The financial services industry erupted earlier this month, soon after the Consumer Financial Protection Bureau published a set of proposed rules for limiting the use of forced arbitration clauses by broad range of entities, including certain providers of financial products and services.
This longstanding practice, whose origin dates back to 1925, of incorporating language that requires consumers and others to waive their constitutional right to a jury trial is attracting a lot of attention these days because of concerns that it favors the interests of lenders over debtors, schools over students, services firms over customers, and even employers over employees.
Arguably, the most cherished and, at the same time, abhorred aspect of this contractual provision is how it prevents groups of (allegedly) unjustly treated parties from filing class-action lawsuits for damages.
The CFPB wants to change that.
Once the 90-day commentary period has lapsed and the bureau’s final rules are put into place, the first of these will prohibit the prospective use of litigation-limiting “arb-clauses” in certain consumer transactions. (Unfortunately, those who have existing contracts with this language will continue to be bound by its terms.)
The second serves as a sanity check of sorts. It stipulates that those companies and institutions that will become subject to the bureau’s new rules will also be required to “submit specified arbital records to the Bureau” at specific intervals.
In other words, the CFPB wants to know that what it ultimately implements is having the intended effect. If that’s not the case, presumably the bureau will consider revising the rules it set forth.
One of the many consumer financial products that the Dodd-Frank legislation authorizes the CFPB to regulate is private student loans. The bureau oversees the entities that originate these loans, along with the firms that administer the resulting contracts on their (originators and entities to which the loans may later be sold) behalf.