Pub. 7 2016 Issue 2

www.wvbankers.org 16 West Virginia Banker T he Consumer Financial Protection Bureau (CFPB), the consumer finan- cial oversight body created by the Dodd-Frank Wall Street Reform and Con- sumer Protection Act, proposed rules on May 5, 2016, that would restrict the use of arbitration clauses in consumer financial contracts. From credit cards to bank accounts to private student loans, the proposal would prohibit financial companies from using mandatory arbitration clauses as a way to block class-action lawsuits, though companies would still be able to require consumers to enter arbitration to resolve individual disputes. Mandatory arbitration clauses, which require plaintiffs to resolve disputes with a company through an arbitration process in lieu of the court system, have become standard boilerplate for many financial companies, bolstered by the U.S. Supreme Court’s ruling in the case of AT&T Mobili- ty LLC v. Concepcion (563 U.S. 333) in 2011, which held that the Federal Arbitration Act preempts state statutes which con- dition the enforcement of an arbitration clause on the availability of class-wide procedures. In March 2015, the CFPB released the findings of a study of arbitration claus- es in the consumer finance field, which included over 850 consumer finance agree- ments and tens of thousands of dispute proceedings and outcomes. The study indicates that mandatory arbi- tration clauses were included in 53% of credit card loan contracts, 86% of private student loan agreements and 44% of de- pository banking institution contracts. Ad- ditionally, the arbitration clauses appeared in 92% of prepaid card agreements and 99% of payday loan contracts in certain states. The study also found that consumers file few arbitration cases. Over a review peri- od of 2010 to 2012, the study showed that only 1,847 individual arbitration disputes were filed with the American Arbitration Association (AAA), the largest admin- istrator of arbitration agreements in the consumer finance field. Of these cases, only about 25 per year in- volved a claim amount under $1,000 – the average claim amount was $27,000. The study further showed an average of just over 1,150 individual cases were filed per year in federal court and similar numbers for small claims court cases. In contrast, the study found that class litigation may provide means of securing relief for a larger number of consumers – pursuant to class settlements approved in federal courts between 2008 and 2012 totaling $540 million per year, at least 32 million class members were eligible for relief. However, many of the mandatory arbitra- tion clauses in use today prohibit arbi- tration on a class-wide basis. The study showed only two class arbitration disputes filed in the three-year period from 2010 to 2012. Individual arbitration claims studied by the CFPB revealed a consumer success rate of only 20%. The CFPB claims the proposal is in line with several recent restrictions introduced by the Dodd-Frank Act, which prohibit arbitration agreements in connection with mortgage loans and whistleblower proceedings, as well as authorized the Se- curities and Exchange Commission (SEC) to regulate such agreements with respect to contracts with broker-dealers and invest- ment advisors. Indeed, a number of regulations have also been proposed or adopted in recent years restricting the use of arbitration agree- ments with respect to lending to military members, the processing of livestock and poultry under federal agriculture law, contracts involving educational institutions which receive federal funding, and long- term care facility contracts in the medical field. Arbitration Up for Debate: New Rules Propose Banning the Use of Class-Prohibitive Arbitration Provisions By David M. Thomas and Michael T. Dean, Dinsmore & Shohl LLP