Locke Lord QuickStudy: CFPB Determined to Rewrite Consumer Contracts and Feed Class Action Lawyers

October 8, 2015

On October 7, the CFPB released an outline of proposed rules that would ban consumer financial services companies from using arbitration clauses to prevent consumers from bringing class action lawsuits. The CFPB also conducted a field hearing in Denver, Colorado on this topic.   

In its press release announcing the proposals and the forthcoming Small Business Review Panel that will consider such proposals, the CFPB indicated that “[c]ompanies are using the arbitration clause as a free pass to sidestep the courts and avoid accountability for wrongdoing.” I disagree. These clauses do not allow consumer finance companies to avoid accountability. These clauses relieve the company and the consumer of the costly and drawn-out burden of a class action lawsuit. They do not shed accountability. These clauses also allow lower pricing for consumer financial products because the threat of a very costly class action lawsuit is removed. Removing these clauses may increase the cost of consumer financial products. I submit this as unintended consequence #1.   

Further, the CFPB indicates that “[t]he proposals under consideration would ban arbitration clauses that block group lawsuits so that consumers can take companies to court to seek the relief they deserve.” True statement. Consumers, through class action attorneys, may seek their day in court. However, it occurs to me that those most rewarded by these potential proposals are the class action attorneys, not the consumers. Is that what the CFPB wants? I submit this as unintended consequence #2. 

As drafted, these proposals would apply to most of the consumer financial products and services under the purview of the CFPB. These would include credit cards, checking and deposit accounts, prepaid cards, money transfer services, certain auto loans, auto title loans, small dollar or payday loans, private student loans, and installment loans. The proposals would also require explicit language in the arbitration clause stating that the clause “does not apply to cases filed as class actions unless and until the class certification is denied by the court or the class claims are dismissed in court.” The CFPB contends that the proposals do not ban arbitration clauses in their entirety. That is true, but the purpose behind the clause is wiped out. The arbitration clause becomes as useless as an umbrella in a hurricane.   

In any event, the CFPB contends that the proposals provide the following three benefits: (1) a day in court for consumers; (2) a deterrent effect; and (3) increased transparency. 

So, with these proposals, consumers stand to pay more for consumer financial products and services, and face overzealous class action attorneys who will reap a substantial portion of the “relief” that could, potentially, be coming their way in a successful lawsuit or settlement. It is not clear to me that the benefits outweigh the costs, especially for the consumer. 

Practice Tips:
  • Start thinking about cataloging the consumer financial services contracts you have that contain arbitration clauses. The CFPB has done quite a bit of work on this issue and is unlikely to take the proposals off the table in their entirety. 
  • Consider the necessary steps that may need to be taken to modify the language in those contracts, as well as new contracts for consumer financial products and services. 
  • Consult with inside and outside counsel to review the necessary changes to the contract language. 

Locke Lord has a dedicated team of financial services regulatory, compliance and litigation attorneys with significant experience handling various aspects of banking and consumer finance. Locke Lord attorneys regularly advise financial institutions on regulatory compliance matters, new product development and represent clients in regulatory enforcement matters, class actions and various lawsuits in the U.S. and abroad. Visit Locke Lord’s Financial Services Regulatory Practice website or contact the author with questions.