REPOST OF JULY 10, 2017 CFPB PRESS RELEASE
CONSUMER FINANCIAL PROTECTION BUREAU ISSUES RULE
TO BAN COMPANIES FROM USING ARBITRATION CLAUSES
TO DENY GROUPS OF PEOPLE THEIR DAY IN COURT
Financial Companies Can No Longer Block Consumers From Joining Together to Sue Over Wrongdoing
WASHINGTON, D.C. — The Consumer Financial Protection Bureau (CFPB) today announced a new rule to ban companies from using mandatory arbitration clauses to deny groups of people their day in court. Many consumer financial products like credit cards and bank accounts have arbitration clauses in their contracts that prevent consumers from joining together to sue their bank or financial company for wrongdoing. By forcing consumers to give up or go it alone – usually over small amounts – companies can sidestep the court system, avoid big refunds, and continue harmful practices. The CFPB’s new rule will deter wrongdoing by restoring consumers’ right to join together to pursue justice and relief through group lawsuits.
"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," said CFPB Director Richard Cordray. "These clauses allow companies to avoid accountability by blocking group lawsuits and forcing people to go it alone or give up. Our new rule will stop companies from sidestepping the courts and ensure that people who are harmed together can take action together."
Hundreds of millions of contracts for consumer financial products and services have included mandatory arbitration clauses. These clauses typically state that either the company or the consumer can require that disputes between them be resolved by privately appointed individuals (arbitrators) except for individual cases brought in small claims court. While these clauses can block any lawsuit, companies almost exclusively use them to block group lawsuits, which are also known as “class action” lawsuits. With group lawsuits, a few consumers can pursue relief on behalf of everyone who has been harmed by a company’s practices. Almost all mandatory arbitration clauses force each harmed consumer to pursue individual claims against the company, no matter how many consumers are injured by the same conduct. However, consumers almost never spend the time or money to pursue formal claims when the amounts at stake are small.
The Dodd-Frank Wall Street Reform and Consumer Protection Act required the CFPB to study the use of mandatory arbitration clauses in consumer financial markets. Congress also authorized the Bureau to issue regulations that are in the public interest, that are for the protection of consumers, and which are based on findings that are consistent with the Bureau’s study of arbitration. Released in March 2015, the study showed that credit card issuers representing more than half of all credit card debt and banks representing 44 percent of insured deposits used mandatory arbitration clauses. Yet three out of four consumers the Bureau surveyed did not know whether their credit card agreement had an arbitration clause. These clauses are not only common and unknown; they are also bad for consumers. By blocking group lawsuits, companies are able to:
- Deny consumers their day in court: The study showed that few consumers ever bring – or consider bringing – individual actions against their financial service providers either in court or in arbitration. Only about 2 percent of consumers with credit cards surveyed said they would consult an attorney or consider formal legal action to resolve a small-dollar dispute. As a result, the real effect of mandatory arbitration clauses is to insulate companies from most legal proceedings altogether.
- Avoid paying out big refunds: Individual actions get less overall relief for consumers than group lawsuits because companies do not have to provide relief to everyone harmed. According to the study, group lawsuits succeed in bringing hundreds of millions of dollars in relief to millions of consumers each year. The study showed that over 34 million consumers received payments, and that $1 billion was paid out to harmed consumers over the five-year period studied. Conversely, in the roughly one thousand cases in the two years that were studied, arbitrators awarded a combined total of about $360,000 in relief to 78 consumers.
- Continue harmful practices: Individual actions might recoup previous individual losses, but they do nothing to stop the harm from happening again or to others. Resolving group lawsuits often requires companies to not only pay everyone back, but also change their conduct moving forward. This saves countless consumers the pain and expense of experiencing the same harm. The Bureau’s study found that in 53 group settlements covering over 106 million consumers, companies agreed to change their business practices or implement new compliance programs. Without group lawsuits, private citizens have almost no way, on their own, to stop companies from pursuing profitable practices that may violate the law.
CFPB Arbitration RuleThe CFPB rule restores consumers’ right to file or join group lawsuits. By so doing, the rule also deters companies from violating the law. When companies know they are more likely to be held accountable by consumers for any misconduct, they are less likely to engage in unlawful practices that can cause harm. Further, public attention on the practices of one company can more broadly influence their business practices and those of other companies. Under the rule, companies can still include arbitration clauses in their contracts. But companies subject to the rule may not use arbitration clauses to stop consumers from being part of a group action. The rule includes specific language that companies will need to use if they include an arbitration clause in a new contract.
The rule also makes the individual arbitration process more transparent by requiring companies to submit to the CFPB certain records, including initial claims and counterclaims, answers to these claims and counterclaims, and awards issued in arbitration. The Bureau will collect correspondence companies receive from arbitration administrators regarding a company’s non-payment of arbitration fees and its failure to follow the arbitrator’s fairness standards. Gathering these materials will enable the CFPB to better understand and monitor arbitration, including whether the process itself is fair. The materials must be submitted with appropriate redactions of personal information. The Bureau intends to publish these redacted materials on its website beginning in July 2019.
The new CFPB rule applies to the major markets for consumer financial products and services overseen by the Bureau, including those that lend money, store money, and move or exchange money. Congress already prohibits arbitration agreements in the largest market that the Bureau oversees – the residential mortgage market. In the Military Lending Act, Congress also has prohibited such agreements in many forms of credit extended to servicemembers and their families. The rule’s exemptions include employers when offering consumer financial products or services for employees as an employee benefit; entities regulated by the Securities and Exchange Commission or the Commodity Futures Trading Commission, which have their own arbitration rules; broker dealers and investment advisers overseen by state regulators; and state and tribal governments that have sovereign immunity from private lawsuits.
In October 2015, the Bureau published an outline of the proposals under consideration and convened a Small Business Review Panel to gather feedback from small companies. Besides consulting with small business representatives, the Bureau sought comments from the public, consumer groups, industry, and other interested parties before continuing with the rulemaking. In May 2016, the Bureau issued a proposed rule that included a request for public comment. The Bureau received more than 110,000 comments.
The rule’s effective date is 60 days following publication in the Federal Register and applies to contracts entered into more than 180 days after that.
More information about the CFPB’s arbitration rule is available at:https://www.consumerfinance.gov/arbitration-rule/
The text of the arbitration rule is available at: http://files.consumerfinance.gov/f/documents/201707_cfpb_Arbitration-Agreements-Rule.pdf
A CFPB video explaining the arbitration rule is available at: https://youtu.be/boQ2tRW_AwE
FOR IMMEDIATE RELEASE:July 10, 2107
CONTACT:Office of CommunicationsTel: (202) 435-7170
Prepared Remarks of Richard Cordray
Director, Consumer Financial Protection Bureau
Arbitration Rule Announcement
July 10, 2017
Thank you for joining us on this call. Today, we are announcing a final rule that prevents financial companies from using mandatory arbitration clauses to deny groups of consumers their day in court. A cherished tenet of our justice system is that no one, no matter how big or how powerful, should escape accountability if they break the law. But right now, many contracts for consumer financial products like bank accounts and credit cards come with a mandatory arbitration clause that makes it virtually impossible for people to sue the company as a group if things go wrong. On paper, these clauses simply say that either party can opt to have disputes resolved by private individuals known as arbitrators rather than by the court system. In practice, companies use these clauses to bar groups of consumers from joining together to seek justice by vindicating their legal rights.
Group lawsuits, also known as “class action” lawsuits, have long been recognized as a means to secure relief under federal and state law. A small number of consumers can take a company to court to seek justice on behalf of all who were harmed by the company’s practices. By blocking group lawsuits, mandatory arbitration clauses force consumers either to give up or to go it alone – usually over relatively small amounts that may not be worth pursuing on one’s own. Including these clauses in contracts allows companies to sidestep the judicial system, avoid big refunds, and continue to pursue profitable practices that may violate the law and harm large numbers of consumers.
The breadth and application of these clauses can be unexpected and severe. For example, when Wells Fargo opened millions of deposit and credit card accounts without the knowledge or consent of consumers, arbitration clauses in existing account contracts blocked their customers from bringing group lawsuits for the unauthorized account openings. Companies have argued that group lawsuits are unnecessary because the government can pursue enforcement actions to address the same problems. But consumers should be able to stand up for themselves and pursue their own legal rights without having to wait on the government. And the government has limited resources and authority to respond to every problem that arises in these financial markets.
Originally, arbitration was primarily used for disagreements between two businesses. But over the last quarter century or so, companies started adding arbitration clauses to their consumer contracts, specifically to block group lawsuits and avoid legal accountability. In the last decade, Congress has addressed mandatory arbitration in a few key areas. In 2007, Congress passed the Military Lending Act, which disallows mandatory arbitration clauses in connection with certain loans made to servicemembers. Three years later, in the Dodd-Frank Wall Street Reform and Consumer Protection Act, Congress went further and banned mandatory arbitration clauses in most residential mortgage contracts.
The Dodd-Frank Act also required the Bureau to study the use of mandatory arbitration for other consumer financial products and services. Congress further authorized the Bureau to issue regulations to limit or prohibit the use of pre-dispute arbitration clauses for consumer financial products or services if such a rule is in the public interest, for the protection of consumers, and if the findings of such a rule are consistent with findings from our study. We conducted the most comprehensive study of mandatory arbitration clauses ever undertaken. We found that these clauses now exist in hundreds of millions of consumer finance contracts affecting tens of millions of consumers. For example, credit card issuers representing over half of all credit card debt have arbitration clauses in their contracts with consumers. Yet few consumers are aware of these clauses and even fewer know how they work. Three out of four consumers we surveyed did not even know whether their credit card agreement contained an arbitration clause.
Our research showed that these little-known clauses are bad for consumers. They may not be aware that they have been deceived or discriminated against or even when their contractual rights have been violated. Moreover, very few people have the time or the money to fight on their own over a small amount of money, which is commonly the stakes in consumer financial matters, even though they can involve the same harm to millions of consumers. In most situations, hiring a lawyer to handle the consumer’s own individual case is not practicable. For example, when faced with the daunting prospect of expending all that effort to recoup a $35 fee or even a $100 overcharge, it is no surprise that few people bother to try. When we surveyed consumers with credit cards, only about 2 percent of them said they would consult an attorney or consider formal legal action to resolve a small-dollar dispute. By forcing people to go it alone, companies are less likely to face legal action from anyone who was wronged. As a result, consumers are hurt in two ways.
First, as compared to group lawsuits, individual arbitration means consumers are less likely to get relief for the harms they have suffered. According to the Bureau’s study, group lawsuits succeed in bringing hundreds of millions of dollars in relief to millions of consumers each year, and at least 34 million members of group lawsuits received payments over the five-year study period. Those payments totaled $1 billion in cash direct to consumers, net of attorney’s fees and expenses. Conversely, over the two years that we studied final results, in about one thousand arbitration cases, the arbitrators awarded a combined total of about $360,000 in relief to a total of 78 consumers. Therefore, by blocking group lawsuits, companies are able to avoid paying out significant amounts of money in private litigation when they wrong consumers.
Second, consumers are likely to continue facing ongoing harm that does not get corrected. Even if some consumers were to bring individual arbitration actions and recoup their own losses, that does not stop the same practices from happening again to them or to others. Resolving group lawsuits often requires companies not only to pay back everyone who was harmed, but also to change their conduct moving forward. This saves countless consumers the pain and expense of experiencing the same harms. The Bureau’s study found that in 53 group settlements covering over 106 million consumers, companies agreed to change their business practices or implement new compliance programs. Without group lawsuits, private citizens have much less power, on their own, to stop companies from pursuing profitable practices that may violate the law.
Today’s rule prohibits banks and other consumer financial companies from including mandatory arbitration clauses that block group lawsuits in any new contracts after the compliance date. The rule does not bar arbitration clauses outright. For these new contracts, however, these clauses have to say explicitly that they cannot be used to stop consumers from banding together to pursue relief as a group. The rule includes the specific language that financial companies must use. By restoring the ability of consumers to file or join group lawsuits, the rule gives companies more incentive to comply with the law. And the deterrent effect of such cases can more broadly influence the business practices of other companies as well.
Our new rule also requires companies to submit their claims, awards, and other information about the arbitration of individual disputes to the Bureau. This will help us better monitor arbitrations to make sure the process is fair for individual consumers. The companies are required to scrub these materials of personal information, and starting in July 2019, we will also post them on our website. This will promote transparency and give consumers, providers, and other regulators more insight into how arbitration works.
Our common-sense rule applies to the major markets for consumer financial products and services under the Bureau’s jurisdiction, including those in which providers lend money, store money, and move or exchange money.
To get it right, our process has been thoughtful and thorough. Before launching our study, we issued a Request for Information to obtain stakeholder input about the scope of the study and the available data. In November 2013, we issued the preliminary results of our study and described the scope of the remaining work. The study itself was published in March 2015. For over two years since, we have worked to determine whether new rules were appropriate based on the study results and the Bureau’s experience and expertise. We consulted with small providers that might be affected. Last May, the Bureau issued a request for public comment, and last August, we held a Tribal consultation. We ultimately considered more than 110,000 responses from consumers, consumer groups, industry, and other interested parties before finalizing the rulemaking. The text of the rule is direct and concise at only 12 double-spaced pages, with some further explanatory commentary.
I am, of course, aware of those parties who have indicated they will seek to have the Congress nullify this new rule. That is a process that I expect will be considered and determined on the merits. My obligation as the Director of the Consumer Bureau is to act for the protection of consumers and in the public interest. In deciding to issue this rule, that is what I believe I have done.
Over the past 50 years, Congress made the decision in many consumer financial statutes to allow individuals to sue to seek relief when they are harmed by violations of the law. Indeed, Congress frequently adopted special provisions to allow for class actions. Congress has acted selectively and carefully, sometimes authorizing such lawsuits so that individuals will not be dependent on the government to protect their rights, and sometimes disallowing them.
But in recent years, private companies have been able to override Congress’s decisions and sidestep accountability under the law, and millions of consumers have found the courtroom doors locked through mandatory arbitration clauses. This rule throws open those doors and allows harmed consumers to band together and seek justice for themselves and all others affected in the same way where Congress has authorized such lawsuits. Based on the study Congress authorized the Bureau to perform, that is the right answer to protect consumers and serve the public interest. Thank you.