CFPB Bans Mandatory Arbitration in Financial Services Contracts

It just got easier for you to sue your bank and credit card company. The Consumer Financial Protection Bureau issued a new rule Monday

It just got easier for you to sue your bank and credit card company. The Consumer Financial Protection Bureau issued a new rule Monday

"Arbitration clauses in contracts for products like bank accounts and credit cards make it almost impossible for people to take companies to court when things go wrong", said CFPB Director Richard Cordray in a statement.

A new rule meant to give consumers greater protection against financial institutions will likely lead to a host of regulatory challenges for community banks, and even more worrisome, potentially costly litigation.

More immediately, its adoption is nearly certain to set off a political firestorm in Washington, where both the administration of President Trump and House Republicans have pushed to rein in the consumer finance agency as part of a broader effort to lighten regulation on the financial industry. Compass Point analyst Isaac Boltansky said in a note the effort to reverse the arbitration rule is "far better positioned politically" than the prepaid rule, but the fate of the rule will "be determined by public perception" in the weeks to come. Congress has already banned mandatory arbitration clauses for mortgages and contracts involving members of the military, he said. "In deciding to issue this rule, that is what I believe I have done".

"We're disappointed that the CFPB has chosen to put class-action lawyers - rather than consumers - first with today's final rule", said Rob Nichols, the president and CEO of the American Bankers Association, a trade organization for the USA banking industry based in Washington, D.C. "Banks resolve the overwhelming majority of disputes quickly and amicably, long before they get to court or arbitration".

The requirement is set to take effect in 60 days.

The CFPB's Truth in Lending Act/Real Estate Settlement Procedures Act integrated disclosure rule (TRID), also known as the "Know Before You Owe" rule, addresses tolerance provisions for the total of payments, incorporates informal guidance into the rule, and extends the rule's coverage to include all cooperative units rather than just transactions secured by real property, among other things.

In the final rule, the bureau requires financial companies to give customers the option of arbitration or of banding together to sue in class actions.

Rachel Brand, the third in command at the DOJ, formerly led the litigation arm of the U.S. Chamber, one of the most vocal opponents to the CFPB's proposal a year ago.

Cordray had acknowledged that the rule is likely to face scrutiny from Congress. "Because God forbid consumers actually have the power to hold big companies accountable for unfair or unethical practices".

"Numerous reports, including the CFPB's own study, show the value that consumers derive from arbitration, especially when compared to class-action lawsuits. That's good for consumers, and it's good for competing businesses that play by the rules". Financial companies that use arbitration will have to submit their records, including initial complains and award information.

The rule "is an extraordinary victory, and it's going to make a huge, concrete difference in the lives of millions of consumers", said Lisa Gilbert, the vice president of legislative affairs at Public Citizen, a nonprofit based in Washington, D.C. that has advocated for this type of rule that would protect consumers. It also imposes data collection requirements for the continued use of mandatory arbitration clauses.

Opponents have said the rule is unnecessary and will lead to expensive litigation. "Banks resolve the overwhelming majority of disputes quickly and amicably, long before they get to court or arbitration". "Under this final rule, consumers lose". "Arbitration has been common practice for decades and provides consumers, employees, and other injured parties with accessible and fair procedures for obtaining redress for claims that can not be vindicated in court".

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