Credit union officials and stakeholders have expressed concerns over newly proposed rules by the Consumer Financial Protection Bureau (CFPB) which would essentially restrict the use of mandatory arbitration clauses by financial companies (including banks and credit unions) in contracts with consumers. In tandem, the proposed CFPB rule would prohibit class action waivers in forced arbitration agreements, thereby allowing consumers and members to file class action lawsuits against financial firms.
On Thursday, the Credit Union National Association (CUNA) filed a comment in which it asked the bureau to consider the "different structure and dispute resolution process" at credit unions versus other financial companies.
As the CFPB itself stated in May of this year, the proposed rules would "prohibit mandatory arbitration clauses that deny groups of consumers their day in court." Namely, the rules are designed to "protect consumers' right to pursue justice and relief and deter companies from violating the law."
But CUNA raised its concerns about the rules, following the lead of banks which have already expressed their own vociferous criticism.
In a letter to CFPB, Leah Dempsey, CUNA's senior director of advocacy and counsel, wrote that the bureau's proposal will have the "practical effect of largely eliminating arbitration" as an option for credit union members, because it would be "difficult for the membership as a whole to continue to subsidize it, while also potentially facing frivolous class action litigation."
Dempsey also noted that while credit unions are "less likely" to have – or to enforce – arbitration clauses than many others in the financial services marketplace, there are certainly credit unions that have them as part of their member agreements and believe it is important to preserve the option of limiting class action litigation.
"Additionally, the arbitration proposal has raised concerns about whether additional compliance considerations may arise when credit unions have relationships with third parties, who will not be subject to the rule and will continue their use of pre-dispute class action waivers," Dempsey added.
Concerns Throughout the CU Community
The National Association of Federal Credit Unions (NAFCU) also issued its own reservations about the rulings.
In a letter to CFPB, Ann Kossachev, the regulatory affairs counsel at NAFCU, wrote that her organization continues to believe that voluntary arbitration agreements provide a "useful means" of dispute resolution for many credit unions and their members.
"Although the CFPB's proposed rule does not ban arbitration agreements entirely, the proposal to eliminate mandatory arbitration, more specifically 'class action waivers,' is a step in that direction," Kossachev wrote. "Most concerning are the proposed monitoring requirements for certain records relating to arbitral proceedings and the subsequent publication of those materials on the CFPB's website."
Kossachev also stated that NAFCU and its members credit unions "strongly support" measures to better protect consumers' privacy interests and ensure that no sensitive material is released to the public, but simultaneously advocate for increased privacy protections for our members.
According to the proposed rule, she added, after collecting information about arbitration claims and awards, the CFPB plans to create an online database available to the public.
In addition, Kossachev warned that NAFCU is "troubled" by the financial and compliance burden this arbitration rule will impose on credit unions, echoing some of CUNA's concerns.
"If the [CFPB] rule is adopted as proposed, credit unions will likely face increased costs, potentially frivolous class action lawsuits, extreme reputational risks, and privacy concerns," she wrote in the letter. "Accordingly, NAFCU and its members implore the CFPB to exempt credit unions from its final arbitration rule."
Pew's Bank Problems
As reported earlier, banks have also criticized a recent report from the Pew Charitable Trusts about the use of arbitration agreements. That study found that despite looming restrictions from CFPB, banks have actually increased adoption of mandatory arbitration clauses.
According to the Pew report, 72% of 29 banks included in the study used them for checking accounts, up from 59% in 2013. In addition, 89% of consumers surveyed said they believe they should have the right to participate in group lawsuits, which mandatory arbitration clauses prohibit. The survey also found that 95% of consumers thought they should be able to bring cases to a judge or jury.
The Pew report came in advance of the CFPB proposal – at the heart of which is a move to remove banks' ability to stop consumers from forming or joining class actions through arbitration agreements.
Banking industry representatives questioned both the methodology and efficacy of the Pew report.
"The [Pew] survey questions are leading and they didn't lay a foundation for the consumers to know the truth, namely that class action lawsuits rarely are of any benefit to consumers," said Alan Kaplinsky, who leads Ballard Spahr's consumer financial services group.
The CFPB's plan to limit arbitration clauses is highly controversial given that it would impact millions of consumer contracts and cover roughly 55,000 companies. The banking industry has threatened to sue over the pending rulemaking, but that can only happen after a final rule comes out, which is estimated to be in the second half of 2017.
The Dodd-Frank Act gave the CFPB the authority to prohibit or impose limitations on the use of arbitration clauses but only if such measures are "in the public interest" and "for the protection of consumers." The law also required the agency to carry out a study of arbitration, and states that any resulting regulation must be consistent with that study.
Members Foot the Bill
With respect to the impact of the proposed rule on credit unions, CUNA noted that it implored the CFPB to understand that it is "difficult to imagine a case" in which class action litigation against a credit union would be a "reasonable course of action" for credit union members since it would put them in a position of essentially having to sue themselves as owners.
"We also point out that when a credit union faces class action litigation, the costs associated with it come out of the pockets of their members," CUNA's Dempsey added. "We strongly urged the CFPB to scrutinize the function of any rule not narrowly tailored to address specific consumer abuses and determine whether it is in the best interest of consumers served by credit unions."
Finally, Dempsey urged the CFPB to reconsider whether class action litigation against credit unions is "consistent with consumer protection."
— Kate Berry contributed to this report.
