Ban Class-Action Waivers in Consumer Financial Products

The Consumer Financial Protection Bureau (CFPB) is moving forward on plans to ban companies from including arbitration clauses that block class action lawsuits in their consumer financial products contracts.

Should the rule proposal become final, companies that focus on consumer financial products should expect to see a rise in class-action litigation.

The Dodd-Frank Act ordered the CFPB to study the use of arbitration clauses in consumer financial products and authorized the agency to issue regulations consistent with the study’s findings. In March, the CFPB published its findings, which included the conclusion that arbitration clauses restrict consumers’ relief for disputes with financial service providers by allowing companies to block group lawsuits.

Earlier this month, the CFPB outlined several regulatory proposals that it plans to submit to a Small Business Review Panel. This is the first step in the rulemaking process, which will likely take several years to complete. The new rules are also expected to be forward-looking and will not apply to existing contracts.

Most notably, the proposed rules would prohibit class action waivers in contracts for consumer financial products and services, including credit cards, checking and deposit accounts, prepaid cards, money transfer services, certain auto loans, auto title loans, small dollar or payday loans, private student loans, and installment loans. According CFPB Director Richard Cordray, arbitration clauses that block class-action litigation operate as a “free pass that prevents consumers from holding their financial providers directly accountable for the harm they cause when they violate the law.”

In good news for businesses, the CFPB proposals under consideration not to completely ban arbitration clauses. However, such clauses would have to explicitly state that they do not apply to cases filed as class actions unless and until the class certification is denied by the court or the class claims are dismissed in court. In addition, businesses that choose to use arbitration clauses for individual disputes must submit to the CFPB the arbitration claims filed and awards issued. According to the CFPB, the information provided would enable the CFPB to better understand and monitor arbitration cases.