CFPB Issues New Arbitration Rule – Are the Flood Gates Opening for Consumer Class Actions against Financial Institutions?

By: Matthew Ferguson and Michael Sabino

On July 10, 2017, the Consumer Financial Protection Bureau (CFPB) issued a rule (full text here), which prohibits many financial institutions from including mandatory arbitration provisions that limit their customers’ ability to join class action litigation. The rule, which may become effective as early as 2018 and only applies to new accounts opened after the effective date, appears to apply to a broad range of financial institutions, including banks, credit card and consumer financing companies, debt management and collections operations, auto leasing companies, and other entities that provide fund transfers and money exchanges (i.e., check cashing services). However, there may be opposition in Congress, as well as by the current administration, to the rule’s ultimate implementation.

The rule further requires impacted financial institutions using arbitration clauses in consumer disputes to submit records relating to arbitration and court proceedings to the CFPB. The CFPB intends to review the collected information to monitor the proceedings to determine whether additional consumer protections are warranted, or if further CFPB action is required.

The enactment of the rule stemmed from the Dodd-Frank Act and instructions from Congress in 2010, which led the CFPB to conduct a study of pre-dispute arbitration agreements between consumers and financial institutions. The study found that in addition to many consumers opting to forgo a formal dispute process with financial service providers, many contracts for consumer financial products and services included mandatory arbitration clauses, which blocked the customers’ ability to join related class action proceedings. The CFPB concluded that class actions provide a more effective means for consumers to challenge potentially problematic and abusive practices by financial service providers than arbitration clauses. Additionally, the agency determined that the arbitration clauses effectively blocked similarly situated consumers from collectively pursuing common disputes in court. The CFPB also found that the use of the arbitration clauses insulated financial institutions from significant consumer-related awards and judgments, which failed to discourage harmful practices from continuing.

If the rule becomes effective, it is likely to impact a wide-array of both small and large financial institutions. By forcibly removing the ability of the financial institutions to arbitrate customer claims, it is foreseeable that the frequency and severity of consumer-oriented class actions faced by these financial institutions will sharply increase. Such an increase in consumer-oriented litigation against effected financial institutions may have a significant impact on those entities’ respective FI, E&O and D&O insurers, who may see an influx of larger claims stemming from class action litigation, instead of smaller and less costly individual arbitrations.

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