How Will the CFPB's Arbitration Rule Effect Auto Finance? | Auto Finance News

Arbitration Rule to Prompt Confusion for Renegotiated Terms

The Consumer Financial Protection Bureau’s new arbitration rule — which bans companies from using arbitration clauses to deny groups of people their day in court — might lead to confusion for auto finance institutions over whether certain actions will be considered new transactions or not, Tom Alleman a lawyer at Dykema Cox Smith, told Auto Finance News.

If a person took out a 48-month lease before the ruling, for example, then that contract is not affected, Alleman said. However, should the lessee now renegotiate the terms to extend the lease to 60 months, it is unknown whether that is a new transaction that would fall under the new provisions.

“The reaction will be to try to understand [the ruling] better, but I don’t think there is a lot of wiggle room, at least so far,” Alleman said. “Everyone will have to look and see whether or not they are covered, but the general answer is yes.”

Financial institutions often have arbitration clauses in their contracts that prevent consumers from joining together to sue their bank or financial company for wrongdoing. The ruling has a broad-sweeping impact on banks, credit cards, and automotive captives and has sparked strong opposition from multiple groups including the American Financial Services Association (AFSA).

“We are disappointed that the bureau has decided to move forward with a final rule,” Bill Himpler, executive vice president of AFSA, said in a statement. “The bureau has ignored its mandate under the Dodd-Frank Wall Street Reform and Consumer Protection Act to limit arbitration only if such a prohibition is in the public interest and for the protection of consumers.”

Financial institutions are collectively arguing that this harms consumers because the ruling will benefit lawyers who put together class action lawsuits, rather than the consumers who form the class action, as lawyers typically take a substantial percentage of any settlement. On the other end, consumer advocates argue that many of these effected borrowers don’t have the means to pursue legal action on their own.

“By blocking group lawsuits, mandatory arbitration clauses force consumers either to give up or to go it alone – usually over relatively small amounts that may not be worth pursuing on one’s own,” CFPB Director Richard Cordray said in a statement. “Including these clauses in contracts allows companies to sidestep the judicial system, avoid big refunds, and continue to pursue profitable practices that may violate the law, and harm large numbers of consumers.”

Some Congressional members of the Republican-controlled Congress have also voiced opposition and Senator Tom Cotton, R-Ark., in particular, has already begun the process of scaling back or voiding the rule entirely.

“This morning I’ve started the process of rescinding this rule using the Congressional Review Act,” Cotton said. “The last thing Americans need is more anti-business regulation that will prompt frivolous lawsuits while hurting consumers.”

The Congressional Review Act that Cotton refers to established expedited procedures by which Congress may disapprove a broad range of regulatory rules issued by federal agencies by enacting a joint resolution of disapproval.

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