Consumer Financial Protection Bureau Issues Draft Rule on Bank Arbitration Clauses

Media outlets like the New York Times have long called attention to the increasingly widespread practice of  the use of arbitration clauses in contracts and agreements with businesses. In an October 31, 2015, Times article the author noted that even well-respected and consumer-friendly businesses like American Express have inserted clauses into their membership agreements that permit the company to “elect to resolve any claim by individual arbitration.” These clauses can result in potential litigants being required to address the matter through private arbitration. Clauses like these can also prevent consumers from joining in class-action lawsuits against a company.

Regardless of personal opinions regarding the effects of private arbitration clauses included in contracts for banks, credit card companies, and an array of other businesses, the Consumer Financial Protection Bureau (CFPB) is weighing-in on the issue. The CFPB has proposed a rule that would limit certain businesses’ ability to impose clauses of this type. This change would significantly alter the legal calculus and litigation risk faced by an array of business.

Banks and other financial businesses seeking guidance regarding the CFPB’s rule can rely on the advice and legal guidance provided by attorney William Heyman. For more than 20 years Mr. Heyman has provided strategic legal advice for businesses in the financial industry. To schedule a confidential consultation at the Law Offices of William S. Heyman call (410) 305-9287 or contact the firm online today.

CFPB Rule Would Prohibit Covered Financial Businesses from Utilizing Mandatory Arbitration Clauses

According to data provided by the CFPB, mandatory arbitration clauses requiring that the company, the consumer, or both can force a matter to be heard in private arbitration rather than through the courts is pervasive. The agency found in a 2015 study that the clauses were present in millions of consumer contracts. In fact, CFPB found that 53% of credit card issuers, 86% of large private student lenders, and 44% of banks taking FDIC insured deposits utilize these clauses. Furthermore, 92% of pre-paid credit card issuers make use of these agreements.

The CFPB’s proposed rule would affect an array of businesses and products. It would broadly prohibit the use of mandatory arbitration clauses by businesses offering credit cards, checking accounts, savings accounts, prepaid debit cards, installment loans, payday loans, student loans, money transfer services and other businesses. This proposed rule would expand on the CFPB’s previous action that already prohibits mortgage and home equity loan providers from using clauses of this type. Similarly, mandatory arbitration clauses are prohibited for payday loans, vehicle loans, and other products offered to military service members. This proposed rule would further extend the ban.

The CFPB was required by law to study the issue. Under Dodd-Frank, it is required to conduct research and authorized to engage in rulemaking.

Is the Prohibition on Mandatory Arbitrations Sound Policy?

Perhaps predictably there is a rather wide gulf in opinions on this issue. Financial industry proponents state that these clauses preserve the consumer’s right to address grievances while drastically reducing litigation costs. They claim that these clauses permit financial service industry companies to offer expanded services to consumers and state the proposed CFPB rule would result in a contracting of services and fewer options for consumers.

However, most studies find that consumers are broadly in favor of all or parts of these rules. For instance, one study found that 91% of consumers were in favor of having the right to join in a class action lawsuit to address perceived issues with a financial transaction. Overall, consumers seem to broadly support the proposed rule.  

Industry watchers have characterized the proposed rule as one of the most broad-reaching actions the CFPB could take. The new rule would apply to an array of industries under the CFPB’s oversight. However, most commenters stop short of stating whether the rule would have an overall positive or negative effect on the industry. However, most agree that consumers are likely to regain some bargaining power that has been eroded by the mandatory arbitration agreements. However, whether this regained bargaining power comes at significant cost to financial companies’ bottom-line remains to be seen. In any case, banks, credit card issuers, and all businesses subject to CFPB regulation should begin exploring the potential legal and other effects of a post mandatory arbitration action landscape.

Financial Businesses and Banks Can Rely on a Strategic Baltimore Business Litigation Attorney

For more than 20 years, Baltimore business lawyer William Heyman of the Law Firm of William S. Heyman has provided strategic, on-point guidance regarding legal developments and litigation for banks and other businesses in the financial industry. To schedule a confidential consultation call (410) 305-9287 or contact the firm online today.