It may not be an outright ban on arbitration clauses, but the Consumer Financial Protection Bureau’s impending proposal to enable more class-action lawsuits comes close.

The agency’s long-awaited plan, which was unveiled early Wednesday, would eliminate arbitration clauses in product agreements that prevent consumers from banding together in litigation. Lenders would still be able to require arbitration clauses for individual claims but the CFPB is considering requiring more disclosure in that area.

CFPB Director Richard Cordray said the industry’s use of arbitration clauses – which, according to the agency, consumers are rarely aware of beforehand – amounts to a “free pass” to avoid class actions.

“Group lawsuits can result in substantial relief for many consumers and create the leverage to bring about much-needed changes in business practices,” Cordray said in prepared remarks for a hearing scheduled for Denver on Wednesday. “But by inserting the free pass into their consumer financial contracts, companies can sidestep the legal system, avoid big refunds, and continue to pursue profitable practices that may violate the law and harm consumers on a large scale.”

The bureau released a 32-page outline of the proposal under consideration, which must still be examined by a small-business review panel before it is formally released. It comes months after the agency produced a study showing that less than 7% of those subject to an arbitration clause knew they were unable to sue. The Dodd-Frank Act required a study of arbitration clauses and authorized the bureau to write rules.

The agency said its proposal would require arbitration clauses to explicitly say that they do not apply in class action cases. Meanwhile, firms still using such clauses for individuals would have to provide the CFPB with information about those claims and the amount of resulting awards given to consumers. The bureau said it is considering whether to publish claim information on its website.

The new restrictions, which are likely to draw industry protests, would apply to a whole host of consumer financial products, including credit cards, automobile leases and products subject to the Electronic Fund Transfer Act, as well as to debt collectors.

“The bureau is concerned that arbitration agreements effectively prohibit class proceedings, including litigation, and that they prevent many consumers from obtaining remedies when they are harmed by their providers of consumer financial products or services,” the outline said.

But arbitration agreements limited to individual claims also still have the potential for consumer harm, the CFPB said.

“Thus, the bureau is considering a limited intervention that would serve to deter the emergence of such unfair arbitrations and also to shed sunlight on any unfairness that might emerge, while at the same time would impose minimal regulatory burdens on current arbitration activity,” the agency said.

The effective date of the proposal would be 30 days after its publication, and the regulation would apply to arbitration agreements entered into 180 days after the effective date.

The agency said it had considered alternative approaches, such as banning all arbitration clauses entirely, or at the other extreme allowing them for class disputes as long as arbitration proceedings met minimum standards of fairness.

But the resulting plan appeared to take into account the greater likelihood of consumers filing lawsuits as part of a class rather than individually. The CFPB study found that relatively few consumers seek individual relief either through arbitration or the federal courts. The claims in individual cases are often small and it can be hard for consumers to find attorneys in those situations to agree to take the case.

“The bureau believes that consumers are better protected and the market is fairer for those companies that comply with the law when consumers also are able to obtain relief by grouping their own disputes against providers of consumer financial products or services in private proceedings, including litigation,” the agency said in the outline.

Yet any regulation may still be a ways off due to the statutory requirement for the CFPB, in certain cases, to facilitate meetings with representatives of small firms to gather feedback on developing policy before it is officially released. The process opens the door to potential changes. In March, the agency issued its proposed framework for regulating payday lenders, but it has still not formally proposed anything as the policy came under the examination of a small-business review panel.

Industry representatives have in the past voiced concerns about significantly curtailing arbitration proceedings.

Upon the release of the CFPB study in March, Alan Kaplinsky of the law firm Ballard Spahr said it may be premature to judge the success of the arbitration process since it is still new compared with the court system.

"In my view, it's not really probative to say today that consumers must not like arbitration because there are relatively fewer arbitrations compared to the number of court cases because the benefits of arbitration are only beginning to be realized," he said.

 

 

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