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CFPB Faces Backlash Over Mandatory Arbitration Ban

5 May 2016
Corporate Counsel

The Consumer Financial Protection Bureau proposed new rules on Thursday that would stop banks and financial services companies from using mandatory arbitration clauses that prevent customers from filing class action lawsuits. Some in the business community say that the proposed rules will only increase costly and unnecessary class action litigation and benefit plaintiffs attorneys more than consumers themselves.

The CFPB has long argued that these mandatory arbitration clauses, which have become commonplace in contracts for customers in the financial sector, severely limit aggrieved consumers’ abilities to seek redress from companies. According to the bureau, consumers won’t bother with arbitration because the amount in dispute is often not worth the effort without the leverage that comes from joining a class action. “Many banks and financial companies avoid accountability by putting arbitration clauses in their contracts that block groups of their customers from suing them,” CFPB Director Richard Cordray said in the bureau’s announcement of the rules.

But many don’t see the new proposed rules as being in the public interest at all. Andrew Pincus, a partner at Mayer Brown, says that the new rule will serve to enrich plaintiffs attorneys who get a lot more out of class action suits than consumers do.

“In the cases where there is some kind of a settlement,” Pincus says, “very few members of the class actually get a check, and the check they get is very small. Arbitration on the other hand is a consumer empowering device—you don’t need a lawyer, you can vindicate your own rights, you don’t have to take days off the go to court.”

Pincus explains that he believes the proposed rule will kill off company-subsidized arbitration plans for customers as “no rational company” will want to keep paying that expense, while also funding class action defense.

The rule will go through a public comment period before it is finalized, but experts say it’s likely to face more than just negative written feedback. “I would anticipate that there will be legal challenges to the arbitration rule," says To-Quyen Truong, a partner at Stroock & Stroock & Lavan and former assistant director and deputy general counsel of the CFPB. 

She says that the rule could be challenged under the Federal Arbitration Act, which generally provides that arbitration agreements are enforceable. Or there could be a challenge on an evidentiary or cost-benefit analysis basis, if critics are able to call into question the way the CFPB used its research and data to justify and craft the proposed regulations.

Another problem in promulgating the rules could be a legal challenge to the bureau itself. PHH Corp, a New Jersey mortgage lender, is challenging the constitutionality of the CFPB’s authority at a case currently in the U.S. Court of Appeals for the D.C. Circuit.

Reprinted with permission from the May 5, 2016 edition of Corporate Counsel © 2016 ALM Properties, Inc. All rights reserved. Further duplication without permission is prohibited.

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