Thought Leadership

The Consumer Financial Protection Bureau Takes Aim at Class Action Waivers in Arbitration Clauses

October 16, 2015 Advisory

The Consumer Financial Protection Bureau (CFPB) last week announced its intent to launch a rulemaking process that would prohibit companies from using arbitration clauses that waive class action lawsuits. The CFPB's proposal would apply generally to all of the consumer financial products and services that the CFPB oversees, including credit cards, checking and deposit accounts, certain auto loans, small-dollar or payday loans, private student loans, and some other products and services as well. 

A section of the Dodd-Frank Act directed CFPB to study "the use of agreements providing for arbitration of any future dispute...in connection with the offering or providing of consumer financial products or services" and to provide a report to Congress on that subject. The CFPB published its Arbitration Study in March of this year, and relied upon the study to support the rules proposals it announced on October 7, 2015. 

The CFPB's proposed rules will undo the U.S. Supreme Court's AT&T Mobility v. Concepcion decision, and weaken the protections afforded by the Federal Arbitration Act. In Concepcion, the Supreme Court ruled, by a 5-4 margin, that the Federal Arbitration Act preempts state laws that prohibit contracts from disallowing class-wide arbitration. As a result of Concepcion, and other Supreme Court decisions on the subject over the past five years, many companies have modified their arbitration agreements to include specific language prohibiting class or mass action claims. Businesses that include class action waivers in their arbitration agreements can require consumers to bring claims only in individual arbitrations, rather than in court as part of class action litigation. 

Under the CFPB's proposal, companies could still use an arbitration clause, but only to the extent that the clause applies on an individual basis. Further, companies would have to say explicitly that the arbitration clause does not apply to cases brought on behalf of a class unless and until class certification is denied by the court or the class claims are dismissed. In other words, at least at this time, the CFPB is not attempting to prohibit the use of arbitration clauses totally, just those that would preclude customers from bringing class-wide claims. 

If adopted, the CFPB’s proposed rules would have far reaching effects on businesses that rely on arbitration clauses in their contracts. Companies that rely on arbitration agreements in their contracts should seek legal counsel as to whether the scope of the CFPB's proposed rules may impact their company’s use of arbitration clauses. Companies subject to the CFPB's rules should consider submitting comments to the CFPB on how the proposed rules will impact their company.

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