Removing Barriers Blog

CFPB Proposes Arbitration Rule in Conjunction Field Hearing
Posted May 05, 2016 by Chandler Schuette

In conjunction with a field hearing in Albuquerque, New Mexico the Consumer Financial Protection Bureau (CFPB) released its anticipated proposed rule for arbitration clauses, and CFPB Director Richard Cordray provided opening remarks. Kevin Hammar of Aldridge, Hammar, Wexler & Bradley, P.A. testified on behalf of the CUNA and represented the credit union perspective, and was joined by consumer group representatives, and other panelists

The proposed rule released today, if finalized, would effectively eliminate the ability to use class action waivers in arbitration and would require financial institutions to insert language into their arbitration agreements reflecting this limitation. We have expressed concerns that this would limit options for resolving disputes and could increase the incidences of frivolous class action litigation against financial institutions, which could cause members to suffer when costs rise and resources are depleted. 

The proposal would also require providers that use pre-dispute arbitration agreements to submit certain records relating to arbitral proceedings to the Bureau. We previously expressed concerns that this could be duplicative of the CFPB’s already public facing complaint database, which has yet to resolve several issues, including concerns about complaint handling and validation. 

We also pointed out that the proposal is inappropriate for credit unions because they are member-owned, not-for-profit financial cooperatives with different dispute resolution incentives compared to for-profit institutions. Chief Advocacy Officer Ryan Donovan stated, “Because of their ownership structure, credit unions prefer to work closely with members to amicably resolve disputes. This proposal, however, removes an important tool that, while used infrequently by credit unions, can provide time and cost-saving benefits for all parties that litigation does not. It also sets up a scenario in which a group of members that have a dispute with their credit union would essentially have to sue themselves, as a class-action suit filed against a credit union could only be brought by a group of member-owners. In that situation, everyone, except the plaintiffs’ attorneys, loses.” 

During the hearing, Hammar highlighted problems with the CFPB’s one-size fits all approach to this and other rulemakings. He talked about the distinction in resolving disputes between credit unions and large banks, noting that credit unions are member owned. He also talked about the problems increased compliance burdens cause for credit unions. 

One notable aspect of the proposal is that the CFPB provided some recognition of the burden frivolous Telephone Consumer Protection Act (TCPA) class actions place on small financial institutions as a result of the lack of statutory damage limits. The proposal notes that trade associations have been advocating for relief for financial institutions from frivolous TCPA class action litigation, and specifically references CUNA’s letter to Congress about this matter. We appreciate that the CFPB has highlighted these concerns, and we plan to respond to the CFPB’s request for comment on whether there are compelling reasons to exclude particular causes of action from the proposed rule. 

We are still in the process of reviewing the 377-page proposal and will be seeking feedback from credit unions about how this rule could impact them now, or in the future.