Consumer Finance Insights
October 26, 2015

Class-Action Waivers on the CFPB Chopping Block

Earlier this month, the CFPB announced that it may propose rules designed to curtail or eliminate class-action waivers from arbitration clauses. Arbitration clauses appear in most financial-services contracts to provide both parties with a cheaper alternative to litigation. Dubbing such clauses “a free pass [to] sidestep the legal system, avoid big refunds, and continue to pursue profitable practices that may violate the law and harm countless consumers,” the Bureau outlined proposals it is considering to limit or prohibit at least the class-action waiver component of arbitration clauses.

The heart of the CFPB’s rationale for limiting such clauses is that consumers are “significantly better protected from harm” when they are able to bring class-action lawsuits. Outline at 16. Thus, the Bureau’s primary proposal is to completely prohibit class-action waivers in arbitration agreements.  The Bureau proposes to accomplish this by requiring that any arbitration clause in a consumer-financial-services contract contain a provision stating that the arbitration clause is inapplicable in class actions.  As an alternative, the CFPB is considering allowing entities to include a provision that requires any class action to be arbitrated.  But the Bureau would play a role in arbitrated class actions by requiring the submission of claims and awards to the Bureau for potential publication.  Finally, the CFPB noted that banning arbitration clauses altogether was yet another alternative, but one that it is not currently considering.

The CFPB attack on arbitration clauses is now several months old.  When we wrote about the release of the CFPB’s arbitration study back in March, we noted that a portion of the report focused on class action waivers and suggested that rules focused on such waivers could be on the way.  The Bureau’s most recent announcement is the next step toward such rules.