The Consumer Financial Protection Bureau's proposal to restrict the use of arbitration clauses would allow it to seize enormous amounts of data from financial firms that could lead to more enforcement actions, according to industry lawyers.

In the CFPB's proposal, released earlier this month, companies would have to submit claims, awards and other information on disputes in arbitration to the agency. The bureau plans to collect records on the process from financial firms and from arbitration providers.

But opening the private arbitration process to enhanced regulatory scrutiny is sparking concern among banks, credit card companies, debt collection firms and payday lenders, among others.

"Companies are still free to arbitrate, but the whole point of it is taken away because everything will become subject to the CFPB," said Elizabeth Bohn, co-chair of the consumer finance industry group at the law firm Carlton Fields. "It defeats the purpose of the arbitration process being a private proceeding if everything is subject to CFPB oversight."

When the proposal was issued, CFPB Director Richard Cordray said collecting data on arbitration will help the agency determine if more enforcement is necessary.

Collecting data "would also enable further review of the substantive allegations raised in these arbitration processes to see if they warrant action by the bureau," Cordray said at a field hearing on the issue.

But Craig Nazzaro, of counsel at the law firm Baker Donelson, said financial institutions face a big risk because the data collected on arbitration could be used against them. Just as the bureau uses customer complaint data in its supervisory and enforcement efforts, so too will the CFPB employ arbitration data.

"The risk is huge; it makes using arbitration clauses in contracts too risky and costly," Nazzaro said. "If arbitration reporting became mandatory, lenders would have to hire staff to comply with any reporting requirements. And if the CFPB makes the data public and searchable, just as they did with customer complaints, plaintiff's attorneys will begin to use it to bring even more litigation."

Though the financial industry has long claimed that resolving consumer disputes through arbitration is less costly and more efficient, the increased oversight and data collection has ratcheted up the economic stakes.

In addition, some firms are worried about the handling of consumer data and how it will be protected, since Cordray is proposing that the data be made public.

The bureau is "considering publishing these materials on our website to promote transparency and enable the public to learn more about the arbitration process," Cordray said at the hearing.

Sabrina Rose-Smith, a partner in the consumer financial services litigation group at Goodwin Procter, said it is unclear how much oversight the CFPB will have over the arbitration process.

"If you have free rein to collect all this information about the process, you have ammunition to nitpick the process," Rose-Smith said. "There is some concern within the industry that the more data they collect on this, especially if they are asking [arbitration] administrators about costs and fees, that they would come into major financial services providers and say here's what we think you have to do. There is concern that [financial firms] would have to change their agreements and be subject to an enforcement action."

The CFPB's proposal states that financial firms that continue to have arbitration clauses must redact consumer names, addresses, phone numbers, Social Security numbers, account numbers, driver's license and passport numbers from information sent to the bureau. But the plan is short on other details.

The final rule is expected to have more specifics on how the data is collected and how it would be made available to the public, Rose-Smith said.

"There is a lot of borrower information in the CFPB's hands without any sense they will be good and careful stewards of it," she said. "I just don't see them having as much practice and ability to safeguard that data as other agencies. Can they strike a balance between transparency and privacy?"

The CFPB proposal does not ban arbitration outright; rather, it would impose two limitations on the arbitration process. First, it would prohibit companies from using an arbitration agreement to block consumer class actions in court and would require providers to insert language in the agreements alerting consumers that they can bring a class action. Second, companies would have to submit certain records relating to disputes with consumers in arbitration to the bureau.

The requirement to put new language into arbitration agreements is also raising concerns.

Richard Gottlieb, a partner at Manatt, Phelps & Phillips, said companies that acquire consumer contracts should be paying particular attention if the contracts have arbitration provisions that contain class-action waivers.

While the new rules do not apply retroactively, the proposal "includes a trap for the unwary in that nonparties to the original contract, such as auto finance companies that purchase consumer contracts from dealers, may be unable to enforce a pre-existing provision without adding the prescribed new language," Gottlieb warns.

Nazzaro said the practical effect of the CFPB's data collection will mean an end to arbitration if the final rule is similar to the proposal.

"I would recommend to all clients that they get out of arbitration clauses completely," Nazzaro said. "The inclusion of an arbitration clause in any contract creates a reporting requirement. If the CFPB sees a spike in disputes, they will focus on that in their next exam. And having the data published could be used by plaintiff's attorney to home in on your institution."

The CFPB's proposal includes extremely broad language covering roughly 50,000 firms, including banks, credit unions, credit card issuers, certain auto lenders, auto title lenders, payday lenders, private student lenders, loan servicers, debt settlement firms, foreclosure rescue firms, prepaid card issuers, installment lenders, money transfer services and certain payments processors.

Some experts said the CFPB's proposal would upend well-settled public policy and 30 years of case law favoring arbitration.

"One of the major advantages of arbitration is that it's private, and that is taken away," Bohn said. "Why would the industry arbitrate if they have to submit everything to the CFPB?"

Subscribe Now

Access to authoritative analysis and perspective and our data-driven report series.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.