In October 2015, the Consumer Financial Protection Bureau (CFPB) announced that it was considering proposing rules that would ban the use of arbitration clauses in financial agreements after it concluded that class litigations may benefit consumers "through the deterrent impact of those settlement agreements on other companies' conduct." After more than six months of waiting, the CFPB finally unveiled a three-hundred seventy-five page proposed reform on May 5, 2016. Simply put, should the rules be adopted, there will be widespread impact on both the financial and legal sectors.
In the aftermath of the recession, Congress passed the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 in order to establish more stringent regulations on financial institutions in the United States. One of the agencies created from passage of the Act was the Consumer Financial Protection Bureau which is responsible for consumer protection in relation to banks, credit unions, securities firms, payday lenders, mortgage-servicing operations, foreclosure relief services, debt collectors, and other financial companies. Under Section 1028 of the Act, the CFPB is required to not only study pre-dispute arbitration agreements related to financial companies within its jurisdiction, it is explicitly empowered to regulate the use of pre-dispute arbitration agreements.
In compliance with the requirements of Section 1028, the CFPB conducted a lengthy study and published its findings back in March 2015. The study found that arbitration clauses were used in hundreds of millions of consumer contracts including 53% of outstanding credit card loans, 86% of loans from student loan lenders, 44% of insured deposits from financial institutions, 92% of prepaid card agreements, and up to 99% of payday loan contracts. Furthermore, the study showed that very few consumers ever brought individual actions against their financial service providers, either in court or in arbitration, but that class actions succeeded in bringing hundreds of millions of dollars in relief to millions of consumers each year. Specifically, the study estimated that 160 million class members were eligible for relief during the period of the CFPB's study with settlement totaling approximately $2.7 billion in cash, in-kind relief, and attorney's fees and expenses. Based on the results of the study, the CFPB has proposed new rules to drastically limit arbitration clauses in financial service or product agreements covering credit cards, checking and deposit accounts, prepaid cards, money-transfer services, certain auto and auto-title loans, payday and installment loans, and student loans.
Under the proposed rule, pre-dispute arbitration agreements could still be utilized, but cannot include any language that blocks consumer class action suits. The rule even goes so far as to require explicit language that memorializes the fact that the provision does not limit the ability of a consumer to bring, or participate in, a class action litigation. Additionally, in the instance that an arbitration provision is included, the proposed rule requires that certain records relating to arbital proceedings arising from the agreement be provided to the CFPB so it can continue to monitor developments that may raise consumer protection concerns.
As expected, the response to the CFPB's proposed rule has been met with a mixed reception. On the one hand, consumer advocacy groups are lauding the proposed changes and believe that the threat of litigation will deter financial institutions from abusing and bullying consumers. In contrast, there is concern that the rules will actually hurt consumers in the long run as increased litigations will result in financial institutions offsetting the costs with higher fees, higher interest rates, and limiting access to services and products such as credit.
However, should the CFPB's proposed rule be adopted, one thing is for certain; the floodgates for class action litigations against financial service providers will be opened and widespread across the country. Unfortunately, the real winners from such lawsuits won't be the "victims" of the alleged unfair practices by the finance industry, but the attorneys representing them. By way of example, Uber Technologies, Inc., the ride-hailing service that has made headlines in recent months, settled two class action lawsuits in relation to allegations that Uber drivers were misclassified as independent contractors rather than employees. Based on the proposed settlement of up to $100 million, individual class members will receive compensation ranging from $10.00 up to $8,000.00 depending on the number of eligible claims that are filed. However, the attorneys' who filed the lawsuit on behalf of the class members are set to receive $25 million in fees, more than three thousand times the amount of the highest compensated class member.
Currently, the U.S. House Financial Services Committee is set to hold a hearing to review the CFPB's proposed rule on May 18, 2016. Additionally, the CFPB will accept public comment for a period of 90 days after publication of the proposed rule in the Federal Register. Once the public comment period has closed, the final rule will be effective 90 days thereafter.