The Consumer Financial Protection Bureau’s proposal to limit the use of arbitration clauses could sweep community financial institutions into the cottage industry of class-action lawsuits, but if you want to know how the little guys might fare in this latest round of rulemaking, you’ll have to read the fine print.
By the time you read these words, the bureau will likely be moving ahead with its small business review panel, the next phase of rulemaking for an Oct. 7 announcement that it would be taking action on arbitration clauses.
“Companies are using the arbitration clause as a free pass to sidestep the courts and avoid accountability for wrongdoing,” CFPB Director Richard Cordray said in announcing the proposal. “The proposals under consideration would ban arbitration clauses that block group lawsuits so that consumers can take companies to court to seek the relief they deserve.”
The bureau further said its proposal would require arbitration clauses to explicitly tell consumers that those clauses do not apply to cases filed as class actions unless a court denies class certification.
Citing its own study of the subject, completed earlier this year, the bureau said that while arbitration agreements are pervasive in credit card and student loan contracts, among others, very few consumers individually seek relief through arbitration or the federal court system. Further, the bureau said that more than 75 percent of consumers in the credit card market did not know if their contract had included an arbitration clause and fewer than 7 percent knew that an arbitration clause could restrict their ability to sue in court.
The bureau clarified that it is not seeking to ban the use of all pre-dispute arbitration agreements – just those that would block class-action litigation.
While it’s easy (not to mention popular) to scorch financial services companies for including those clauses in their agreements, bankers might point out that arbitration is intended to resolve disputes more quickly and cheaply than a trial in court – and further, that arbitration clauses put a limit on more frivolous class-action suits.
The Devil’s In The Details
The Consumer Bankers Association immediately blasted the proposal as siding with trial attorneys over consumer interests, perhaps a nod to litigants who are only happy to use well-intentioned consumer protection laws for their own profit, and the Financial Services Roundtable similarly derided the bureau’s latest proposal, arguing that a ban on arbitration clauses would “only benefit plaintiff lawyers.”
“The idea that the CFPB would restrict the use of these arbitration clauses is not surprising to me. The mission of the CFPB is to protect consumers and this is totally in line with their mission,” said Kevin J. Handly, a Boston-based banking lawyer. “On the other hand, I think probably most financial institutions, including community banks, would consider this an adverse development. They already feel like they are burdened by excessive litigation and regulation and that the arbitration clause is one mechanism by which they can reduce the litigation that they’re subjected to.”
Of course, the Massachusetts Bankers Association (MBA) is keeping an eye on the proposal, said Senior Vice President Jon Skarin.
“I don’t know exactly how many of our banks have arbitration clauses in their deposit account agreements, but that’s an area we would have concerns about potentially,” he said. “A lot of it’s going to be in how they craft the details as they go forward.”
Andrew Glass, a partner at K&L Gates who often represents financial institutions in class-action suits, said the rule could have the effect of discouraging businesses from including arbitration clauses entirely in their consumer services agreements.
“I would say arbitration agreements would be permitted, but they couldn’t include a class waiver provision, and so it would make compelling arbitration on an individual basis difficult,” Glass remarked. “After the regulation went into effect, there would be a question about, could a small institution continue to maintain its current form of services agreement with new customers.”
Before the bureau can issue a more formal rule, it must convene a small business review panel, after which point it will issue a more formal proposal and invite comments.
Skarin said he expects the MBA will have some feedback for the bureau at that point, and Glass said he would urge small financial institutions to chime in now while the sausage is still being made.
“I think most banks try very earnestly not to violate consumer rights and try to do right by their customers when a violation is identified,” Handly said. “I think probably most financial institutions and their counsel would say it’s really not necessary for the CFPB to so restrict arbitration clauses in consumer agreements.”
