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CFPB ban on mandatory consumer arbitration may attract challenge

The Consumer Financial Protection Bureau's new rule prohibiting mandatory arbitration clauses in most consumer banking contracts has just been published in the Federal Register, which makes it official. However, the rule's publication also starts the clock on two challenges that may be brought against it.

The new rule makes it unlawful for banks and financial service providers to require consumers to sign contracts containing mandatory arbitration clauses when they open new accounts. These mandatory arbitration clauses involve an agreement that any disputes arising will be resolved via individual arbitration rather than by class action lawsuits.

Arbitration advocates have argued that class action lawsuits are a clumsy way of resolving disputes that mostly benefit lawyers. They claim that individual arbitration is quick and cost-effective in comparison to any lawsuit.

On the other hand, opponents of the clauses argue that class actions are a vital way for consumers to level the playing field with wealthy, powerful banks. An individual, they argue, has little chance against a large financial services company, which may hire the same arbitrator over and over again. In real terms, individuals cannot afford to pay for the same level of representation that banks keep on hand every day. Only by banding together in a class action can consumers get a fair chance.

The CFPB may essentially agree with that position, but others in government and industry almost certainly don't.

Now that the rule is published, according to Reuters, any member of the council of the nation's top financial regulators could petition to put the rule on hold. They would have to submit their petition within 10 days of the rule's publication and ultimately demonstrate that the rule poses a substantial risk of injury to the banking system. The acting comptroller of the currency claimed he was already moving forward with a petition.

Another way the rule could be challenged is through the Congressional Review Act, which essentially allows Congress to veto new regulations by any agency. That process allows the rule to be challenged anytime in the next sixth months. Some Senate Republications are already drafting a resolution to scuttle it.

Beyond those direct attacks on the rule, Congress could always pass an opposing law later, or any number of groups could challenge its legality in court. Reuters said the U.S. Chamber of Commerce is considering options.

Former CFPB head Richard Cordray says that the analysis leading to the adoption of the rule was extensive. Furthermore, he pointed out that Congress has already prohibited the clauses in home mortgages with no noticeable impact on the banking industry.

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