Banks, credit card companies and other financial firms are strategizing ways to stave off higher legal bills they expect from the Consumer Financial Protection Bureau's proposal to limit the use of arbitration clauses, which industry representatives argue will open the floodgates to class action lawsuits.
Some companies are considering adding so-called class action waivers to existing arbitration agreements – if they have not done so already – to reduce the number of lawsuits that could be filed, because existing agreements get grandfathered in when the final rule goes into effect.
"If your arbitration agreement doesn't include class action waivers, you should put them in now, there's still time to do that," said Robert Jaworski, a member of the financial industry group at the law firm Reed Smith. "It's important for financial institutions to review the rule, see if they're subject to the rule and determine if they should comment on the rule."
The CFPB's arbitration plan, released in May, is arguably one of the bureau's most controversial rule-makings since the agency's inception. The financial impact would be substantial given the proposal would cover roughly 50,000 firms across a wide range of industries.
The financial sector is already gearing up to sue the bureau, likely through a trade association such as the U.S. Chamber of Commerce, but that can only happen after the final rule comes out. In the meantime they have to prepare in case the proposal isn't changed or overturned in court.
Companies have a relatively short window of time if they want to add the waivers, Jaworski said. The proposal's comment period ends Aug. 22. The final rule goes into effect 210 days after it is published in the Federal Register, which is estimated to be in the second half of 2017 at the earliest.
Alan Kaplinsky, who leads the consumer financial services group at Ballard Spahr, agreed that companies should consider making changes to current contracts.
"If a company is not now using arbitration and is often being hit with meritless class-actions… then they certainly should implement an arbitration program," Kaplinsky said. "Existing arbitration agreements will be grandfathered in under the new rule."
Currently, mandatory arbitration clauses affect hundreds of millions of consumer contracts; 80 million credit card holders alone were subject to arbitration clauses at the end of 2012, the CFPB found in its 2015 study.
But there are plenty of consumers with contracts that have no arbitration clauses at all. Fewer than 16% of credit card issuers and just 8% of large banks include arbitration clauses in their credit card and checking account contracts, the CFPB's study found. By contrast, 84% of payday loan and 92% of prepaid card contracts included arbitration clauses.
Eric Mogilnicki, a partner at the law firm Covington & Burling, said he expects transition issues as companies try to preserve old clauses.
"There may be a flood of arbitration clauses added to contracts just before the rule takes effect," Mogilnicki said. "Then after the rule, there will be two classes of people – those with arbitration clauses and those with none. And the same courts that have been hostile to arbitration in the past may seek to ignore these valid arbitration clauses."
Matt Stromquist, a partner at the boutique Chicago law firm Pilgrim Christakis, said the CFPB's study shows a near-split between the number of class action lawsuits and arbitration claims filed each year.
The CFPB's narrative on arbitration is that it strips consumers of their right to sue. But class actions already are a fixture in financial litigation.
Stromquist said it is a misnomer for the bureau to suggest that the proposal would "restore" the rights of consumers to bring class actions.
"I'm in court every day defending against class actions," Stromquist said. "The courts are chock full of class action lawsuits in a consumer setting. If class actions weren't happening, they wouldn't have the data on class actions in their study."
The CFPB's study lists 187 putative class actions filed a year in federal court or in selected state courts by at least one person who sought to sue on behalf of a class. By comparison, there were roughly 178 individual arbitration filings a year in which there was an affirmative claim made by a consumer. Those cases involved just six products: auto loans, credit cards, checking accounts, prepaid cards, payday loans and private student loans.
The CFPB's 728-page study also found that consumers rarely file individual disputes involving financial products or services in any forum.
Consumers received an average of $5,389 in arbitration, compared with just $32.25 from class action settlements that were analyzed in the study. The disparity in payouts to consumers is a major focus of the financial services industry.
"Only a small portion of filed class actions benefit consumers, with the CFPB itself finding that over 80% of class actions do not yield any class payoff," Mogilnicki said.
He also expects the final rule will be challenged under the Administration Procedure Act that governs internal procedures of administrative agencies.
"I'm sure there will be a challenge; the question is, which financial institutions regulated by the bureau are willing to sue the bureau?" he said.