CFPB Takes Fresh Aim at Binding Arbitration Clauses

The Consumer Financial Protection Bureau is likely to propose rule changes that would make it harder for businesses including auto lenders to avoid class-action suits by inserting binding arbitration clauses in contracts.

That conclusion is based on remarks prepared for CFPB Director Richard Cordray for a “field hearing” on arbitration today in Dallas. Cordray said in his prepared remarks corporations use arbitration clauses to “rig the game” against consumers.

“Group lawsuits can result in substantial relief for many consumers and create the leverage to bring about much-needed changes in business practices.  But by inserting the free pass into their consumer financial contracts, companies can sidestep the legal system, avoid big refunds, and continue to pursue profitable practices that may violate the law and harm consumers on a large scale,” he said in prepared remarks.

Conversely, lenders have argued that without binding arbitration, plaintiffs could use the mere threat of a class action as a “blackmail tool” to force a settlement,  said Tom Hudson, a partner at Hudson Cook, Hanover, Md., in a column written for Auto Finance News in June.

Hudson said auto lenders and retailers have used arbitration clauses extensively since the early- to mid-1990s. “For the most part, the arbitration agreements performed as advertised,” by heading off lengthy, expensive litigation, he said in the column.