CFPB’s Proposal to Ban Arbitration Waivers

The Consumer Financial Protection Bureau held a field hearing on October 7, 2015 in Denver, CO. The Bureau used the event to announce that the CFPB is empaneling a Small Business Review Panel so it can start the process of proposing a rule to ban use of arbitration provisions to block class actions. The event consisted of CFPB Director Richard Cordray’s comments, discussion from panelists, and comments from the audience.

CFPB’s proposal to be considered is: (1) a ban on class action waivers which would prohibit companies from blocking group lawsuits through arbitration clauses in their contracts and (2) a requirement that companies under CFPB jurisdiction must send to the Bureau all filings made by or against them in consumer financial arbitration disputes and any decisions that stem from those filings. The CFPB emphasized that it is not proposing at this time to limit the use of arbitration clauses in individual cases.Logo1_horizontal-lockup_@2

The CFPB will convene its Small Business Review Panel to review its proposal and do a report on small business impact. The Panel is made up of representatives from the CFPB, the Chief Counsel for Advocacy of the Small Business Administration (SBA), and the Office of Management and Budget’s Office of Information and Regulation Affairs. The Panel will conduct an outreach meeting with a selected group of representatives from small businesses to provide feedback on the potential economic impacts of complying with proposed regulations. Within 60 days of the outreach meeting, the Panel will issue a report. The CFPB will consider the Panel’s report and comments provided by the small businesses as it prepares its proposed rule. Once the rule is proposed, any small business may submit formal written comments during the public comment period.

How will this affect car dealers?

If the CFPB bans class action waivers in arbitration clauses, an arbitration provision in retail paper assigned to finance sources will have to explicitly state it does not apply to cases filed as class actions unless class certification is denied by a court. Even though dealers are not directly subject to CFPB regulations, the financial institutions to which dealers assign retail installment sales contracts are. Therefore, dealers would be indirectly affected by this ban because the financial institutions could not purchase retail installment contracts with provisions waiving class actions.  

The “horribles” cited by arbitration opponents do not exist in car dealer arbitrations.

  • Arbitration opponents claim that consumers don’t choose arbitration for small balance disputes, leaving them unresolved. Unlike the small balance disputes that were the primary focus of the CFPB arbitration study, the rare disputes between car dealers and their customers that remain unresolved are large enough that consumers choose to arbitrate them.
  • Results are achieved without the delays and expense inherent in litigation such as pretrial motions, lengthy and costly discovery, preparation and trial, and appeals. The results are more favorable to consumers than the results of individual litigation.
  • The results are much more favorable than the typical results of class action lawsuits that can go on for years and yield small recoveries for class members.
  • Car dealer class actions historically, even when successful, have resulted in small recoveries by class members and huge awards to class attorneys.
  • Car deals are most often done on a one on one basis between the dealer and the vehicle buyer. They are not the faceless transactions without personal contact that were the focus of the CFPB arbitration study. Dealers who use arbitration provisions do so to maintain the informal nature of the customer/dealer relationship to resolve the issues that may develop infrequently.

For now, nothing has changed for dealers who use arbitration provisions in transaction paperwork. If the CFPB adopts a rule, by law, there will be time between adoption and its effective date to analyze the impact and take appropriate action.