New Rule Seeks to End Forced Arbitration
May 4, 2016, the Consumer Financial Protection Bureau (“CFPB”) issued a proposed rule that would prohibit many providers of consumer financial products and services from including forced arbitration provisions in their agreements with consumers unless the agreement also allows consumers the ability to file a class action lawsuit. The proposed rule will provide millions of consumer who are currently forced to arbitrate their grievances on an individual basis the ability to litigate their claims on a class wide basis. For the next 90 days anyone may file a comment with the CFPB regarding the proposed rule at regulations.gov. The CFPB will then consider these comments in drafting a final rule, which is expected to go into effect sometime next year.
If the proposed CFPB rule goes into effect, it is likely to result in substantial benefits for consumers. Take the payday loan industry for example. According to a 2015 CFPB study, 98.5% of all payday lenders use mandatory arbitration provisions in their agreements with their customers. In other words, if you need a payday loan you have no choice but to give up your fundamental right to an open trial by judge or jury. As it stands now, these arbitration provisions also prevent consumers from aggregating their claims with others who have suffered the same wrong. This hurts all consumers. For example, if I learn that a payday lender is overcharging each of its customers by $5, I am stuck arbitrating my individual claim behind closed doors. I probably won’t even bother arbitrating as I could end up spending significant amounts of time and money to recover a few dollars. Such a situation creates significant incentives for the lender to not change its deceptive practices. The lender may have to pay out a little money to those who realize they are being ripped off but it gets to keep the rest of its ill-gotten gains from those who don’t realize it. When consumers have the right to bring a class action, this problem evaporates. Class actions benefit consumers for several reasons. First, class actions are public. No class action may be settled without all class members being notified and given the opportunity to object to the settlement or opt-out of it if they don’t wish to participate. Second, class actions provide benefits to all class members, not just those who took the time to retain a lawyer and go to court. If an individual wins an arbitration , the company only pays that individual. Third, because of the amounts of money involved in class action litigation, plaintiffs are able to hire top-flight legal talent on a contingency fee basis, which levels the playing field between well-heeled corporations and individual consumers.
With today’s proposed rule the CFPB has taken a huge step forward for consumer rights.
 The full proposed rule can be found here.
 Because of these hurdles very few consumer arbitrate their claims. According to a New York Times investigation between 2010 and 2014, only 505 consumers arbitrated claims that were valued at $2,500 or less. A link to the New York Times article can be found here.
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Faruqi & Faruqi, LLP focuses on complex civil litigation, including securities, antitrust, wage and hour, and consumer class actions as well as shareholder derivative and merger and transactional litigation. The firm is headquartered in New York, and maintains offices in California, Delaware and Pennsylvania.
Since its founding in 1995, Faruqi & Faruqi, LLP has served as lead or co-lead counsel in numerous high-profile cases which ultimately provided significant recoveries to investors, consumers and employees.
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About Timothy Peter
Timothy J. Peter is an Associate in Faruqi & Faruqi, LLP’s Pennsylvania office and focuses his practice on complex civil litigation. Mr. Peter has represented plaintiffs in consumer, derivative, securities and whistleblower cases. His successes include a $25 million class action securities settlement in which participating class members will recover over 65% of their losses.