Groups Praise, Question Financial Watchdog’s Mandatory Arbitration Ban

A decision by the Consumer Financial Protection Bureau that financial companies may not require consumers to resolve disputes in arbitration, rather than in class action lawsuits, prompted strong criticism from industry groups, while consumer advocates cheered the new rule.

A move by the Consumer Financial Protection Bureau to ban mandatory arbitration in consumer contracts with financial companies has groups on all sides of the issue speaking up this week.

On Monday, the CFPB released a final rule prohibiting clauses that require consumer disputes to be resolved in arbitration rather than in court, clauses that banks and credit card companies commonly include in contracts for financial products and services. Financial institutions say arbitration provides a fair and cost-efficient way to resolve disputes without litigation, but but critics of the clauses say they limit consumer rights—particularly, the right to band together to bring class action lawsuits alleging wrongdoing by financial institutions.

“Arbitration clauses in contracts for products like bank accounts and credit cards make it nearly impossible for people to take companies to court when things go wrong,” CFPB Director Richard Cordray said in a news release on Monday. “These clauses allow companies to avoid accountability by blocking group lawsuits and forcing people to go it alone or give up. Our new rule will stop companies from sidestepping the courts and ensure that people who are harmed together can take action together.

BAnks: “Consumers Lose”

The new rule came out of a CFPB review of mandatory arbitration clauses that was required by the Dodd-Frank Wall Street Reform and Consumer Protection Act. The rule, a lengthy document [PDF] that most stakeholders are still studying, has raised concerns for industry groups.

For example, a statement by Credit Union National Association President and CEO Jim Nussle characterized the rule as unnecessary and said it “does credit union members an incredible disservice.”

“We are disappointed that the CFPB continues to apply new rules on credit unions when there is no evidence of consumer abuse by credit unions, and as financial institutions that are member-owned, credit unions have a long history of working with their members to resolve disputes,” Nussle said.

American Bankers Association President and CEO Rob Nichols, meanwhile, said the decision would hurt, rather than help, consumers.

“Despite acknowledging these benefits [of mandatory arbitration] in its own study, the bureau has chosen to write a rule that would essentially eliminate arbitration—and force consumers into court—by requiring companies to face a flood of attorney-driven class-action lawsuits from which consumers receive virtually nothing. Under this final rule, consumers lose,” Nichols said in a statement.

Other groups speaking out against the rule included the Independent Community Bankers of America and the Consumer Bankers Association.

consumer Groups: “An Important Step”

Consumer groups, which have long opposed mandatory arbitration, hailed the action.

“This rule targets one of the worst problems with arbitration, when it shields financial companies from accountability for widespread wrongdoing,” Consumers Union Senior Policy Counsel George Slover said in comments to The Consumerist. “This rule takes an important step to restore some basic rights that consumers need and deserve, and to restore some accountability for financial companies.”

The U.S. Public Interest Research Group cited the recent Wells Fargo scandal, in which customers were fraudulently signed up for accounts they never asked for, as an example of the need for class action litigation.

“This CFPB rule will prevent Wells Fargo and other wrongdoers from blocking groups of consumers from taking them to court,” U.S. PIRG Consumer Program Director Ed Mierzwinski said in a news release. “Incredibly, Wells Fargo has argued that mandatory arbitration clauses on its actual accounts prevent its customers from bringing class actions against its millions of fake accounts.”

The battle over the rule is just getting started. According to Law 360 [registration required], some experts believe Congress may step in. Already, Sen. Tom Cotton (R-AR) has pledged to rescind the rule using the Congressional Review Act, which allows Congress to nullify agency regulations with a simple majority.

Richard Cordray, the director of the Consumer Financial Protection Bureau. (Brookings Institution/Flickr)

Ernie Smith

By Ernie Smith

Ernie Smith is a former senior editor for Associations Now. MORE

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