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Arguments for, against CFPB's proposed arbitration clause rules heat up

Industry advocates said the Consumer Financial Protection Bureau'sproposed arbitration clauserules will hurt consumers, while consumer groups said the rules will help low-incomecustomers gain access to class-action lawsuits during a field hearing May 5 in Albuquerque,N.M.

The CFPB's proposedrules would prohibit financial institutions from including mandatoryarbitration clauses in contracts unless they include a provision that would allowconsumers to file class-action lawsuits. In addition, it would require companieswith arbitration clauses to submit to the bureau any claims, awards, or relatedmaterials that are filed in arbitration cases in order to monitor the process forconsumers.

CFPB Director Richard Cordray stressed during his opening remarksthat the rules would not abolish arbitration clauses.

"As noted previously, this is the same approach FINRA hastaken in regulating similar provisions in certain investor contracts and it doesnot go as far as Congress did for mortgage contracts or certain credit contractsfor service members," he said.

He said the agency's March 2015 study found that individual arbitrationsrelated to financial issues are not filed often and as a result "we do notbelieve we have enough data to justify restricting them further at this time."

Alan Kaplinsky, a partner at Ballard Spahr LLP, said on a panelfollowing Cordray's remarks that companies would do away with arbitration clausesif the class-action waiver was implemented. The rule would ultimately hurt consumersas companies passed on added litigation costs to customers, he added.

"I was sincerely hoping this day would never come becauseit really is a sad day for consumers," he said.

Only 4% of the class-action lawsuits studied in the CFPB's studyresulted in the consumer receiving any money, he said. The study also found thatthe average class-action outcome was $32.35 per consumer, compared to an averagearbitration outcome of $5,389, he said.

F. Paul Bland Jr. executive director at Public Justice, calledthe idea that arbitration helps consumers a "fairytale" because very fewcustomers use individual arbitrations.

"Particularly in the last five years, banks, payday lendersand others, have just been able to completely break the law within their communityand their customers really couldn't do anything about it," he said.

In a response to comments made about the low number of customersusing arbitrations, Travis Norton, executive director at the U.S. Chamber of Commerce,said it was because most institutions try to resolve issues before it gets to litigation.

During public comments after the panel, many praised the CFPB'sproposed rules, although some noted that class-action lawsuits are not the solutioneither.

One commentator who had recently received $4.23 in a class-actionlawsuit said he would rather go through arbitration.

Other commentators from Native American advocacy groups saidthe proposed rules would help their community sue payday lenders and "demonstratethat we are not suffering alone."

The CFPB will accept comments on the proposed rule for the nextthree months.