CFPB Proposes Prohibiting Financial Product and Service Providers From Using Mandatory Arbitration Clauses

Mandatory arbitration clauses deny consumers’ rights to file or join class actions

By Jeff Sorg, OnlineEd Blog

(May 5, 2016) –  In recent years, many contracts for consumer financial products and services – from bank accounts to credit cards – have included mandatory arbitration clauses. They affect hundreds of millions of consumer contracts. 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 cases  brought in small claims court. Where these clauses exist, either side can generally block lawsuits from proceeding in court. These clauses also typically bar consumers from bringing group claims through the arbitration process. As a result, no matter how many consumers are injured by the same conduct, consumers must proceed to resolve their claims individually against the company.

Our study on arbitration released in 2015 showed that very few consumers ever bring – or think about bringing – individual actions against their financial service providers either in court or in arbitration. The study found that class actions provide a more effective means for consumers to challenge problematic practices by these companies. According to the study, class actions succeed in bringing hundreds of millions of dollars in relief to millions of consumers each year and cause companies to alter their legally questionable conduct.  The study showed that at least 160 million class members were eligible for relief over the five-year period studied. Those settlements totaled $2.7 billion in cash, in-kind relief, and attorney’s fees and expenses. However, where mandatory arbitration clauses are in place, companies are able to use those clauses to block class actions.

The CFPB proposal

The proposal would ban companies from putting mandatory arbitration clauses in new contracts that block groups of their customers from suing them. The proposal would open up the legal system to consumers so they could file a class action or join a class action when someone else files it. Groups of consumers would have the opportunity to obtain relief from the legal system, and many companies would be incentivized to comply with the law to avoid group lawsuits. Also, the Bureau would be able to monitor the individual arbitration process, providing insight into whether companies are abusing arbitration or whether the process itself is fair. [SOURCE: CFPB Press Release]

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Jeff Sorg

About the Author

Jeff Sorg is a co-founder of OnlineEd®, a Web-based vocational school founded in 1997 where he also serves as Corporate Secretary, Chief Operating Officer, and School Director. Sorg holds vocational instructor licenses in Oregon, Washington, California, and Nevada and has authored numerous pre-licensing and continuing education courses. Sorg was awarded the International Distance Education Certification Center's CDEi Designation for distance education in 2008. OnlineEd® provides real estate, mortgage broker, insurance, and contractor pre-license, post-license, continuing education, career enhancement, and professional development and designation courses over the Internet.