The Comments Are In: The CFPB And Arbitration

With the wide range of highly controversial subjects that fall under the CFPB’s purview, arbitration may come as something of a surprise. Unlike payday lending or prepaid card rules, which affect products consumers actually use day in and day out, arbitration only comes up when things have gone wrong between a consumer and a company they have gotten services from and both seek a remedy for making that wrong right.

But as the CFPB has contemplated rules that would limit the use of arbitration clauses in consumer contracts, controversy and contention have followed. In fact, as the public comment period on those rules came to a close in the waning days of August, the CFPB found itself flooded with written comments.

And we do mean flooded — almost 13,000 comments poured in via emails, letters and postings on the CFPB website.

Fans of the proposed rule change note that businesses that insert that language into contracts — often without giving the customers an opt-out — do so to protect themselves against the possibility they will have to face the court system in the event that they run afoul of the law.

Opponents of the regulation note that, by making it much easier for plaintiffs’ attorneys to mount class-action suits against businesses, the rule change has the very real possibility of raising the cost of doing business for everyone.

So, what exactly is the rule proposing, and who makes up the “for” and “against” sides?

Well…

Arbitration And The New Rules — The Cliffs Notes

Arbitration is invisible to most consumers because most consumers don’t end up in a conflict with their cable company, cell phone provider or credit card company that warrants its use.

But those that do — and find that it has escalated far enough that they want to file suit over it — often find they can’t because of an arbitration clause in the original contract they signed.

Arbitration — a legally binding method of dispute resolution that happens outside a courtroom — is less formal, faster and generally less expensive than a court case. Instead of being presided over by judges, matters are heard by arbitrators (or a panel of them, depending on the specific nature of the dispute). Class actions are disallowed, as are summary judgments, meaning both sides are, more or less, offered an opportunity to present their full case without having to withstand motions of dismissal.

Arbitration is also a much shorter process. In extremely complicated situations, it can go on for about 14 months, but that is unusual.

Litigation, on the other hand, can — and often does — take years. And lots of money.

The issue with arbitration comes up when it becomes a non-negotiable part of a consumer contract, since most of the contracts/terms of service that American consumers sign used to have it inserted. Credit cards, cable contracts, cell phone agreements — somewhere in the fine print consumers were prompted to waive away their right to sue in favor of using arbitration should a future dispute arise.

And this is where the CFPB takes issue and is aiming its regulations.

“Consumers should not be asked to sign away their legal rights when they open a bank account or credit card,” said CFPB Director Richard Cordray in a statement in October of last year. “Companies are using the arbitration clause as a free pass to sidestep the courts and avoid accountability for wrongdoing. The proposals under consideration would ban arbitration clauses that block group lawsuits so that consumers can take companies to court to seek the relief they deserve.”

And so, we get to the new rules.

The CFPB is not looking to outright ban arbitration clauses in consumer accounts, but it is looking for two very big modifications.

The first would simply force all arbitration clauses to include verbiage that would still make class-action lawsuits possible. One of the main complaints about arbitration is that, as a legal format, it disallows class-action suits. The rule modification would force firms to explicitly state in their contractual arbitration clauses that they do not apply to cases filed as class-action unless and until the class certification is denied by the court or at such time as the case is dismissed by a court.

The second big change is more oversight. Firms that use arbitration clauses for individual disputes will, going forward, have to submit all arbitration claims filed and awards issued to the CFPB.

Oy.

But it’s hard to know what that means. Is that submission an FYI only or an “I’ll see you in my offices later?”

So, how did a change to the regulations that govern the rules of a clause of consumer contracts manage to foment 13,000 comments?

Well…

The National ‘Class-Action Expansion Rule’

Among the more outspoken opponents of the arbitration rule change is the U.S. Chamber of Commerce, which, over the course of a 103-page letter to the CFPB, explained that the proposed rule change won’t help customers, will hurt businesses and can only hope to enrich a generation of lawyers that will fire-bomb businesses with class-action suit after class-action suit.

“[The rule’s beneficiaries] are not consumers but rather the plaintiffs’ lawyers who file class-action lawsuits, and the defense lawyers’ businesses are forced to retain,” the chamber noted in its letter.

It further questioned the CFPB’s legal authority to make the rule change under Dodd-Frank and used its comments to signal willingness to contemplate a legal challenge to the rule change.

On the other side of the issue are consumer advocacy groups, who praise the CFPB’s latest effort to make the playing field “fairer and safer” for consumers.

Different studies point in different directions when it comes to outcomes for consumers, and many of the figures come care of the health care industry, instead of banking, where these new rules are centered.

Do consumers do better or worse in arbitration than they do in typical court cases? Harder to say than one might expect. Also hard to explain: why consumers are so much less likely to make use of it than the court system, especially if there is no evidence they do any worse there (and some evidence they do better.)

The new rule is expected to take effect next year after the agency reviews the comments and drafts the final rule.

Meanwhile, the plaintiff’s bar is eagerly waiting in the wings, quantifying what could happen if the ruling falls in their favor.