Today's Trends in Credit Regulation

It's the End of the World as We Know It (and I Don't Feel Fine)
By Eric L. Johnson

No, I'm not talking about stocking up on freeze-dried food, water, and ammo and getting your "bug-out" bags ready for that kind of the end of the world. I'm talking about the end of the world as it relates to pre-dispute arbitrations - so dramatic a shift from current practice it will feel like the end of the world (unless you're a plaintiffs' attorney).

At a recent field hearing in Denver, the Consumer Financial Protection Bureau announced that it is considering proposing rules that would ban consumer financial companies from using the types of arbitration agreements currently used to reduce the risk of class action lawsuits. The CFPB claims the arbitration clauses give a creditor a 'free pass' to sidestep the courts and avoid accountability for wrongdoing.

As you may know, the Dodd-Frank Act required the CFPB to study the use of arbitration clauses in consumer financial markets and, to protect consumers, gave it the power to issue regulations consistent with the study's findings. The CFPB claims that its most recent study, released last March, shows that arbitration clauses restrict consumers' relief in disputes with financial service providers by allowing companies to block class action lawsuits. They also claim that in the consumer finance markets studied, few consumers seek individual relief through arbitration or the federal courts, while millions of consumers are eligible for relief each year through group settlements.

The proposed rules would not ban arbitration clauses altogether, but the clauses would have to say explicitly that they do not apply to cases filed as class actions unless and until class certification is denied by the court or the class claims are dismissed in court. In addition, the proposed rules would require that companies choosing to use arbitration clauses for individual disputes submit to the CFPB the arbitration claims filed and the awards issued.

The CFPB wants to monitor consumer finance arbitrations to ensure that the process is "fair" for consumers. There's that word again - "fair" - that the CFPB and its director love to use, without actually telling us what it means. Place your bets on whether what's "fair" to a consumer will ever be "fair" to the financial companies that use arbitration clauses. Furthermore, the CFPB is considering publishing the claims and awards on its website so the public can monitor them. I suppose this is yet another example of the CFPB's modern-day public stockade - the CFPB can publicly shame or humiliate companies brazen enough to want to protect themselves by using an arbitration clause for individual disputes.

So, what are the next steps? The CFPB will convene a Small Business Review Panel to review its proposal and prepare a report on small business impact. The Panel is comprised of representatives from the CFPB, the Chief Counsel for Advocacy of the Small Business Administration, and the Office of Management and Budget's Office of Information and Regulatory Affairs. The Panel will conduct an outreach meeting with a select group of small business representatives to provide them with feedback on the potential economic impacts of complying with the proposed rules. Within 60 days of convening, the Panel will issue a report on the input it received. When it prepares the proposed rules, the CFPB must discuss and consider the Panel's report and the comments and advice provided by small businesses. The CFPB predicts an effective date of 30 days after the final rules are published. The CFPB anticipates that the rules would apply to arbitration agreements entered into 210 days after the final rules are published.

For the time being, nothing has changed for lenders and finance companies that use arbitration agreements in loans and retail installment sales contracts. But, in the very near future, I bet you'll be singing, "It's the end of the world as we know it" along with me. But, unlike the band REM, we may not "feel fine."

Eric L. Johnson is a partner in the Oklahoma office of Hudson Cook, LLP. Eric can be reached at 405-602-3812 or by email at

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