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New CFPB Rule Restricts Bank Arbitration Clauses

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  • Posted on: Jul 16 2017

The Consumer Financial Protection Bureau (CFPB) has released a highly anticipated rule that bars banks and credit card companies from using arbitration clauses to prevent customers from joining class action lawsuits. The rule was initially proposed by CFPB Director Richard Cordray last year and is slated to go into effect in eight months.

Currently, mandatory arbitration clauses are used in an array of financial products and the rule applies to new agreements for credit cards, auto loans, payday loans and services that provide third-party billing.

“These clauses allow companies to avoid accountability by blocking group lawsuits and forcing people to go it alone or give up,” CFPB Director Richard Cordray said in a statement.

The CFPB was authorized to review the effect of these clauses by the Dodd Frank Act. The bureau’s study indicated that hundreds of millions of contracts rely on arbitration clauses that have kept disputes out of court nearly two-thirds of the time, not only for class actions but individual actions against financial service providers as well.

“Our new rule will stop companies from sidestepping the courts and ensure that people who are harmed together can take action together,” said Cordray

Although arbitration clauses are still permitted, the new rule requires companies to state that consumers cannot be stopped from joining class action cases. Instead, customers must be given the option of pursuing arbitration or joining a class action in the event of a dispute.

Opposition to the New Rule
Congress now has 60 legislative days to overturn the rule and GOP lawmakers may utilize the Congressional Review Act to challenge the regulation (as Republicans have done with a number of rules issued in the waning days of the Obama Administration).

In addition, Keith Noreika, the acting Comptroller of Currency, previously sent a letter to Cordray raising concerns about the new rule and asked the CFPB to share data that was relied on to formulate the new rule; the agency did not provide the data. Noreika also noted that the Dodd-Frank Act authorizes the Financial Stability Oversight Council to set aside any CFPB rule that can be shown to put the safety of the wider financial system at risk.

The Takeaway
Although critics of the rule argue that class actions are costly, result in lower awards for consumers and ultimately benefit attorneys that bring these cases, proponents contend that consumers have a right to be heard in court and the class actions serve to correct bad corporate behavior. At this juncture, It remains to be seen whether GOP lawmakers will set aside the rule or whether lobbying groups such as the U.S. Chamber of Commerce will take legal action to block the rule.

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