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CFPB to Issue Proposal on Class Action Bans in Consumer Contracts

Later this week, the Consumer Financial Protection Bureau ("CFPB") is expected to issue a proposal that would prevent the use of class action bans in contracts between consumers and banks, as well as other firms. This proposal may, in fact, prove tantamount to a ban on arbitration clauses altogether, because it doubly burdens affected businesses with the costs of both defending against class actions and covering the costs of arbitration proceedings in individual cases, which may prompt them to remove arbitration clauses from their contracts. Proponents believe that the effects of this action will better equip consumers to seek and receive recompense from businesses, particularly in situations in which the individual damages would be too small to justify the costs of arbitration.

            This proposal is being issued as a result of a Dodd-Frank commissioned study conducted by the CFPB assessing the effects of mandatory arbitration clauses. In spite of arguments that arbitration's relative low costs and increased efficiency as compared to litigation benefit both parties to a contract, the CFPB found that the benefits that accrue to consumers were not as significant as proponents of arbitration claim. In fact, the CFPB's report stated that consumers were awarded less than $365,000 in damages and debt forbearance by arbitrators in more than 1,000 cases filed in 2010 and 2011, as compared to $2.7 billion in recoveries by over 32 million consumers in class action settlements over the five-year period that it assessed. These findings are especially significant considering that class action bans and arbitration clauses have been used by businesses as a primary defense against class actions in recent years.

            These regulations come after a period during which the Supreme Court has issued a number of rulings that strengthen the enforceability of arbitration clauses. In this sense, the impending proposal would equip consumers with a new mechanism to combat wrongdoing by companies with such clauses in their consumer contracts. Consumers can be adversely affected by the regulations if companies respond by removing arbitration provisions, rendering consumers in individual disputes that amount to less than the cost of filing fees without any means of recovery. While the employer response with respect to arbitration clauses remains to be seen, the CFPB's proposal amounts to a significant shift in the ability to bring class action lawsuits arising from misconduct in a wide array of cases.     

The legal team at SFMS has significant experience litigating FCA matters. If you have any questions regarding this subject or this posting, please contact Alec Berin (aberin@sfmslaw.com) or Chiharu Sekino (csekino@sfmslaw.com). We can also be reached toll-free at (866) 540-5505.

 

Shepherd, Finkelman, Miller & Shah, LLP is a law firm with offices in California, Connecticut, Florida, New Jersey, New York, Pennsylvania and Wisconsin. SFMS is an active member of Integrated Advisory Group (www.iaginternational.org), which provides us with the ability to provide our clients with access to excellent legal and accounting resources throughout the globe. For more information about our firm, please visit us at www.sfmslaw.com.

Sources:

http://www.law360.com/articles/791273/cfpb-proposal-could-snuff-out-arbitration-even-without-ban

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