CFPB Announces Intent To Commence Arbitration Rulemaking

On October 7, the Consumer Financial Protection Bureau (CFPB) announced that it is considering two rulemaking proposals that would severely limit the use of pre-dispute arbitration clauses in consumer financial service contacts. Ignoring the well-documented problems and abuses associated with class action litigation, the Bureau has concluded that because class actions effect a greater aggregate transfer of wealth from alleged "wrongdoers" to plaintiffs' class action lawyers and plaintiff classes than does arbitration, it is in the public interest and for the benefit of consumers to eliminate arbitration clauses that would limit its use. The Bureau has also concluded, as it must under the Dodd-Frank Act, that imposing such limitations by regulation would be consistent with its recent Report to Congress.

BACKGROUND

The Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) mandated a CFPB study on the use of pre-dispute arbitration clauses in consumer financial products and services, with a report of its findings sent to Congress.

The Dodd-Frank Act further authorized the CFPB to prohibit or impose conditions or limitations on the use of arbitration clauses by regulation if the CFPB determined that it would be in the public interest and for the protection of consumers to do so. However, any such regulation must be consistent with the findings of the CFPB's study.

The CFPB commenced its process in 2012, and from the beginning, it has appeared that the CFPB would target arbitration clauses requiring individual arbitration. The Supreme Court held that state laws barring these agreements were preempted by the Federal Arbitration Act in AT&T Mobility LLC v. Concepcion, 131 S. Ct. 1740 (2011). On March 10, 2015, the CFPB released its Final Report to Congress which removed all doubt. As we wrote in our Client Alert at the time, the "Report's conclusion, and Director Richard Cordray's remarks, were as expected: consumers are better served by litigation—and particularly, class action litigation—than by agreements to arbitrate disputes."1 On March 10, 2015, the CFPB released its Final Report to Congress which removed all doubt.

The CFPB's October 7 announcement of the planned rulemaking seeks to implement this conclusion.

THE CFPB'S PROPOSALS

The Bureau announced that it is considering two proposals. First, the Bureau proposes to require an arbitration provision "to say explicitly that it does not apply to cases brought on behalf of...