In 2011, the U.S. Supreme Court held in AT&T Mobility v. Concepcion that a mandatory arbitration clause included in a cell phone contract effectively eliminated a consumer’s opportunity to seek redress through a class-action lawsuit. On July 15, 2015, Consumer Financial Protection Bureau (“CFPB”) Director Richard Cordray testified before the Senate Banking Committee and indicated that the CFPB—the same entity that has enforcement authority for certain laws that affect the real-estate industry, including TILA, RESPA, and HOEPA—will convene a small business review panel in part to decide what action to take regarding arbitration clauses in financial services agreements.
This testimony comes on the heels of a March 2015 study that found that consumers do not understand the arbitration clauses that are found in their financial services agreements—such as credit cards, checking accounts, payday loans, prepaid loans, private student loans, and mobile wireless contracts. In consumer contracts, arbitration clauses often limit a consumer’s ability to participate in or bring a class-action lawsuit. The CFPB has determined that mandatory arbitration is not in consumers’ best interests and now appears poised to enact rules affecting a company’s ability to include an arbitration clause in a consumer financial contract.
Although it appears clear that the arbitration-limiting rule is coming, House Republicans amended the 2016 spending bill to require additional research on the issue before any regulations are enacted. In July, Cordray indicated that March 2015 report was comprehensive and that the CFPB was ready to move forward with the rulemaking procedure—including the small business review panels, as well as a notice-and-comment opportunity. (The small business review panels are required by the Dodd-Frank Act.)
While the focus of the forthcoming rulemaking efforts will be financial products or services like credit cards, checking accounts, debit cards, auto loans, prepaid cards, payday loans, and retail-installment contracts, the rulemaking may spill over into other consumer contracts that include mandatory arbitration clauses limiting the availability of class action litigation. In short, the real-estate industry should be aware that any CFPB arbitration rulemaking likely will impact any mandatory arbitration clauses appearing in real-estate-related contracts.
Before the rulemaking process begins, companies should review any consumer contracts that have arbitration clauses—particularly those that restrict class-action litigation. Ensure that any arbitration clauses are plainly written and clearly disclosed. Would an average consumer understand the terms of the arbitration clause? Does the arbitration clearly offer a choice to opt-out?
As the CFPB moves forward, you may also wish to participate in the rulemaking process by submitting comments. If you choose to do so, you may wish to prepare with assistance of counsel.