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CFPB Rule on Forced Arbitration and Class Action Bans

The Consumer Financial Protection Bureau (CFPB) has issued a rule to prohibit fine print clauses that allow financial products and service companies to avoid accountability for widespread violations.  The rule forbids forced arbitration clauses unless the contract permits class actions in court. Companies must provide the CFPB with reports on individual arbitrations (with identifying information redacted), and then publish the information to a public website.

The rule applies to the core consumer financial markets involving lending money, storing money, and moving or exchanging money. With some exceptions, the rule would cover most:

Loans and credit, including credit cards, payday loans, student loans, and auto loans (only the auto finance company, not the auto dealer, except for certain buy-here/pay-here auto dealers). This includes providing leads, referrals, purchasing, selling and servicing credit. (Note that mortgages are already prohibited from having forced arbitration clauses.)

—Bank accounts, prepaid accounts, mobile money transfer apps, and remittances.

—Credit reporting, credit scores, credit monitoring.

—Debt management, debt settlement, and debt relief services, including help avoiding foreclosure.  This includes debt relief involving medical debt, taxes, and other kinds of debt even if not credit related.

—Check cashing, check collection, check guaranty services.

—Auto leases, but not auto dealers who assign their leases.

—Debt collection and payment processing related to these products or services.

Key areas that the rule will not apply to include:

—Auto dealers (other than some buy-here/pay-here dealers), such as claims related to discriminatory loan markups, add-ons, repossessions, lemon laws, odometer fraud, or deception about a car’s history.

—For-profit colleges, such as fraud about job placement rates, the usefulness of a certificate, or schools that close, such as Corinthian Colleges and ITT Technical Institute. (But the lenders to students who attend those colleges are covered.)

Financial services offered directly by governments or tribes to members within their jurisdiction. But the rule will apply to tribal payday lenders and others who offer financial products off-reservation.

—Individuals and others that offer a product or service to no more than 25 consumers in the current or previous calendar year.

—Nonfinancial products and services, like nursing homes, cable and cell phone providers, employers, medical malpractice, or stores that offer payment plans but do not charge. However, wireless service providers will be covered if they permit other companies to cram charges onto cell phone bills.

The rule applies only to new contracts entered into 211 days after the final rule was published and older contracts that are purchased or acquired after that date.