In May, the Consumer Financial Protection Bureau (CFPB) delivered a much-needed win to consumers by leveling the first blow to mandatory arbitration. The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 authorizes the CFPB to limit arbitration in contracts for consumer financial products and services. After a multi-year analysis into the effects of arbitration on consumers and businesses, the CFPB proposed a rule prohibiting companies from using pre-dispute arbitration agreements to block consumer class actions and requiring providers to insert language into their arbitration agreements reflecting this limitation. To accomplish this, agreements between consumers and companies must state:
We agree that neither we nor anyone else will use this agreement to stop you from being part of a class action case in court. You may file a class action in court or you may be a member of a class action even if you do not file it.
While the CFPB’s proposed rule does not prohibit companies from forcing individuals to arbitrate their disputes, it does require the companies to provide information about the arbitration, including the initial claim and any counterclaim as well as any award issued. The proposed rule’s requirements on individual arbitration information disclosure allow the process to be more transparent for consumers as the CFPB plans to provide this information to the public on its website.
The CFPB published and provided its study to Congress in March 2015, and the results showed that mandatory arbitration provisions seriously undermine consumers’ rights and relief. Businesses won bigger judgments against consumers in arbitration than the consumers obtained in relief, according to the analysis. The CFPB highlighted the 2015 study’s finding that class actions bring “hundreds of millions of dollars in relief to millions of consumers each year and cause companies to alter their legally questionable conduct” and noted that mandatory pre-dispute arbitration clauses can block class actions.
This proposed rule finally provides a step in the right direction toward reigning in the abusive arbitration practices that many consumers have faced. Although the precise wording of the final rule is subject to change, the proposed rule demonstrates the CFPB’s commitment to protecting the Seventh Amendment rights of consumers. This rule provides a huge win for consumers, and although it only applies to the financial markets, hopefully it will pave the way for other industries as well.
There is a 90-day comment period after the proposed rule is published in the Federal Register. The effective date of the final rule is 30 days after final rule is published in Federal Register. Consistent with the Dodd-Frank Act, the proposed rule will apply only to agreements entered into 180 days after the effective date. The final rule will apply to agreements entered into 211 days after the final rule is published in the Federal Register.
The public is invited to comment on the proposed rule. It is published in the Federal Register and available for viewing at http://files.consumerfinance.gov/f/documents/CFPB_Arbitration_Agreements_Notice_of_Proposed_Rulemaking.pdf. If you need any more information on the proposed rule, or the subject matter generally, contact Leslie Pescia at 800-898-2034 or by email at Leslie.Pescia@beasleyallen.com.
You can find the May 5, 2016, proposed rule on the CFPB’s website at: http://files.consumerfinance.gov/f/documents/CFPB_Arbitration_Agreements_Notice_of_Proposed_Rulemaking.pdf . If you have any questions, contact Leslie Pescia, a lawyer in our firm’s Consumer Fraud and Commercial Litigation Section, at 800-898-2034 or by email at Leslie.Pescia@beasleyallen.com.
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