According to the announcement, the CFPB wants to cut off lenders’ ability to include clauses prohibiting borrowers and bank account holders from filing or joining class action lawsuits in their contracts.
Eric Goldberg, Senior Counsel at CFPB, said that these clauses typically state that either the company or the consumer can require that disputes be resolved by privately appointed arbitrators, except for cases brought in small claims court.
“Where these clauses exist, either side can generally block lawsuits from proceeding in court,” Goldberg stated. “These clauses also typically bar consumers from bringing group claims through the arbitration process. As a result, no matter how many consumers are injured by the same conduct, consumers must proceed to resolve their claims individually against the company.”
According to the CFPB, clauses preventing group actions against lenders affects hundreds of thousands of borrowers and account holders‒‒few of whom, when grievances occur, consider filing individual suits, given the strength in suing in numbers. A 2015 bureau study on arbitration showed that very few consumers even consider bringing individual actions against financial service providers, in court or in arbitration and that class actions provide “a more effective means for consumers to challenge problematic practices by these companies.”
By “more effective,” the CFPB is referring to the $2.7 billion in cash, in-kind relief, and attorney’s fees and expenses received by 160 million class action complainants. Creditors took enough notice of that number to introduce clauses designed to quite literally keep consumers from ganging up on them, but the CFPB has found such clauses damaging to consumers and that they effectively give creditors a major advantage in any legal matter.
“This practice has evolved to the point where it effectively functions as a kind of legal lockout.”
CFPB Director Richard Cordray
“This practice has evolved to the point where it effectively functions as a kind of legal lockout,” said Richard Cordray, director of the CFPB. “Literally with the stroke of a pen [creditors] are able to block any group of consumers from filing joint lawsuits.”
The CFPB proposal would, in addition to opening up the legal system to consumers for consumers to file or join a class action suit, give the bureau the power to monitor the individual arbitration process, “providing insight into whether companies are abusing arbitration or whether the process itself is fair,” according to Goldberg.
“Our research found that very few consumers know anything about these ‘gotcha clauses,’ Cordray said. “Even fewer consumers know how they actually work. Everyone benefits from a marketplace where companies are held accountable for treating their customers fairly and in accordance with the law.”
National Association of Federal Credit Unions (NAFCU) Director of Regulatory Affairs Alexander Monterrubio said in response to the CFPB's proposed rule that "NAFCU and our members believe that consumers should have access to fair and efficient methods of dispute resolution. To that end, we urge the Bureau to avoid promulgating any rule that unreasonably limits the availability of arbitration or creates burdensome reporting requirements that negatively affect credit unions. NAFCU is especially concerned with the CFPB’s plan to publish the arbitration data it collects as such actions would present system-wide reputational risk, meddle in the arbitration process, and create significant privacy issues.”