CFPB Targets Pre-Dispute Arbitration Agreements in Consumer Financial Services Contracts in New Report to Congress

By: Andrew C. Glass, Robert W. Sparkes, Roger L. Smerage

In the wake of the Great Recession, numerous federal government actors have sought to limit, and in some cases, eliminate, the inclusion of pre-dispute arbitration agreements in consumer financial services contracts.  For instance, in 2010, as part of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”), Congress amended the federal Truth-in-Lending Act to prohibit the use of pre-dispute arbitration provisions in residential mortgage contracts and home-equity line-of-credit agreements.  See 15 U.S.C. § 1639c(e)(1).  Now, acting pursuant to a mandate provided by the Dodd-Frank Act, see 12 U.S.C. § 5518(a), the Consumer Financial Protection Bureau (“CFPB”) has joined the hunt.  On March 9, 2015, the CFPB issued a report to Congress that appears to put the use of such agreements in all consumer financial services agreements – including credit card, checking account, and payday loan agreements – in the agency’s cross-hairs.

Many businesses, including those in the consumer financial services industry, include pre-dispute arbitration agreements in their consumer agreements.  They do so, in part, to streamline and manage the costs of dispute resolution.  Indeed, the United States Supreme Court has repeatedly discussed the advantages of arbitration in decisions dating back decades, including in a series of decisions issued since 2010.  Yet, some, including members of the plaintiffs’ bar, have complained about the prevalence of pre-dispute arbitration agreements, and the CFPB’s recent report echoes those complaints.  The report states, for example, that “[c]onsumers with [pre-dispute arbitration] clauses in their agreements generally either do not know whether they can sue in court or wrongly believe that they can do so” and that there was not “any statistically significant evidence of an increase in prices among those companies that dropped their arbitration clauses and thus increased their exposure to class action litigation risk” during the period of the report’s study.  See Consumer Fin. Protection Bureau, Arbitration Study: Report to Congress, pursuant to Dodd-Frank Wall Street Reform and Consumer Protection Act § 1028(a), at 11, 18 (Mar. 2015).

While voluminous, the report does not precisely detail the extent to which the CFPB may expand the ban on pre-dispute arbitration agreements in consumer financial services contracts.  This is not surprising.  The report is a mere precondition to the CFPB’s exercise of rulemaking authority that Congress delegated to the CFPB under the Dodd-Frank Act.  See 12 U.S.C. § 5518(b).  In light of its report, however, the CFPB is likely to issue formal notice of rulemaking in the near future proposing specific restrictions on the use of pre-dispute arbitration agreements by businesses in the consumer financial services industry.  K&L Gates will continue to monitor the CFPB’s activity in this regard and provide regular updates.