Consumer Financial Protection Bureau Proposal Would Ban Mandatory Arbitration Provisions in Most Financial Contracts

The Consumer Financial Protection Bureau (“CFPB”) has proposed a plan to ban mandatory arbitration provisions in most consumer contracts entered into with banking institutions and credit card companies. The proposed rule would allow consumers to file class-action lawsuits when a dispute related to such contracts arises.  Although the CFPB proposal is currently open for public comment, it is likely to be adopted as such rule changes do not require legislative approval.

The CFPB’s proposal follows closely behind a Congressional prohibition on arbitration agreements in the residential mortgage market and a recent United States Department of Education proposal to adopt measures designed to constrain the use of mandatory arbitration provisions by for-profit colleges that receive federal student aid.

According to the CFPB:

The CFPB proposal is seeking comment on a proposal to prohibit companies from putting mandatory arbitration clauses in new contracts that prevent class action lawsuits. The proposal would open up the legal system to consumers so they could file a class action or join a class action when someone else files it. Under the proposal, companies would still be able to include arbitration clauses in their contracts. However, for contracts subject to the proposal, the clauses would have to say explicitly that they cannot be used to stop consumers from being part of a class action in court. The proposal would provide the specific language that companies must use.

The proposal would also require companies with arbitration clauses to submit to the CFPB claims, awards, and certain related materials that are filed in arbitration cases. This would allow the Bureau to monitor consumer finance arbitrations to ensure that the arbitration process is fair for consumers. The Bureau is also considering publishing information it would collect in some form so the public can monitor the arbitration process as well.

Opponents of the CFPB’s proposal argue there would be a dramatic increase in protracted litigation if such a rule were adopted.  Some also reportedly believe the measure would result in little benefit to consumers and a potential windfall to plaintiffs’ attorneys.

If adopted, the proposed mandatory arbitration ban would only apply to new consumer accounts.  It would not have an effect on existing credit card and other financial contracts. The entire proposed rule is available for review on the CFPB’s website.

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