New CFPB Rule Prohibits Consumer Waiver of Class Action Litigation

ABSTRACT: After conducting a study, which spanned several years, on the prevalence of mandatory arbitration clauses in consumer financial products, the CFPB has issues a new rule that will prohibit financial institutions from including mandatory arbitration clauses that prohibit a consumer from joining in class action litigation against the bank.

In an effort to afford consumers with greater accessibility to the courtroom, the Consumer Financial Protection Bureau (the “CFPB”) has enacted a new rule that, while it does not ban arbitration clauses outright, does substantially limit a financial institution’s right to mandatory arbitration provisions. Specifically, the new rule prohibits financial institutions and consumers from contracting to waive the consumer’s right to join in class action lawsuits with other consumers against that entity.

The arbitration rule was preceded by a CFPB study, spanning several years, of the prevalence and impact of arbitration clauses in consumer financial contracts. One of the chief concerns of the CFPB is the plain ignorance of consumers with respect to arbitration clauses contained within consumer contracts.  According to the study, more than half of credit card and checking account agreements contain mandatory arbitration provisions. Yet, 3 out of 4 of consumers who entered into agreements with such arbitration clauses were not aware that they had done so. 

CFPB Director Richard Cordray, in his public statement regarding the new rule, further justified the rule on the basis that class action lawsuits are more effective in curbing unsavory lending and servicing practices than arbitration, as the penalties and damages imposed in class action litigation vastly exceed those assessed in arbitration. 

In addition to restricting arbitration provisions, the new rule requires financial institutions to report the results of arbitration to the Bureau so that the results may be assessed for fairness and effectiveness.  It is important to note that the rule only applies to new contracts between consumers and financial institutions, and not those already in effect.

Predictably, commentators and critics have already observed that the new arbitration rule truly stands to benefit the plaintiff’s class action bar, rather than the consumers being represented in class action litigation.  Some also view the arbitration rule as an unjust infringement of the freedom to contract with no rational basis under the law.  Legal challenges to the new arbitration rule in the coming months are unquestionably imminent.  The new arbitration rule may be found here.