CFPB looks to ban arbitration clauses that prohibit class action suits; final rule likely next year

CFPB looks to ban arbitration clauses that prohibit class action suits; final rule likely next year

The Consumer Financial Protection Bureau (CFPB) has issued a proposed rule that would bar consumer contracts like those from vehicle sales from requiring dispute resolution by arbitration instead of going to court. At this point, the rule looks likely to take effect next year since it does not require Congressional approval.

Reaction from the business community was swift.

–The CFPB is proposing to give the biggest gift to plaintiffês lawyers in a half century all at the expense of the consumers the agency is charged with protecting,” said the U.S. Chamber of Commerce in a statement. –The CFPBês own study concludes that arbitration empowers consumers to resolve disputes easily and quickly on their own without having to hire a lawyer. Nevertheless, the CFPBês rule will have the practical effect of eliminating arbitration for most consumers.”

The rule will affect dealers in three ways, said dealer lawyer and WANADA Kindred-line member, Michael Charapp of Charapp and Weiss, LLP.

1. It will affect the availability of affordable financing and leases if lenders cannot protect themselves against class actions through arbitration.

2. The language that will be required in credit documents potentially affects the ability of dealers to protect themselves from credit and lease class action suits from plaintiffsê lawyers representing consumers.

3. Even if the language does not improperly subject dealers to class action lawsuits, dealers will still face liability through indemnification agreements with lenders who get sued in class actions.

The proposal does not ban the required use of arbitration outright. But arbitration clauses in contracts would have to say explicitly that they cannot be used to stop consumers from joining a class action suit. The rule will provide specific language that companies must use.

Attorney Alan Kaplinsky of Ballard Spahr, who opposes the rule, said in testimony at the CFPB hearing where the rule was announced that it is a –de facto ban” on arbitration. –If this proposed regulation becomes final, most companies will simply abandon arbitration altogether.”

Contracts with arbitration clauses signed by all parties before the final rule next year will be grandfathered in. The rule will take effect after a 90-day public comment period followed by a comment review before the CFPB writes the final rule. Ballard Spahr said that process means the effective date would be the second quarter of 2017 at the earliest. The American Bankers Association, Consumer Bankers Association and the National Association of Federal Credit Unions have all told the CFPB they oppose the rule.