The Consumer Financial Protection Bureau (CFPB) recently proposed new regulations that expand the prohibition of arbitration agreements in consumer financial products and services. Arbitration provisions are already prohibited in residential mortgage agreements. However, the proposed rules significantly broaden these consumer protections, shifting focus to other consumer financial products and services overseen by the CFPB, including providers of consumer:

  • credit and checking accounts;
  • car leases;
  • debt management services;
  • credit reports;
  • payment processing services; and
  • debt collection.

The proposed rules will:

  • prohibit consumer finance companies from using mandatory binding arbitration agreements that block consumer class action lawsuits; and
  • require companies that use arbitration provisions in their agreements to submit arbitration claims, awards and records to the CFPB for abuse monitoring purposes.

The CFPB’s proposal is a response to its study on the use of mandatory arbitration provisions in consumer finance agreements. The study found most consumers are unaware their finance agreements contain arbitration provisions. And of those who are aware of the provision, the majority do not understand what the provision entails — or its very significant legal ramifications.

Further, the study found consumers were less likely to pursue a finance company through individual actions and more likely to obtain relief when taking part in a class action. Many finance companies leaned heavily on the arbitration provision as a method of keeping disputes out of court and saving money in the process.

Thus, the CFPB intends the rules to protect consumers’ rights to seek relief in court through class action lawsuits and curtail the over reliance of finance companies on arbitration as a means to block a proper hearing. The regulations are also expected to dissuade misconduct by holding finance companies accountable and providing increased transparency through the CFPB’s collection and monitoring of arbitration records.

Why focus on arbitration?

A closer look at how arbitration provisions function in finance agreements reveals the reasoning behind the CFPB’s tighter controls.

A mandatory arbitration provision in a consumer finance agreement grants a third-party arbitrator the authority to hear and resolve a dispute arising from the agreement. The arbitrator issues a binding award in favor of either the consumer or finance company as a remedy for the dispute.

Arbitration in real estate contracts: Will you sign away your right to your day in court?

In return for agreeing to arbitration, the opposing parties to the agreement relinquish their rights to settle their disputes in a court of law.

While these arbitration agreements offer a less costly and quicker alternative to a court trial, they also pose major disadvantages to consumers, including:

  • the critical loss of a consumer’s rightsto a trial by jury and to appeal the arbitrator’s decision;
  • the potential for egregious errors or incorrect application of the law by the arbitrator when issuing an award, which remains final and binding [Hall v. Superior Court (1993) 18 CA4th 427];
  • no requirement for legal precedence, thus risking unpredictable, “arbitrary” awards;
  • a lack of accountability as there is no requirement for arbitration proceedings to be published like court cases;
  • the risk of a biased arbitrator since arbitrators are not prohibited from having a connection to an individual in the case; and
  • the prevention of class action lawsuits by multiple consumers experiencing the same misconduct from a finance company, which reduces the likelihood of consumers obtaining relief.

Due to the risks arbitration poses to consumers and the need for a judge to protect the public, arbitration provisions are no longer permitted in trust deeds, consumer mortgage agreements and rental or lease agreements. [12 Code of Federal Regulations §1026.36(h)]

Editor’s note — Arbitration provisions have always been excluded from (RPI) Realty Publications, Inc. forms as a matter of policy since their creation in 1978.

The CFPB’s latest attention to other financial products and services is an attempt to broaden protections to ensure more consumers obtain relief when confronted by misconduct from a finance company — which is, after all, they very purpose of the CFPB.

Awaiting the next step

With the CFPB now hanging in the balance following the recent presidential election and talks of dismantling the agency, it is uncertain when or if these proposed rules will actually take effect.

According to the CFPB’s latest statement of regulatory priorities, the CFPB has received an influx of comments on the proposal and may develop a final rule in spring 2017.

In the meantime, opponents have issued rebuttals seeking to prevent implementation of the arbitration restrictions, claiming the rules will elevate costs to finance companies and consumers alike. However, the proposed rules remain a top priority for the CFPB and a critical step in protecting consumers from unscrupulous companies that seek to limit consumer access to thorough legal aid.