When the Consumer Finance Protection Bureau (CFPB) released its study on the use of pre-dispute arbitration (PDA) clauses earlier this year, many expected the CFPB to propose a ban on all PDAs in contracts for consumer finance products like credit cards, checking and deposit accounts, prepaid cards, money transfer services, certain auto loans, auto title loans, small dollar or payday loans, private student loans, and installment loans. On October 7, 2015, the CFPB partially validated those expectations when it announced it was considering proposing rules that would severely curtail – but not ban – the use of PDAs. The CFPB’s proposal will ban only PDAs that require consumers to waive their right to pursue class actions.
This proposed “class waiver” ban has received most of the critical attention since the announcement, but a second aspect of the CFPB’s proposal should also get the attention of the consumer finance community: the CFPB is proposing to require consumer finance companies to disclose to the CFPB any arbitration claims filed and awards issued. The CFPB would then publish the arbitration filings and awards on the CFPB website. This disclosure requirement will have a profound effect on consumer finance companies, especially those smaller and mid-size businesses that deal with repeat filings instead of class actions.
Importance of Confidentiality in Arbitration Proceedings
A business’s ability to maintain confidentiality of arbitration proceedings and awards cannot be discounted. A company’s ability to keep arbitration proceedings and awards confidential helps to prevent unfavorable facts or rulings from a prior case from being used against that company in a later case. Put another way, confidentiality of arbitration proceedings helps prevent the facts in Case A from forming the basis for the decision in Case B. Likewise, confidentiality helps to prevent an unfavorable award from Case A being used to extort a settlement in Case B. And on an even more nuanced level, a presumption of confidentiality helps reduce the cost of arbitration proceedings by reducing the need to negotiate special protections for the use of sensitive information disclosed in the proceedings.
Impact of CFPB’s Proposal
The CFPB’s proposal would negate or diminish the benefits that result from the presumption of confidentiality in arbitration proceedings by requiring public disclosure of arbitration proceedings and awards. By creating a database of arbitration filings and awards, the CFPB proposal would give de facto precedential value to prior arbitration. Even if a prior award does not have actual, legal binding effect on a future proceeding, the existence of a public database of awards will give plaintiffs’ attorneys additional ammunition to bring claims against consumer finance firms. For example, publication of awards could allow unscrupulous claimants or their attorneys to file arbitration demands based solely on a prior arbitration award in much the same way that unscrupulous plaintiffs’ attorneys file class action cases in the hope of reaching a settlement without reaching the merits of the case solely by virtue of the costs of defense.
Thus, while the proposed ban on class waivers in PDAs has received the bulk of the attention, changes to confidentiality rules for PDAs may have a similar impact on consumer finance businesses. These businesses – especially smaller and medium sized businesses that may not be directly affected by the class-waiver issue – should not lose sight of the confidentiality issues in the upcoming fight over the CFPB’s proposed rules.
