By: Scott D. Gilchrist, Attorney

On May 5, 2016 the federal Consumer Financial Protection Bureau announced a proposed rule that would prevent financial service companies from barring class actions in contracts with their customers. For the past several years, the CFPB has been studying so-called “forced arbitration” clauses in consumer contracts, which require customers to give up their right to take claims to court and prohibit either filing or participating in class actions.  In a lengthy report to Congress last year, the CPFB made several findings critical of forced arbitration in consumer contracts.

contractsignatureFor instance, the agency found that forced arbitration affected tens of millions of Americans, but that only a very small percentage of such consumers even knew they had signed away their rights. The CFPB also found that for consumer financial claims under $1,000, a mere 25 consumers on average attempted to pursue a remedy through mandatory arbitration. In contrast, where forced arbitration agreements did not exist, the agency found that on average 32 million consumers were eligible to recover money under class actions, and that more than $200 million in class action recoveries were actually distributed to consumers each year. Based on these findings, it was expected that the CFPB would act to limit the use of forced arbitration in consumer contracts.

Changes for financial service contracts

The proposed rule announced by the CFPB would impose three significant requirements on financial service providers.

  1. The rule prohibits the use of arbitration agreements to block consumer class actions in court. In short, providers would not be permitted to prevent their customers from filing or participating in class actions.
  1. Any provider that does include an arbitration provision in a consumer contract would be required to advise the customer, with language in the contract, that the customer was free to file or participate in class actions.
  1. The rule requires those financial service providers who do use individual arbitration agreements to report data to the CFPB concerning the actual use of arbitration by customers and the results of those proceedings.

 Next steps

The proposed rule is now open for comments by the public. If the rule is finalized by the CFPB, it would take effect about ten months later. The rule would affect consumer agreements entered after the effective date, and in some instances to consumer contracts amended after the effective date.

If adopted, the CFPB’s rule on forced arbitration would mark a significant change in the availability of class actions in consumer rights cases. Court decisions over the past decade have enforced arbitration agreements, even in “fine print” customer contracts, severely limiting the ability of consumers to bring class actions in response to widespread wrongdoing by providers. In the vast financial services and products industry, the new rule by the CFPB would make class actions available again, allowing large groups of customers to seek a remedy when companies operate outside the bounderies of the law.

The CFPB’s proposed rule can be found here.