CFPB proposes prohibiting mandatory arbitration clauses that deny groups of consumers their day in court

By Eric Goldberg – MAY 05, 2016

On Nov. 1, 2017, the President signed a joint resolution passed by Congress disapproving the Arbitration Agreements Rule under the Congressional Review Act (CRA). Pursuant to the joint resolution, the Arbitration Agreements Rule has no force or effect. On Nov. 22, 2017, the Bureau published a notice removing the Arbitration Agreements Rule from the Code of Federal Regulations.

The materials relating to the Arbitration Agreements Rule on the Bureau’s website are for reference only.

View the Bureau's notice removing the Arbitration Agreements Rule from the Code of Federal Regulations

Today, we are proposing rules that would prohibit mandatory arbitration clauses that deny groups of consumers their day in court. Our proposal is designed to protect consumers’ right to pursue justice and relief and deter companies from violating the law.

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

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.

Public comment

The public is invited to comment on these proposed regulations for ninety days after the proposed rule is published in the Federal Register. Written comments will be carefully considered before any final regulations are issued.

Updated Sep. 1, 2016: The comment period has now closed. Read comments received .