Fierce Battle Ahead for CFPB Arbitration Plan

WASHINGTON — The Consumer Financial Protection Bureau's plan to revamp how consumers fight financial services companies over alleged harm has sparked a battle of its own.

Banks charge that a pending agency proposal to ban class action waivers, which would allow consumers to team up in lawsuits, is a gift to trial lawyers and would remove out-of-court arbitration as a consumer option. Some even suggest the plan could not survive a Supreme Court challenge.

But during a field hearing Wednesday, the same day it unveiled its draft proposal to prevent firms from restricting customers to out-of-court arbitration proceedings for group claims, consumer activists and academics lauded the agency while also suggesting it should go further.

"Companies are imposing mandatory arbitration largely for the purpose of insulating themselves from class actions," Jean Sternlight, a law professor at the University of Nevada, Las Vegas, said at the hearing in Denver. "The CFPB hasn't gone as far as I would have liked," she added, but it is "a very important first step."

Banking industry representatives, meanwhile, responded harshly to the plan, which still must be reviewed by an advisory panel of small-business executives before being officially proposed. They say the only party benefiting from fewer arbitration agreements is plaintiff attorneys, while banks may ultimately end arbitrations completely — even for individual claims — as a result of new rules.

"By requiring companies to insert in their arbitration provisions language excepting class actions from arbitration, the bureau is in reality proposing an outright ban. It is a de facto ban, let's call it what it is," said Alan Kaplinsky, a partner at Ballard Spahr, at the hearing. "If this proposal becomes a final regulation, most companies will simply abandon arbitration altogether. That's because the cost-benefit analysis of using arbitration will shift dramatically."

The proposed framework would require companies to specify in customer agreements that special arbitration clauses do not apply in class action cases, which are typically the more practical route for consumers to pursue litigation versus individual claims. Arbitration clauses forestalling individual lawsuits would still be allowed, but firms would have to provide the bureau details about individual claims and awards processed through arbitration to aid the CFPB in assessing the fairness of the process.

The new restrictions would apply to arbitration agreements entered into 210 days after a final rule is published. The proposal, which stems from a March CFPB study showing consumers rarely knew they were subject to an arbitration clause, would generally cover products regulated by the bureau, everything from credit cards to checking accounts to student loans.

At the field hearing, CFPB Director Richard Cordray said consumers' right to have "their day in court" is consistent with "personal liberty."

"People should have the ability to protect themselves by acting to vindicate their rights," he said. "Nobody should have to rely on the government first deciding to pursue an enforcement action in order to get their money back and hold others accountable."

But the industry, which argues that the arbitration process offers benefits to consumers, does not see the issue that way.

"We are disappointed the bureau, despite numerous studies and the CFPB's own report, is choosing to side with trial attorneys over the interests of consumers," said Richard Hunt, the chief executive of the Consumer Bankers Association, in a statement.

The proposed framework also drew competing reactions from members of Congress.

"Unfortunately, the bureau disingenuously ignores arbitration's pro-consumer features, which were highlighted in its own study," said Rep. Randy Neugebauer, R-Texas, chairman of the Financial Services subcommittee on financial institutions, in a press release. "This latest effort will create more jobs and opportunity for trial lawyers instead of helping hardworking Americans on Main Street."

But Sen. Sherrod Brown, D-Ohio, the ranking member on the Banking Committee, said that many consumers from his state do not "realize that they've signed away their right to hold banks, credit card issuers, and other financial services companies accountable in court."

"The CFPB's decision to address the unjust and harmful practice of forced arbitration is an important step toward leveling the playing field for consumers," Brown said in a press release.

Others, meanwhile, focused on whether the 2010 Dodd-Frank Act, which mandated the CFPB study and authorized the agency to write arbitration rules, gave the bureau power to invalidate arbitration agreements preventing class actions.

Matthew Adler, a partner at Pepper Hamilton, said a 2013 Supreme Court decision in a case involving American Express made it difficult to invalidate such arbitration clauses without a legislative amendment to the Federal Arbitration Act. Adler said the provisions in the Dodd-Frank do not go that far.

"It's going to be very difficult, without Congress amending the Federal Arbitration Act to invalidate class action waivers, for an administrative agency to do that on its own," said Adler.

But Donald Hawthorne, a financial litigator at Axinn Veltrop & Harkrider, said Dodd-Frank in fact did provide such authority.

"What you have here is an exception to the usual presumption in favor of arbitration that was specifically contemplated by Congress in the Dodd-Frank Act," he said.