CFPB Proposal Would Allow Consumers to Forego Arbitration in Favor of Class Litigation

The Consumer Financial Protection Bureau (“CFPB”) is reportedly considering implementing new regulations that would stop banks and other financial institutions from requiring consumers to settle disputes through binding arbitration. Currently, most consumers agree to resolve all fee and other disputes with financial institutions through arbitral proceedings when opening their accounts. Although engaging in arbitral proceedings normally saves both parties time and money, critics argue the current process is unfair to banking customers. For example, some consumer advocates apparently believe repeat party banking institutions stop using arbitrators who issue awards that are unfavorable to the financial institution and instead choose to shop around for a different arbitrator for future proceedings.

Typically, an arbitration award cannot be appealed. According to CFPB Director Richard Cordray, the current system not only encourages arbitrators to rule in favor of banks, but also allows them to “sidestep the legal system, avoid big refunds, and continue to pursue profitable practices that may violate the law and harm countless consumers.” Still, the CFBP proposal would not wholly ban arbitration. Instead, it would provide consumers with the opportunity to engage in class-action litigation against financial institutions in certain instances.

Despite that consumer advocates are in favor of allowing bank customers to file suit against their financial institution or credit card companies, the CFPB’s proposal is expected to incur significant resistance from both the financial industry and the nation’s legislators. Texas Representative Jeb Hensarling, Chair of the House Financial Services Committee, stated “Forcing consumers to hire expensive lawyers and go to trial rather than use a low-cost dispute resolution system harms the very low and middle income consumers the CFPB should be helping.”

An article that was recently published in the Houston Chronicle states,

The Dodd-Frank Act required the CFPB to study forced arbitration and submit a report to Congress. In its final report, released in March, the CFPB found companies widely used arbitration clauses to dismiss class action lawsuits and, despite being on the majority of financial products, three out of four Americans did not know they were subject to arbitration.

The CFPB held an open meeting on the proposal in Denver on Wednesday. While there were some critics of the plan, the overwhelming majority of audience members and participants were in favor of the CFPB weighing in on the issue.

What do you think about the CFPB’s proposal? We would love to hear your thoughts!

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