It generally means that a "consumer financial product or service" offered or provided for use by consumers primarily for personal, family or household purposes as defined in 12 U.S.C.A. § 5481 can not include a pre-arbitration dispute clause that bans members from participating in class actions. The rule would apply to institutions that sell financial products including bank accounts and credit cards. Because consumers generally don't carefully read the fine print on the agreements for their checking accounts and credit cards, they are often unaware they are subject to arbitration. They are used heavily by banks.
Prevented from banding together in a class and pooling their resources, most people simply abandon their claims entirely, never making it to arbitration at all.
Consumer advocates have been pushing for years for stricter federal regulation of these types of clauses.
"The real benefactors of the CFPB's arbitration rule are not consumers, but trial lawyers who pocket over $1 million on average per class action lawsuit", said Richard Hunt, the President of the Consumer Bankers Association in a statement. According to the study, few consumers seek relief through arbitration or an individual lawsuit in federal court, although millions are eligible each year for relief that would come from class action settlements. But there's also a bottom line impact: banks could be exposed to billions of dollars in lawsuits from customers.
What's more, many consumers aren't aware they may have entered into contracts that have mandatory arbitration clauses in them.
The CFPB announced it was researching the issue in 2012.
A new rule meant to give consumers greater protection against financial institutions will likely lead to a host of regulatory challenges for community banks, and even more worrisome, potentially costly litigation.
For one thing, while it will allow class actions to proceed, financial companies can still require mandatory arbitration for individual claims. The ban also won't apply to any existing contracts. Some 75% of consumers don't know whether or not their credit card agreement contains an arbitration clause, Cordray said. Its 400 members include traditional installment lenders, vehicle finance/leasing companies, consumer and commercial finance companies, mortgage lenders and servicers, payment card issuers, industrial banks and industry suppliers.
More immediately, its adoption is nearly certain to set off a political firestorm in Washington, where both the administration of President Trump and House Republicans have pushed to rein in the consumer finance agency as part of a broader effort to lighten regulation on the financial industry. "This morning I've started the process of rescinding this rule using the Congressional Review Act".
"Noreika cited a section of the Dodd-Frank Act that gives the Financial Stability Oversight Council - a panel of regulators headed by the Treasury secretary - power to set aside any CFPB rule that can be shown to put the safety of the wider financial system at risk", Dexheimer reports.
Cotton's announcement is the first congressional action to rescind the rule. Arbitration clauses can limit your options if you have a legal issue with a financial service provider. Congress also authorized the Bureau to issue regulations that are in the public interest, that are for the protection of consumers, and which are based on findings that are consistent with the Bureau's study of arbitration.