United States: CFPB Moves To Ban Class Action Waivers But Will Not Ban Individual Arbitration

In a move that the financial industry long anticipated but nonetheless greeted with loud groans, the Consumer Financial Protection Bureau ("CFPB") on October 7, 2015 proposed to ban class action waivers in contracts for consumer financial products and services. Although the proposed ban would not take effect for a few years, it would have a significant impact on banks and nonbank lenders because it is expected to lead to a major increase in class action litigation. Since class action waivers and arbitration clauses have historically gone hand-in-hand in consumer agreements, these provisions have helped stem the tide of class actions in recent years. According to the CFPB, more than half of credit card contracts and 44 percent of checking account agreements contain arbitration clauses, and these provisions are common in auto finance contracts as well.

The CFPB's announcement came in the form of a 34-page "outline of proposals"1 that must be reviewed by a Small Business Review Panel before the CFPB can begin formal rulemaking. The CFPB discussed its proposals at a field hearing in Denver, where CFPB Director Richard Cordray criticized class action waivers as a "free pass that prevents consumers from holding their financial providers directly accountable for the harm they cause when they violate the law."2 Industry representatives argued that the proposed class action waiver ban would be harmful because it would encourage frivolous lawsuits. They also argued that it was unnecessary because most consumers are able to resolve their disputes through customer service inquiries or complaint mechanisms operated by the CFPB and the state attorneys general.

Ban Will Likely Take Effect in 2018, Will Not Affect Existing Contracts

Pursuant to the Small Business Regulatory Enforcement Fairness Act, the October 7 outline will be reviewed by a Small Business Review Panel. Only after obtaining feedback from the Panel can the CFPB formally propose new regulations for notice and comment. We expect the Panel's process to take four to eight months,3 with a proposed rule potentially released in the first half of 2016. Following a comment period, the CFPB would consider comments and issue a final rule, possibly by mid-2017. The Consumer Financial Protection Act ("CFPA") requires that any limits on arbitration apply to customer agreements entered into at least 180 days from the effective date of the final rule, and the CFPB is contemplating an effective date 30 days after the publication of the final rule.4

Thus, like all new CFPB rules, the proposed ban on class action waivers would take several years to draft and implement. Fortunately for financial institutions, even if adopted, it will only impact contracts that are entered into after the rule takes effect – likely no earlier than 2018 – and of course the rules will not impact non-consumer financial contracts.

Given the magnitude of industry opposition to this potential rule, the CFPB may have an incentive to finalize and implement the rule by then because Director Cordray's five-year term expires in July 2018. Although the CFPA permits the Director to serve beyond the expiration of the term "until a successor has been appointed and qualified,"5 the agency will likely want to complete its changes to the arbitration system well before the White House and Congress begin discussions of a nominee to succeed Director Cordray.

Proposal Follows March 2015 Report to Congress that Foreshadowed a Proposed Ban

The CFPB's proposal follows its release in March 2015 of a 700-page Report to Congress, in which the agency argued that consumers receive far more monetary benefits from class action litigation than from arbitration.6 The March Report fanned the flames of a spirited debate between consumer advocates and industry representatives about the impact of arbitration clauses. Industry has argued that arbitration clauses save financial institutions money, which financial institutions can then pass along to consumers in the form of cheaper and more available credit. The CFPB's March Report contended that the removal of arbitration clauses did not result in an increase in the cost of credit to consumers. At the October field hearing, Director Cordray said the Report "did not find evidence that credit card companies either increased prices or reduced access to credit when they eliminated their arbitration clauses."

CFPB Preserves Mandatory Pre-Dispute Arbitration Clauses for Individuals

To the extent there is a silver lining for financial institutions in the CFPB's announcement, it is the fact that the CFPB decided not to propose an outright ban on mandatory arbitration clauses. Indeed, such a ban would likely encounter strong opposition in Congress and the courts, which have repeatedly confirmed federal policy favoring arbitration clauses (as embodied in the Federal Arbitration Act). Instead, the Bureau's targeted approach proposes to allow pre-dispute arbitration clauses in consumer financial contracts, under two conditions:

  • The contract must state that the arbitration clause does not apply to class action litigation, unless and until the class certification is denied by the court or the class claims are dismissed in court. The CFPB expects to provide model contract language.
  • Companies must submit to the CFPB all filings made by or against them in consumer financial arbitration disputes, and any decisions resulting from those filings.

The CFPB said that it would use the proposed information collection to monitor the effects of arbitration clauses on the resolution of individual disputes. In his remarks, Director Cordray said that the decision not to ban arbitration clauses for individual disputes "is consistent with the conclusions reached in our study. It is also consistent with rules that the Financial Industry Regulatory Authority has applied to broker-dealers for years, with the approval of the Securities and Exchange Commission."

But the CFPB's decision to permit institutions to continue requiring arbitration for individual disputes will not provide much comfort to industry, given that, as the CFPB found in its Report, "companies rarely use their arbitration clauses to block consumers from suing them in individual cases."7

Financial Institutions Should Prepare for an Increase in Class Action Litigation

Even though the proposed ban on class action waivers would not take effect until 2018 or later, financial institutions should redouble their efforts now to ensure they are complying with all consumer financial laws, to avoid any gaps or potential vulnerabilities in 2018. The proposed class action waiver has the potential to increase the level of scrutiny on banks' practices as much as – if not more than – the creation of the CFPB back in 2010, for the simple reason that, as zealous as the CFPB has been about policing the practices of banks and other lenders, it only has 1,400 employees. By comparison, the size and resources of the class action bar is limited merely by the size of the attorney fees, which will only grow as a result of the increasing number of class actions.

In recent years, Reed Smith has defended hundreds of putative class actions filed across the country, often by the leading national plaintiffs' class action firms. We are currently representing dozens of financial institutions in class action suits, including cases involving RESPA, TILA, TISA, TCPA, MERS, FDCPA, HAMP, HBOR, mortgage insurance, call recording, and fair lending. We have a successful track record handling all phases of such litigation, including dispositive motions, class certification, discovery, and trial. In several significant instances – our experience includes the national coordination and organization of the defense of multiple actions in different jurisdictions where overlapping issues are raised, including proceedings before the Judicial Panel on Multidistrict Litigation.


1 CFPB, "Small Business Advisory Review Panel for Potential Rulemaking on Arbitration Agreements" ("Outline"), October 7, 2015, available at http://files.consumerfinance.gov/f/201510_cfpb_small-business-review-panel-packet-explaining-the-proposal-under-consideration.pdf.

2 CFPB, "Prepared Remarks of CFPB Director Richard Cordray at the Arbitration Field Hearing" ("Cordray Remarks"), October 7, 2015, available at www.consumerfinance.gov/newsroom/prepared-remarks-of-cfpb-director-richard-cordray-at-the-arbitration-field-hearing-20151007/.

3 The last major outline of proposals that the CFPB took to a small business panel was on payday, car title, and installment lending. That outline was released in March 2015; seven months later, the CFPB is still drafting a proposed rule.

4 Outline at 22 (citing 12 U.S.C. 5518(d)).

5 12 U.S.C. 5491(c)(2).

6 To view our Client Alert discussing the March 2015 Report, click here. The Report is available at www.consumerfinance.gov/reports/arbitration-study-report-to-congress-2015/.

7 Cordray Remarks.

Client Alert 2015-280

This article is presented for informational purposes only and is not intended to constitute legal advice.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Similar Articles
Relevancy Powered by MondaqAI
In association with
Related Topics
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions