CFPB Rule Would Give Consumers Their Day In Court

As has been widely reported, the Consumer Financial Protection Bureau is soliciting public comment on whether to establish regulations concerning arbitration agreements for consumer financial products and services. The formal comment period closes on August 22, 2016, and you can comment by following this link.

The proposed rule would accomplish two things. First, it would prohibit the consumer finance industry from using arbitration agreements which block class action lawsuits and force consumers to seek relief on an individual basis in arbitration. Second, it would require the consumer finance industry to turn over arbitral records to the CFPB.

The proposed rule is without question in the best interests of consumers. The consumer finance industry has used arbitration agreements to block consumers from banding together to obtain relief in court. This has effectively given the industry a “free pass”; as the CFPB notes, “companies can sidestep the legal system, avoid big refunds, and continue to pursue profitable practices that may violate the law and harm countless consumers.”

The CFPB’s comprehensive study on the use of arbitration agreements for financial products and services fully supports this rule-making. The study found that very few consumers even seek relief through arbitration, and those who do rarely receive any recovery. On average, according to the CFPB, consumers recover about 12 cents for every dollar of their legal claims. By comparison, consumers who are able to bring class action lawsuits are far more likely to obtain compensation. According to the CFPB study, which looked at 400 class action lawsuits, about 13 million consumers received $2.7 billion in total recoveries. The availability of such relief, moreover, plays a critical role in deterring corporate misconduct.

It should come as no surprise, then, that the banking and lending industry is seeking to derail this rule, as Alison Frankel recently reported. The industry’s main argument is that consumers are better off under the current system. That position has no empirical support whatsoever and directly contradicts the sound CFPB study.

It should be obvious enough who stands to gain from a legal system that allows one party to exempt itself from the ordinary operation of consumer law.