United States consumer agency seeks to ban mandatory arbitration


This article previously appeared on the Holland & Knight Consumer Protection Defense & Compliance blog and is re-published here with permission.

The CFPB's rule could be a win for consumers. Now, they're looking to do the same to a rule issued Monday that would let consumers band together to sue their banks or credit card companies rather than use a mediator to resolve a dispute. In arbitration, both the evidence and the arbitrator's final decision are typically confidential among the parties.

Consumer groups and Democratic lawmakers, however, have cheered the CFPB's rule. Since its inception, the CFPB has been tasked with reviewing arbitration clauses in financial contracts. He also pioneered the use of pre-dispute arbitration provisions in consumer contracts. Banks, credit-card companies, and other financial-services firms will no longer be able to force individual consumers into corporate-friendly mandatory arbitration hearings to settle disputes. Meanwhile, over that same period, 78 consumers participated in arbitration, recovering a total of $360,000. While the award to an individual consumer in a class action averages $29 per consumer, the award to an individual consumer in an arbitration averages $4,615 per consumer.

Should the rule make it past any court challenges - and if Cordray's actions aren't invalidated by the PHH case - companies will need to get used to the courtroom.

The arbitration process is rigged to favor the financial institution. The rule is not an outright ban on arbitration clauses. The rule will take effect in 60 days (September 2017) and will apply to contracts that begin 180 days later (March 2018).

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Absent the assurance of legal rights, contracts can be used to abuse one party's dominance over another.

"This rule is just a large gift for class action lawyers". "You may file a class action in court or you may be a member of a class action filed by someone else". The CFPB will also place additional requirements for documentation and reporting measures for when companies do undergo arbitration. The CFPB intends to use the information it collects to monitor arbitral and court proceedings. Those documents would then be posted on the agency's website with identifying information redacted. "Our new rule will stop companies from sidestepping the courts and ensure that people who are harmed together can take action together", said the CFPB's director, Richard Cordray. Class action waivers deny consumers their day in court, help companies avoid paying out refunds and allow them to continue harmful practices, the CFPB says.

For more news, visit Bloomberg. But it nearly didn't happen: With the election of Donald Trump and Republican control of the White House, the CFPB faces major changes, including the expiration of Cordray's term next year.

But the move by the CFPB - a high-profile independent agency created under President Obama - is likely to face pushback from the banking industry and the Republican-controlled Congress, which sees the CFPB as an agency with too much power and too little oversight. "Arbitration is a convenient, efficient and fair method of resolving disputes at a fraction of the cost of expensive litigation". The administration has called for the agency's restructuring and the president's budget calls the agency an "unaccountable bureaucracy".

In May, the entire roster of D.C. Circuit judges heard oral arguments as it reconsiders the case.