CFPB Releases Final Rule to Limit Forced Arbitration in Financial Contracts

Release Date: 
July 10, 2017
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Long-Awaited Rule Restores Right to Band Together in Court Against Bad Actors in Consumer Financial Marketplace

Federal Consumer Agency Released Its Final Rule to Stop Financial Institutions’ Use of Forced Arbitration Clauses That Ban Class Actions

WASHINGTON, D.C. – The CFPB has issued its long-anticipated and widely supported rule that will restore consumers’ right to join together in court to hold bad actors in the financial industry accountable when they break the law. The National Association of Consumer Advocates applauds the bureau for giving consumers back their rights in the financial marketplace.

The final rule, as proposed in May 2016 after a three-year long comprehensive government study of forced arbitration in the financial markets, and now ending with a two-year rule-writing process, would limit the use of terms in banking, credit card, payday loan, auto loan, prepaid cards, and other financial contracts that force customers to resolve disputes with big banks and lenders in secret arbitration proceedings. Specifically, the rule when it goes into effect will restore consumers’ ability to participate in class actions and will make the arbitration process more transparent by publishing key materials from individual arbitration cases.

While the policy does not ban forced arbitration outright, it ends class action bans which are the worst aspect of these fundamentally unfair terms,” said Ira Rheingold, executive director of the National Association of Consumer Advocates (NACA). “The policy reinstates rights and remedies for millions of Americans, including servicemembers and veterans, older Americans, and working families.”   

Forced arbitration is a predatory practice in which corporations use their take-it-or-leave-it fine-print contracts to restrict their customers’ constitutional right to go to court by forcing them to resolve disputes in private arbitration proceedings. Corporations handpick the arbitration firms that would hear and decide the disputes and arbitrators’ decisions are rarely appealable. Millions of these ripoff clauses in contracts also prohibit consumers from participating in class actions.

“We are pleased with this common sense solution to give consumers back their right to go to court when they are systematically cheated or ripped off by big banks or predatory lenders,” said Christine Hines, NACA’s legislative director. “With this change, bad actors in the financial markets will be less inclined to fleece their customers and pad their bottom line with illegal or fraudulent practices.”

Indeed, the bureau’s forced arbitration study required under federal law showed that financial institutions’ contract terms effectively blocked their customers from going to court to seek remedies for harm. Only a handful of customers of the tens of millions of consumers in the marketplace received any remedies in the forced arbitration process. Meanwhile, in its study of class actions across consumer finance markets over a five-year period, at least 160 million class members were eligible for remedies. The class actions not only compensated wronged consumers it stopped potentially illegal practices and changed corporate conduct.

It’s also clear that the valuable work of the bureau and state attorneys general to enforce consumer protection laws against wrongdoers does not remove the need for consumers to help themselves in court. During the five-year study and rulemaking process, state AGs sent two letters to the bureau, lamenting consumers’ lack of access to remedies and the important role of private enforcement and consumer class actions to help address some of the worst widespread financial practices in their states.

“The mountain of evidence shows that forced arbitration clauses with class action bans are a get-out-of-jail-free card for financial institutions that wrongly take a little bit of money from a lot of people with deceptive fees, charges or other fraudulent and illegal behavior,” Hines said. “The highly anticipated and broadly supported rule is a much-needed step to help ordinary consumers hold wrongdoers accountable.”

For more information, visit Everything You Need to Know About CFPB's Forced Arbitration Rulemaking