CFPB Issues Proposed Rule Seeking to Prohibit Mandatory Arbitration Clauses

CFPB Arbitration Agency Rule-Making & Guidance

On May 5, the CFPB released a highly anticipated proposed rule that would ban covered providers of most financial consumer products and services from including mandatory pre-dispute arbitration clauses in future consumer agreements. In addition, the proposed rule would require a covered provider involved in arbitration pursuant to a pre-dispute arbitration agreement to submit specified arbitral records to the CFPB. Following its March 2015 Arbitration Study, the CFPB asserts that the proposed rule would (i) protect consumers’ right to seek justice and relief in court; (ii) deter companies from violating the law, claiming “attention on the practices of one company can affect or influence their business practices and the business practices of other companies more broadly”; and (iii) increase transparency by requiring companies that use arbitration clauses to submit to the CFPB any claims filed or awards issued in arbitration. 

The CFPB officially announced its proposed rule during a May 5 field hearing in Albuquerque, New Mexico. In his opening remarks at the field hearing, CFPB Director Cordray opined that, “[i]f arbitration truly offers the benefits that its proponents claim, such as providing a less costly and more efficient means of dispute resolution, then it stands to reason that companies will continue to make it available.” Opponents of the proposal argue that, among other things, by requiring companies to insert language into arbitration clauses that explicitly states the clauses cannot be used to stop consumers from being part of a class action, the CFPB is, in fact, placing a de facto ban on arbitration. In a U.S. Chamber post, Executive Director of Center for Capital Markets Competitiveness Travis Norton, who was present at the CFPB’s field hearing, reasoned that companies can only bear the costs of arbitration because they do not simultaneously have to defend themselves in class actions, writing that “[n]o economically rational company (or individual) is going to spend additional money voluntarily [on arbitration] when it is forced to pay millions in litigation costs imposed by the broken class action system.”