Consumer Financial Protection Bureau Rolls Back Arbitration Clauses

JULY 13, 2017

The Consumer Financial Protection Bureau (CFPB) has issued a final rule, limiting the ability of financial institutions and banks to force individuals and entities to agree to arbitration on an individual basis should a dispute arise.

The final rule prevents financial services providers from including arbitration clauses in consumer contracts unless the arbitration clauses expressly permit class actions to be filed and proceed in court. In addition, the CFPB requires the financial services providers to provide the Agency with their arbitration clauses, along with claims and decision information.

CFPB’s final rule was based partially on a 2015 study that showed over 50 percent of credit card companies and 44 percent of banks mandated arbitration of disputes in their agreements; however, most consumers were unaware about the requirement.

CFPB Director Richard Cordray stated, "Arbitration clauses in contracts for products like bank accounts and credit cards make it nearly impossible for people to take companies to court when things go wrong. These clauses allow companies to avoid accountability by blocking group lawsuits and forcing people to go it alone or give up.”

After the final rule was published, several Congressional Republicans announced their opposition to it, including Banking, Housing & Urban Affairs Committee member Sen. Tom Cotton (R-AK) who stated, “The Bureau’s new rule on arbitration clauses ignores the consumer benefits of arbitration and treats Arkansans like helpless children, incapable of making business decisions in their own best interests. The last thing Americans need is more anti-business regulation that will prompt frivolous lawsuits while hurting consumers.”

Cotton indicated he intends to utilize the Congressional Review Act (CRA) to attempt to override the new regulation. The CRA allows Congress to nullify regulations by a simple majority vote in both chambers if acted upon within 60 “legislative” days. It is unknown whether sufficient support exists for the CRA resolution of disapproval.