On February 18, 2016, Director Richard Cordray of the Consumer Financial Protection Bureau (CFPB) gave a speech at the American Constitution Society, in which he repeatedly attacked arbitration provisions found in consumer agreements and set the stage for CFPB rulemaking that will likely greatly restrict the use of arbitration provisions going forward.

The CFPB’s Arbitration Study

Director Cordray’s remarks largely summarized the CFPB’s earlier statements and consideration of proposed rules related to the restriction of arbitration provisions in consumer agreements related to financial products and services.  For instance, in March 2015, pursuant to a mandate under The Dodd-Frank Wall Street Reform and Consumer Protection Act, the CFPB released its Arbitration Study: Report to Congress 2015, which is a report on a study conducted by the CFPB to evaluate the impact of arbitration provisions on consumers.

Among other things, the study concluded that

• arbitration clauses “restrict consumers’ relief for disputes with financial service providers by allowing companies to block group lawsuits;”
• most arbitration provisions include a prohibition against consumers bringing class actions;
• very few consumers individually pursue relief against businesses through arbitration or federal courts; and
• more than 75 percent of consumers in the credit card market did not know if they had agreed to arbitration in their credit card contract.

As a result of the study, the CFPB began considering rule proposals that would

• ban companies from including arbitration clauses that block class action lawsuits in their consumer contracts, unless and until the class certification is denied by the court or class claims are dismissed by the court;
• require companies to that use arbitration clauses for individual disputes to submit to the CFPB all arbitration claims and awards (which the CFPB may publish on its website for the public to view) so that the CFPB can ensure that the process is fair to consumers and determine whether further restrictions on arbitrations should be undertaken; and
• apply to nearly all consumer financial products and services that the CFPB regulates, including 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.

Arbitration Rulemaking is Imminent

Director Cordray’s latest comments make clear that restricting arbitration provisions, including banning class action waivers in arbitration provisions, is a key priority for the CFPB.  In fact, Director Cordray stated that “after carefully reflecting on the findings of our study, the Bureau has decided to launch a rulemaking process to protect consumers.”  The CFPB’s next step in that process is to “publish a Notice of Proposed Rulemaking and seek public comment from all stakeholders prior to finalizing a rule.”

Companies should pay close attention to the rulemaking process as it could have significant legal implications.  For example, if the CFPB passes arbitration restrictions that include class action waivers, companies that currently have such provisions in their consumer contracts will need to reevaluate those provisions.  One of the major considerations companies will face is whether to eliminate arbitration provisions completely from their contracts in order to preserve the right to maintain class action waivers.

The CFPB’s Arbitration Study is Marred with Controversy

Despite the CFPB’s reliance on its arbitration study to justify its current rulemaking efforts to restrict arbitration clauses, the study has been widely criticized as having relied on insufficient data and ignoring other information that would lead to conclusions not favorable to the CFPB’s initiative to eliminate class action waivers.  In other words, the CFPB is accused of using flawed and insufficient data to reach its desired outcome of restricting arbitration clauses and class action waivers.  One such critique, titled The Consumer Financial Protection Bureau’s Arbitration Study: A Summary and Critique, was issued by law professors from the University of Virginia School of Law and George Mason University School of Law.

You can view a transcript of Director Cordray’s remarks here: http://www.consumerfinance.gov/newsroom/prepared-remarks-of-cfpb-director-richard-cordray-at-the-american-constitution-society/.

You can view an outline of the proposals the CFPB is currently considering here: http://files.consumerfinance.gov/f/201510_cfpb_small-business-review-panel-packet-explaining-the-proposal-under-consideration.pdf.

You can view the CFPB’s March 2015 report on arbitration provisions here: http://www.consumerfinance.gov/reports/arbitration-study-report-to-congress-2015/.

You can view a critique of the CFPB’s March 2015 report here: http://mercatus.org/sites/default/files/Johnston-CFPB-Arbitration.pdf.