CFPB Paves Way for New Limits on Arbitration

WASHINGTON — The Consumer Financial Protection Bureau is seeking input for a study that could pave the way for new limits on consumer arbitration clauses.

The agency said Tuesday it is launching an inquiry, required under the Dodd-Frank Act, into how arbitration and arbitration clauses affect consumers and financial services firms. The financial reform law also allows CFPB to impose new regulations or conditions on the clauses — which consumer advocates have long criticized — and observers said a regulation is all but certain.

"I don't think that they'll eliminate them entirely," said L. Richard Fischer, a partner with the law firm Morrison & Foerster, "but the conditions will be so onerous as to make them impractical. This is a foregone conclusion."

Industry and consumer groups have been waiting on CFPB to weigh in on arbitration clauses in the wake of two Supreme Court rulings in support of mandatory arbitration.

In January, the high court struck down a lower court ruling that said the Credit Repair Organizations Act gave customers a right to sue in court and banned them from waiving their rights under the law. The court also ruled last April that businesses may require customers to sign binding agreements that prohibit them from joining class action lawsuits.

The Dodd-Frank Act, however, allows CFPB to issue rules that may "prohibit or impose conditions" on the use of arbitration agreements if the study finds that it would be in the public interest and would protect consumers.

"Arbitration clauses are found in many contracts for consumer financial products," CFPB Director Richard Corday said in a press release Tuesday. "We want to learn how arbitration clauses affect consumers, and how effective arbitration is in resolving consumers' issues. This inquiry will help the bureau assess whether rules are needed to protect consumers."

The bureau is asking the public for information about the prevalence of arbitration clauses in consumer financial products and services, what claims consumers bring in arbitration, if claims are brought by financial firms against consumers, how consumers and companies are affected by actual arbitrations and how they're affected by the clauses outside of arbitration. It is also seeking suggestions on the appropriate scope, methods and sources of data for conducting the study.

Comments are due by June 23.

The agency also notes in the press release that Dodd-Frank gives it the power to issue regulations "consistent with the study" to protect consumers.

Companies that use pre-dispute arbitration clauses often claim that it is faster and cheaper than litigation, the bureau said in the release, while others say consumers may not realize they are signing away their right to a trial.

"Even if consumers understand arbitration clauses, these clauses may still have significant impacts that warrant study by the CFPB," the agency said.

But observers said there is no doubt that study will lead to new, restrictive regulations.

"I think there were a lot of people who wanted that in Dodd-Frank not so CFPB could bless the current status quo, but so they could revisit it," said Jeffrey Taft, a partner with the law firm Mayer Brown LP, "especially since it's become clear that the courts are just basically going to say it's okay."

The bureau has a range of options to address potential concerns, banking lawyers said, from ramping up consumer education about the existence of arbitration clauses, to issuing regulations to expand disclosures, to issuing enforcement actions for unfair or deceptive practices in particularly egregious situations.

"The CFPB has not demonstrated any propensity to sort of do things because they have to," said Kevin Petrasic, a partner with Paul, Hastings, Janofsky & Walker. "I think they do things because it's part of their mission, and they are not going to undertake this examination and then let the information sit there."

Alan Kaplinsky, a partner with Ballard Spahr, said he was pleased CFPB is seeking public comments for its study, which will ensure input from the banking industry. But he said the bureau's press release failed to mention class actions lawsuits as an alternative to arbitration, or the Supreme Court decision that said companies may enforce individual arbitration instead of allowing class action suits.

"That is disappointing since most of the opponents of consumer arbitration are plaintiffs' class action lawyers who are trying to preserve their livelihood at the expense of consumers," he said. "I would have wanted the CFPB to focus on how whether class actions are a better alternative for consumers than arbitration."