New Regulations Could Make Arbitration Clauses Tough For Companies To Impose
On Wednesday the Consumer Financial Protection Bureau announced plans to begin a rulemaking process that would make it tougher for companies to impose arbitration clauses on customers. The CFPB said in the announcement that currently, many US financial products and services come with such arbitration clauses. These clauses generally “state that either the company or the consumer can require disputes about that product to be resolved by privately appointed individuals (arbitrators), rather than through the court system.” This enables companies to “generally block lawsuits from proceeding in court” and to “typically bar consumers from bringing group claims through the arbitration process.” CFPB Director Richard Cordray said of the new rulemaking process, “Consumers should not be asked to sign away their legal rights when they open a bank account or credit card. Companies are using the arbitration clause as a free pass to sidestep the courts and avoid accountability for wrongdoing. The proposals under consideration would ban arbitration clauses that block group lawsuits so that consumers can take companies to court to seek the relief they deserve.” Bloomberg News reported similar remarks by Cordray during a speech in Denver on Wednesday, when he explained, “Many violations of consumer financial law involve relatively small amounts of money for the individual victim. Group claims often are the only effective way consumers can pursue meaningful relief for harms that can add up to large amounts of money for financial providers.”
What Happens Next
Bloomberg News projected that this rulemaking process “is likely to be a point of contention between the agency and financial firms that say the CFPB burdens it with costs that sometimes are passed to consumers.” Additionally, business groups are likely to oppose the rulemaking. Such groups have in the past “argued that arbitration prevents unnecessary lawsuits and leads to lower consumer prices because companies will charge less if they don’t face the risk of litigation.” However, a timeframe for the rulemaking process is uncertain. SNL Financial reported that after Wednesday’s field hearing, CFPB Director Richard Cordray told the publication, “We’re at the beginning of a long rulemaking process,” and “all the input that we hear here and throughout that process will be important to us as we digest it and think about how to proceed.”
What This Means For Small Businesses
Enacting burdensome financial regulations on businesses will have negative effects on the small business community, particularly small businesses operating in the financial services sector. More CFPB rulemaking is unnecessary.
Additional Reading
CBS News and the New York Times also covered the CFPB rulemaking.
Note: this article is intended to keep small business owners up on the latest news. It does not necessarily represent the policy stances of NFIB.
