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Consumer Watchdog Looks to Limit Mandatory Arbitration Clauses

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  • Posted on: May 31 2016

Do mandatory arbitration clauses prevent class action lawsuits?

The Consumer Financial Protection Bureau recently proposed a rule that would scale back mandatory arbitration clauses used by banks and other financial firms to limit their exposure to legal liabilities. While the new rule continues to allow arbitration in cases pursued by individual consumers, class actions would no longer be prevented.

“Many banks and financial companies avoid accountability by putting arbitration clauses in their contracts that block groups of their customers from suing them,” CFPB Director Richard Cordray said in a statement.

The rule applies to a wide range of consumer financial products and services currently under the Bureau’s regulatory umbrella, including lending, storing and moving or exchanging money. The CFPB announced the highly anticipated rule after years of study required by the Dodd-Frank law. There is a 90 day comment period in play until August 5th, and a strong push back by industry groups is highly likely.

“Our proposal seeks comment on whether to ban this contract gotcha that effectively denies groups of consumers the right to seek justice and relief for wrongdoing,” said Cordray.

While arbitration clauses could still be included in contracts, they would have to state that arbitration cannot be used to stop consumers from joining a class action. In this regard, the CFPB will require  specific language to be used. The Bureau also intends to monitor the arbitration process by requiring firms to submit materials used in these proceedings.

Some critics argue that lifting the ban will lead to a wave of litigation and that the only beneficiaries will be trial attorneys. Industry groups opposed to the proposed rule also note that a CFPB study found consumers using arbitration have more successful outcomes than members of a class-action.

On the other hand, proponents of the rule contend low income families and students are frequently sold products with higher interest rates. Because they are more vulnerable these groups are forced to accept the restrictions of mandatory arbitration and forfeit their basic legal rights in the process.

At this juncture, it is unclear if and when the new rule will be approved. Given the tenor of the times under the Dodd-Frank regime, however, it is likely that class action lawsuits will no longer be prevented by mandatory arbitration clauses. This will invariably pose risk management issues across the financial services sector. Moreover, banks and financial firms will be faced with increased compliance costs associated with revising contracts to contain the required language as well as providing documentation to the CFPB regarding arbitration proceedings. For these reasons, any business engaged in selling financial products to consumers is well advised to engage the services of an experienced arbitration attorney to prepare for the new rule.

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