Consumer Financial Protection Bureau (CFPB) Director Richard Cordray has announced an inquiry into how consumers and financial services companies are affected by arbitration and mandatory predispute arbitration agreements.
The inquiry, authorized and mandated by the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (see Sec. 1028(a)) seeks public input on or before June 23, 2012, regarding the scope and methodology of this inquiry, which will lead to a report to Congress on the subject.1 The CFPB seeks comment on the prevalence of predispute arbitration clauses, how often customers bring such arbitration claims, the speed and outcome of such arbitrations, customers’ satisfaction with the arbitration process, and whether and under what circumstances financial institutions affirmatively bring arbitration claims against consumers (e.g., to collect debts). The CFPB also requests comment on the extent to which predispute arbitration clauses affect the number and types of claims consumers bring, the price and availability of financial services to consumers, compliance with consumer protection laws by financial institutions and consumer awareness of their legal rights and remedies. However, the CFPB expressly states that it is not seeking comment at this time on whether it should adopt a rule restricting predispute arbitration agreements — presumably, such a rule would only be proposed after the CFPB completes its study of arbitration agreements.
Many contracts for consumer financial services products and services contain a “pre-dispute arbitration clause” requiring the parties to a given contract or transaction to resolve disputes through arbitration rather than the court system. Last year’s Supreme Court decision in AT&T Mobility LLC v. Concepcion, which held that class-action waiver clauses in predispute arbitration agreements are enforceable under the Federal Arbitration Act, has made arbitration agreements even more significant in the consumer context. As a result, the potential impact for both bank and non-bank financial institutions of a federally imposed limit on predispute arbitration agreements is significant, both in terms of the general costs of defending consumer claims and the valuation of consumer receivables through securitization.
Even financial services firms not directly subject to the jurisdiction of the CFPB should pay attention to the CFPB’s report on predispute arbitration agreements. Section 921 of the Dodd-Frank Act gives the SEC the ability to forbid broker-dealers and investment advisers from enforcing predispute arbitration agreements, parallel to the authority given to the CFPB in Section 1028 of the Dodd-Frank Act. If the CFPB concludes that mandatory predispute arbitration agreements hinder the ability of consumers to protect their rights without meaningfully lowering the cost or increasing the availability of financial services to consumers, it may be difficult for the Securities and Exchange Commission to reach a contrary conclusion. We encourage SEC-regulated entities as well as CFPB-regulated entities to consider the questions raised by the CFPB concerning the arbitration process and to submit comments on the CFPB’s proposed study.
*This alert was co-authored by Nicholas Gess and W. Hardy Callcott.
If you have any questions or would like more information on the issues discussed in this LawFlash, please contact any of the following Morgan Lewis lawyers:Gess-Nicholas
This article was originally published by Bingham McCutchen LLP.