CFPB Considers Crackdown on Arbitration Clauses: What You Should Know

By Heather Munro | Comments

A proposed Consumer Financial Protection Bureau (CFPB) ruling that would give consumers greater power to sue banks, credit companies, and other financial organizations has drawn heavy criticism from the lending sector. The ruling, projected to go into effect early next year after approval and comments, would bar financial organizations from including clauses that block signing parties from organizing to level a class action, or collective, lawsuit against them.

Issue Background

A common feature in consumer onboarding contracts, arbitration clauses compel the signer to pursue remediation for any problems through one-on-one arbitration with the company, rather than joining with other affected individuals to seek joint compensation.

In 2010, the Dodd-Frank financial overhaul law caused the CFPB to embark on a years-long study of arbitration clauses and their impacts. The study results were published in late 2015, showing that the clauses were massively widespread — appearing in the contracts of over 50% of nationwide credit card issuers, 44% of bank-insured deposits, and 86% of major student loan lenders. In some states, this number was as high as 99% for payday loans and 92% for prepaid card contracts.

CFPB Rationale

The proposed ruling argues that forcing consumers to waive their right to collective suit essentially allows financial organizations to sidestep accountability for potential wrongdoing. While the clauses explicitly allow consumers to seek redress through arbitration, they function practically as something of a bottleneck. Only about 600 individual disputes per year are resolved through arbitration, as most individuals are either unaware of the option or find it too time-consuming to pursue for relatively minor claims.

Realtor Ramifications

For those in the mortgage, real estate and home equity industry, not much will change: the CFPB already prohibits mandatory arbitration clauses in contracts pertaining to these fields. Similarly, brokerage contracts may still require arbitration for individual disputes, but may not prohibit the signer from participating in class action suits. However, realtors and lenders working with clients should be aware that the ruling may have a dramatic impact on their overall financial portfolio: as such, it will be increasingly important to keep an eye on the news landscape and take shifting circumstances into account when making equity and real estate recommendations.

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