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CFPB and Banks Battle Over Arbitration Clauses, Class Actions

Philip R. Stein

After the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 authorized its creation, the Consumer Financial Protection Bureau (CFPB) began operating on July 21, 2011. In the more than five years since it opened its doors, the CFPB has rarely appeared shy or hesitant about asserting its authority. Critics—most often the businesses over which it exercises jurisdiction, or proponents of “limited government”—in fact have assailed the agency as a prime example of allegedly unaccountable bureaucrats run amok. Still, few steps taken by the CFPB have aroused its critics’ ire as much as its now-pending proposal to stop banks and other financial firms from placing class action bans in consumer contracts.

In May of this year, the CFPB unveiled a proposal to rein in financial services companies’ use of mandatory arbitration clauses in consumer contracts. The proposal does not ban mandatory arbitration clauses for individual claims, but calls for the removal of bans on consumers joining in class action lawsuits over alleged wrongful acts by financial services firms. Almost immediately, the proposal sparked an outcry in the financial services industry, and the passions on both sides of the key issues have not subsided since. The Bureau has already received an unusually large volume of comments, and the comment period continues. The proposal clearly alarmed the consumer financial services industry, with market participants such as banks and payday lenders arguing heatedly that eliminating the class action ban from arbitration clauses would essentially eliminate arbitration as an option for consumers. They see arbitration as being significantly more affordable and convenient for individuals who believe they have actionable claims to assert against the financial firms. Attempted class actions, a potential means of reducing costs for individual consumers, ultimately often fail to survive judicial scrutiny (due to legal and factual hurdles to class certification), but even having to challenge class certification can be costly enough to business defendants that they regularly contractually seek to preclude litigation—and say they will not pay for consumer arbitration programs if the threat of a class action in court remains intact.

But consumer advocates wish the CFPB had gone farther in its proposal against mandatory arbitration clauses. Their hope had been that the CFPB would seek to ban such clauses altogether, rather than simply proposing that those clauses that prevent class actions be eliminated. Nevertheless, consumer advocates strongly back the current proposal. Their principal concern as to this issue is that class action bans effective limit suits against banks, because most consumers will not pursue individual arbitration given the relatively small amounts at issue on an individual basis. It is only when a relatively large number of similarly-situated consumers can band their claims together, advocates say, that claims are likely to be asserted—and that banks and other financial firms are likely to be held to account.

What is odd—and, some would add, unseemly—about the CFPB’s aggressive push to rein in arbitration clauses is that this very issue has been addressed repeatedly in recent years by the United States Supreme Court. On each such occasion, the Supreme Court has upheld companies’ inclusion of mandatory arbitration clauses—indeed, the Court has specifically rejected the argument that class action bans in mandatory arbitration clauses mean that consumers cannot “effectively vindicate” their rights.

The CFPB and consumer advocates contend that those case precedents only make the need for agency action more urgent. Moreover, they point out, the Dodd-Frank Act gave the CFPB express authority to study the use of mandatory arbitration clauses in consumer contracts, and, if necessary, take action in an attempt to circumscribe their use.

The financial services industry is gearing up to protect its perceived right to continue to make use of such clauses and to avoid class actions by contractual decree. The battle lines are drawn, and a whole host of arguments—over costs, alleged governmental agency activism, consumer rights, and the utility of arbitration versus putative class actions—hang in the balance.

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