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The Evils of Arbitration According to the CFPB

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BY BRAD R. BERGMOOSER

Will possible proposed rules by the Consumer Financial Protection Bureau alter the way your credit union customers open a bank account or credit card? Arbitration provisions are facing greater scrutiny. Here’s what you need to know about how these potential changes may affect the products and services your CU offers consumers.

On October 7, 2015, the Consumer Financial Protection Bureau (CFPB) issued a “proposal to a proposal”aimed at limiting arbitration clauses in consumer agreements.A “proposal to a proposal” means there is no official proposed rule…yet.

The CFPB does not like class action prohibitions in arbitration clauses and feels they create disastrous results for consumers.Specifically, CFPB Director Richard Cordray has stated, “Consumers should not be asked to sign away their legal rights when they open a bank account or credit card.” Broad generalizations and factual inaccuracies aside, contractual provisions such as arbitration clauses are an important tool to mitigate and account for risk – an essential issue for financial institutions and (ironically) their regulators.

The rationale for the proposed rules comes from the results of a study released by the CFPB in March.According to the Bureau, the study “showed that arbitration clauses restrict consumers’ relief for disputes with financial service providers by allowing companies to block group lawsuits,” and “very few consumers individually seek relief through arbitration or the federal courts, while millions of consumers are eligible for relief each year through group settlements.”Making the connection between the proposed arbitration restrictions and the data suggesting that consumers do not heavily utilize the arbitration process, however, ignores the expansive system of consumer-friendly laws and regulations currently in place that serve to resolve many issues before the consumer is faced with the decision to pursue further legal action.

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