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CFPB moves to end mandatory arbitration in financial services contracts

By TED CARTER

The U.S. Consumer Financial Protection Bureau wants to bar banks, credit card companies and other financial products providers from forcing consumers to agree to arbitration to settle account disputes.

Banks, unsurprisingly, oppose the change. “Consumers will get less and pay more,” said Rob Nichols, president and CEO of the American Bankers Association, or ABA.

The Consumer Financial Protection Bureau calls the standard arbitration clause a “contract gotcha” that lets financial companies “sidestep the legal system, avoid accountability, and continue to pursue profitable practices that may violate the law and harm countless consumers.”

The mandatory arbitration clauses and the CFPB proposal are in a comment period after which the watchdog agency will decide whether to prepare rules initiating the contractual rule changes.

Along with eliminating mandatory arbitration  agreements and giving consumers an opportunity to join class-action lawsuits, the CFPB proposal would require banks and other financial services providers to submit arbitral claims and awards to the agency for possible public posting.

The rule, if approved, would have little to no impact on the residential mortgage market, as mortgage lenders are already prohibited from using arbitration agreements under a rule that took effect in 2013, the website mortgageorb.com reports.

A 2015 study by the CFPB concluded that class actions provide more effective means for consumers to challenge problematic practices by financial services companies.

“According to the study, class actions succeed in bringing hundreds of millions of dollars in relief to millions of consumers each year and cause companies to alter their legally questionable conduct,” the CFPB said in announcing the rule proposals last week.

“The study showed that at least 160 million class members were eligible for relief over the five-year period studied. Those settlements totaled $2.7 billion in cash, in-kind relief, and attorney’s fees and expenses. In addition, these figures do not include the potential value to consumers of class action settlements requiring companies to change their behavior. However, where mandatory arbitration clauses are in place, companies are able to use those clauses to block class actions.”

Jackson banking lawyer Craig Landrum said in touting the proposed rules, the CFPB ignored its data regarding the benefits to the consumer of arbitration vs. class action. “Out of this data the study reported that of the 15 percent of class actions that settled, consumers received an average cash payment of $32.35 each after an average of two years, Landrum, a partner in Jones Walker’s Banking and Financial Services group, said in an email.

The bulk of the money went to lawyers handling the class actions, according to Landrum. “Class counsel recovered $424,495,451. In 60 percent of the 562 class actions, class members received no benefits,” he said.

On the other hand, consumers who prevailed in an individual arbitration got an average of $5,389 (166 times as much as the class member) generally in 2-7 months, Landrum said. “In many cases the lender pays the filing costs of arbitration and the cases get individual attention.”

The Jackson banking lawyer said the CFPB data he cited came from a review of 1, 847 AAA arbitrations, 562 class actions, 3,462 individual federal court actions and 419 class action settlements.

In further support of arbitration, the CFPB’s 2015 study noted arbitration offers an efficient, low-cost method of settling disputes, said Nichols, the American Bankers Association chief.

But those conclusions seemed not to matter in the agency’s formulation of the new proposed rules, he said in a written statement

Instead, the Bureau “has chosen to put the future of arbitration at risk by requiring companies to face a flood of attorney-driven class action suits from which consumers receive virtually nothing,” Nichols said.

What’s needed, he added, is an approach to “regulating arbitration in a way that puts consumers — not class action lawyers — first.”

An attorney for the non-profit Mississippi Center for Justice, whose work includes helping consumers victimized by providers of financial services, said he believes the effect of the new rules “will be opposite” of what the ABA is predicting.

“If we’re able to bring all of these claims together, it promotes economy,” said Charles Lee, the Center’s consumer protection director.

Allowing individuals with similar claims to combine those into a class action suit “would even the playing field,” Lee said.

At the moment, with the banks having “all types of resources,” the playing field is hugely uneven, he said.

CFPB Executive Director Richard Cordray said as much at a May 5 field hearing on the arbitration issue in Albuquerque, N.M.

“Based on our research, we believe that any prospect of meaningful relief for groups of consumers is effectively extinguished by forcing them to fight their legal disputes as lone individuals,” Cordray said. “These battles – frequently over small amounts of money – would often have to be fought against some of the largest financial companies in the world.

“When faced with the daunting prospect of spending considerable time and effort to recoup a $35 fee or even a $100 overcharge, it is not hard to see why few people would even bother to try.”

Just “by inserting the magic words of an arbitration clause, financial companies can avoid being held directly accountable for their actions affecting their customers,” Cordray said.

He said his agency’s proposed rules are in response to concerns Congress has voiced over fairness in consumer finance laws. “First in the Military Lending Act, passed in 2007, Congress barred arbitration clauses in connection with certain loans made to service members,” he said. “In 2010, in the Dodd-Frank Wall Street Reform and Consumer Protection Act, Congress went further by barring arbitration clauses in mortgages, which make up the largest consumer finance market.

“In so doing, Congress expanded on a ban that Fannie Mae and Freddie Mac had imposed several years earlier on mortgage contracts they purchased.”

Similarly, in the Dodd-Frank Act, Congress authorized the Securities and Exchange Commission to regulate the use of arbitration clauses in contracts between investors and brokers and dealers, Cordray said. “ Here Congress was building on work by the Financial Industry Regulatory Authority (FINRA), which has long required that arbitration clauses adopted by its broker-dealer members cannot be used to block class actions by customers.”

He noted the CFPB took on the 2015 arbitration study on orders from Congress and received authorization to initiate new rules based on the study.

Under the CFPB proposal, current contracts could maintain their arbitration clause. New ones, however, would specify the consumer can opt to join a class action suit to settle disputes.

Companies that maintain arbitration as an option for consumers would have to submit claims, awards, and other information regarding arbitration cases to the CFPB. “We are considering publishing these materials on our website to promote transparency and enable the public to learn more about the arbitration process,” Cordray said.

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