Today, the CFPB issued a statement indicating that they are going to propose a rule that would prohibit the financial services industry (banks, credit card issuers etc.) from including class action waiver provisions in pre-dispute arbitration agreements that they require consumers to sign as a condition of doing business with the financial services provider. In other words, under the proposed rule, signing an arbitration agreement would not preclude the consumer from joining other consumers in a class action claim in court against the bank or other financial services provider.

The CFPB’s proposed rule prohibiting companies from blocking group lawsuits through the use of arbitration agreements is a terrific development for consumers. The CFPB study issued a few months ago revealed that banks and other financial services providers use arbitration agreements as claim suppression devices — because the claims consumers have are mostly small value, an arbitration agreement discourages them from trying to vindicate their claims individually. Only if they can join with other consumers in a class proceeding can they effectively vindicate their rights and the rights of other consumers. The CFPB’s move is important because the Supreme Court routinely enforces arbitration agreements with class action waivers. Thus, consumer claims have been effectively suppressed.

Here are some comments from Rich Cordray today regarding this proposed rule:

“After carefully considering the findings of our landmark study, the Bureau has decided to launch a rulemaking process to protect consumers. The proposal under consideration would prohibit companies from blocking group lawsuits through the use of arbitration clauses in their contracts. This would apply generally to the consumer financial products and services that the Bureau oversees, including credit cards, checking and deposit accounts, certain auto loans, small-dollar or payday loans, private student loans, and some other products and services as well.

One approach we might have taken would be a complete ban on all pre-dispute arbitration agreements for consumer financial products and services. Our proposal would not do that. Companies could still have an arbitration clause, but they would have to say explicitly that it does not apply to cases brought on behalf of a class unless and until the class certification is denied by the court or the class claims are dismissed in court. This means we are not proposing at this time to limit the use of arbitration clauses as they apply to individual cases.”

For the full text of his comments, see http://www.consumerfinance.gov/newsroom/

Sarah Cole is a professor as well as the director of the Program on Dispute Resolution at Ohio State University Moritz College of Law. She has focused her research on the legal issues and policy that have arisen as a result of the increased use of alternative dispute resolution (ADR). She frequently publishes articles on dispute resolution topics and is a contributor to ADR Prof Blog.