ABA Bank Compliance - May/June 2014

dicial procedure to resolve any controversy or settle any claims arising out of the transaction. After a dispute or claim arises under the transaction, the prohibition does allow consumers and creditors to agree to settle or use arbitration or other nonjudicial procedure. The rule also prohibits the waiver of claims related to violations of federal law.

The prohibition applies to loans for which applications were received on or after June 1, 2013. It doesn’t apply to loans with earlier applications, even if the loan didn’t close until after June 1. Arbitration provisions in loans closed before June 1 are exempt from the prohibition.

Continued Scrutiny of Mandatory Arbitration

Section 1028 of the Dodd-Frank Wall Street Reform and Consumer Protection Act requires the CFPB to conduct a study of the use of mandatory arbitration agreements in connection with consumer financial products or services. Section

1028 also authorizes the CFPB to prohibit or limit the use of mandatory arbitration agreements if the study indicates such a prohibition or limit would be in the public interest and protect consumers.

The bureau launched its study in April 2012 and released its preliminary research on mandatory arbitration agreements in December 2013. The research indicates that large banks commonly use arbitration clauses in credit card and checking account agreements and that roughly nine out of 10 clauses allow banks to prevent consumers from participating in class actions.

The research also shows that while tens of millions of consumers are subject to arbitration clauses in the markets the CFPB studied, on average, consumers filed only 300 disputes in these markets with the leading arbitration association each year between 2010 and 2012. In comparison, during that same period, more than

3,000 cases were filed by consumers in
federal court about credit card issues
alone. More than 400 of these federal
court cases were filed as class actions.

The CFPB found only two instances in which class filings were able to be brought into arbitration. Almost no consumers filed arbitrations about disputes for less than $1,000. While payouts in a class action lawsuit are spread over a large number of people, the CFPB also found that similarly situated consumers are likely to collect more through participation in a class action suit than through pursuing claims individually in arbitration.

For the second phase of the CFPB’s study, the bureau intends to look at a number of areas, including whether consumers are aware of the terms of arbitration clauses and whether arbitration clauses influence consumers’ decisions about which products to purchase.

The findings could lead the CFPB to issue new regulations prohibiting mandatory arbitration for nonmortgage products and give consumers more weapons against banks.

Coping With the Change

Banks should review all of their mortgage loan documents (including HELOCs and any loans secured by real estate) to confirm that they do not include mandatory arbitration clauses (or the equivalent). In addition, banks need to account for greater foreclosure costs in their financial and strategic planning, as well as the potential for future prohibitions on mandatory arbitration with other products and services. ■