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CFPB Proposes Prohibiting Mandatory Arbitration Clauses

on Thursday, 5 May 2016 in Banking Update

Earlier today, the Consumer Financial Protection Bureau (“CFPB”) held a field hearing in Albuquerque, New Mexico on mandatory arbitration clauses found in the terms and conditions of several consumer financial products, including credits cards, bank accounts and prepaid cards. The CFPB released its Notice of Proposed Rulemaking (“NPRM” or “Proposed Rule”) on Arbitration clauses in advance of the Field Hearing, a copy of which can be found here.

An initial review of the Proposed Rule reveals several provisions that will likely have a negative impact on the financial services industry. The Proposed Rule:

  • Prohibits providers from using a pre-dispute arbitration agreement to block consumer class actions in court, the impact of which will likely cause participants in the financial services industry to stop using mandatory arbitration agreements all together;
  • Requires providers to insert language into their arbitration agreements alerting consumers that class actions cannot be restricted. There are multiple examples for different situations, but the standard notice reads as follows: “We agree that neither we nor anyone else will use this agreement to stop you from being part of a class action case in court. You may file a class action in court or you may be a member of a class action even if you do not file it.”; and
  • Requires companies with arbitration clauses to submit to the CFPB claims, awards, and certain related materials that are filed in arbitration cases.

The CFPB is also considering publishing information on arbitral awards that it collects in some form so the public can monitor the arbitration process as well.

Comments to the Proposed Rule are due 90 days after publication in the Federal Register (that date of which is still to be determined) and the proposed effective date is 30 days after publication of the final rule in the Federal Register. Finally, the Proposed Rule would only apply to agreements entered into more than 180 days after the effective date.

Grayson J. Derrick, Eli A. Rosenberg and Jonathan J. Wegner

1700 Farnam Street | Suite 1500 | Omaha, NE 68102 | 402.344.0500