Bankers Association, Consumer Bankers Association and The Financial Services Roundtable wrote to the Bureau, on consumers, the court system, and financial services providers.
Consumers will be forced to shoulder the increased costs to both state and federal court systems, which are estimated to face an additional 6,042 class actions every five years, as well as face the increased court backlogs that will delay resolution of all cases. Further, “[a]s customers of the providers, they will be saddled with higher prices and/or reduced services, because the billions of dollars in additional class action litigation costs will be passed through to them in whole or in part,” the groups wrote.
The Bureau itself concluded there is nothing per se harmful to consumers about arbitration, the organizations added, and its prohibition would result in a loss “to a fast, efficient, less expensive, and more convenient dispute resolution system” for consumers as well as a higher average recovery ($5,400 for arbitration as compared to $32.35 for a class action).
As for the court system, already overburdened and underfunded courts would face a significant increase in the number of cases on their dockets, the industry groups said. “The Bureau ignores the broader impact of the proposed rule on society,” according to the letter. “Permanently burdening the court system with 6,042 additional class actions every five years in the hope that a few might succeed—and return a negligible $32.35 to the average class member—is indisputably bad public policy and is clearly not in the public interest.”
Financial services providers will also face “unprecedented and staggering” costs, with the Bureau estimating providers will incur between $2.62 billion and $5.23 billion over a five-year basis to defend against the additional class actions.
The groups also challenged the CFPB study that formed the basis of the proposal, pointing to inconsistencies and arguing that the study was “incomplete” because it failed to consider consumer satisfaction with arbitration.
To read the letter from the state AGs, click here.
To read the letter from the industry groups, click here.
Why it matters
If the rule becomes final as is, the impact on class action litigation will be significant and detrimental to large swaths of the financial industry. And the Bureau’s bias—in favor of a litigation vehicle that does not appear to be benefiting consumers as much as the plaintiffs’ lawyers who file them—will be grist for many anticipated attacks in federal court. Comments on the controversial proposal were due at the end of August, and the Bureau will now consider the input received before it takes the next step. Given the breadth of opinions shared on the proposed rule, the CFPB faces some serious challenges not just to promulgation but also to enforcement of any finalized prohibition on arbitration.
