Credit unions may find themselves in court more often if the CFPB acts on its proposed ban on class action waivers in arbitration clauses – a change some industry experts said could inflate compliance costs and eliminate products and services.
The proposed rules, announced Oct. 7, would make it illegal for contracts for many types of consumer financial products to have arbitration clauses that prevent members from participating in class action lawsuits. In the CFPB's cross-hairs are credit unions, banks, card issuers, auto lenders, private student lenders, loan originators, money-transfer providers and a host of other financial services firms. It may also add payment processors to the list, it said.
"Consumers should not be asked to sign away their legal rights when they open a bank account or credit card," CFPB Director Richard Cordray said. "Companies are using the arbitration clause as a free pass to sidestep the courts and avoid accountability for wrongdoing."
Arbitration clauses, which typically require an arbitrator rather than the court system to resolve disputes between parties, are common. But according to the CFPB, the clauses are "buried" in many contracts and few consumers realize they prohibit joining others in suing an institution in court. More than 75% of credit card consumers didn't know they were subject to arbitration clauses, for example, according to a three-year study the CFPB issued to Congress in March.
To be clear, the CFPB's proposals would not ban arbitration clauses. However, the clauses would have to say explicitly that they don't apply to cases filed as class actions unless a court denies class certification or dismisses the complaint.
"What I think they're getting at is they're trying to address situations where an organization has a policy or procedure that, let's say, harms a whole group of people in the same way for the same reasons," explained CUNA Mutual Group VP of Wealth Management Kevin Thompson. "It could be a pricing thing or something like that. Any one individual might not be harmed enough to be incented to take action, but a group may be so inclined."
Many credit unions and other institutions would likely have to update their member agreements, loan documents and other contracts under the proposed rules. But that may be the least of their worries.
"Credit unions are already spending much more on legal fees than they were five, 10 years ago," said attorney Dustin DeVore, who leads the credit union practice at Kaufman & Canoles in Williamsburg, Va. "Now they're going to be spending even more. Whether this is a good thing or not – there's no question it's going to drive up costs. As you know, that leads to fewer member services, high loan rates, you name it."
Though FINRA publishes arbitration awards in disputes between customers and broker-dealers, and states such as California publish some data about consumer finance arbitrations, arbitration is largely a confidential affair today. The new proposals would significantly change that, however, by requiring institutions to report arbitration claims and awards issued. By publishing the information on its website, the CFPB argued, it can expose unfair arbitrators and show attorneys which kinds of cases are most successful.
The experts worried credit unions and other institutions could turn into targets as well.
"Everyone likes to sue a financial institution because they're 'the bad guy,'" Patty Corkery, an attorney specializing in credit union law at Holzman Corkery in Southfield, Mich., said. "I think that this would put this on the radar of a lot of plaintiffs' attorneys that that's all they do is class action, because they make a ton of money."
Whatever happens, it will likely happen quickly. The CFPB is considering setting an effective date of 30 days after the rule is published, and credit unions would then have 180 days to comply. Arbitration agreements already entered into would not need to be changed or amended, it added.
In the meantime, the best defense is a good offense, Thompson warned.
"You treat people with respect and honesty and make sure you're doing business the right way, because there are people out there watching, whether that's the CFPB or the class-action lawyers," he said. "The best way to deal with this always is to be honest and upfront and do business correctly. Then all of this sort of fades into the background."
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