The New CFPB Rule Everyone Is Talking About

Wooden gavel laying on American dollars

Last week, the Consumer Financial Protection Bureau (commonly referred to by its acronym, CFPB) announced a new rule that would limit the use of mandatory arbitration clauses in some consumer financial services agreements. This is a pretty big deal for many consumers and lenders.

Here’s a bit of background:

As you likely recall, the United States faced a major economic crisis beginning around 2007. Most people agree numerous factors caused this crisis, but home loans and financial services seemed to be at the core of the problem. As a result, Congress passed a series of bills aimed at preventing a future economic crisis. In 2010, Congress passed the Dodd-Frank Wall Street Reform and Consumer Protection Act (commonly referred to as Dodd-Frank). One element of the Dodd-Frank Bill is the creation of a new government agency, the CFPB. The CFPB is the federal government’s consumer protection enforcement center and it consolidates the enforcement authority that was previously shared by several other government agencies. In their own words, the CFPB is the “U.S. government agency that makes sure banks, lenders, and other financial companies treat you fairly.” Dodd Frank specifically directed the CFPB to study the implications of arbitration in consumer contracts and possibly spell out new rules.
Also, here is a bit of background on arbitration. Black’s Law Dictionary (the trusted source for many attorneys) defines arbitration as: “[t]he investigation and determination of a matter or matters of difference between contending parties, by one or more unofficial persons, chosen by the parties, and called ‘arbitrators,’ or ‘referees.”’ I define arbitration as: a process to settle disputes, outside of a court proceeding, that regularly involves a mini-trial. Arbitration proceedings have many of the elements of a court proceeding but are often less formal, less expensive, and much faster.

So why is this CFPB rule such a big deal?

  1. Frequently, arbitration happens in private and no information can be shared publically; all the parties are bound by confidentiality.
  2. Generally, arbitration decisions cannot be appealed. This means that businesses can avoid the embarrassment of a public trial and can avoid the cost of a protracted litigation process.
  3. Also, many arbitration agreements preclude consumers from joining a class action lawsuit. This is a hot-button topic from the consumer perspective particularly troubling in the consumer context, where an individual’s damages might not be substantial enough to justify individual litigation, but often thousands of consumers have been injured in the same way and a class action would be the most efficient means of resolving a dispute. From the lender perspective, however, whether the claims are meritorious or not, class action lawsuits expose lenders to huge risk.

Consumer advocates argue that arbitration makes it nearly impossible for many consumers to seek justice, because it’s not economically feasible unless consumers can join together and bring a class case. The CFPB seems to agree with this argument. Alternatively, many businesses argue that the CFPB study is flawed and that class actions are disastrous for businesses and the economy.

Wherever you land on this issue, the new CFPB rule is certain to have huge impact on consumers and businesses in the consumer financial services industry.

Check out what consumer advocates have to say: http://www.publicjustice.net/new-rule-fighting-fine-print/

Check out what the U.S. Chamber of Commerce has to say: https://www.uschamber.com/issue-brief/the-cfpb-s-flawed-arbitration-study

For more information, see these articles:

NPR

The Wall Street Journal

The Seattle Times