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CFPB Bans Forced Arbitration; Opens Door for Suits against Financial Services Firms

The Bureau of Consumer Financial Protection completed a rule originally proposed in May 2016 that prohibits banks and other consumer financial firms from including mandatory arbitration clauses that block class-action lawsuits in consumer contracts.  The rule does not apply to SEC-regulated entities. The Wall Street Journal reported that the rule has drawn strong opposition from banking regulators and Republican lawmakers have launched an effort to repeal it. CFPB Director Richard Cordray clarified that the rule does not ban arbitration clauses outright but the clauses must “say explicitly that they cannot be used to stop consumers from banding together to pursue relief as a group.” Lawmakers are continuing to call for Cordray’s ouster as a legal battle continues over whether the CFPB’s structure is constitutional. Cordray along with consumer groups hail the rule as a victory for consumers, the WSJ reported. “By restoring the ability of consumers to file or join group lawsuits, the rule gives companies more incentive to comply with the law. And the deterrent effect of such cases can more broadly influence the business practices of other companies as well,” read a statement from Cordray. The rule also requires companies to insert language into their arbitration agreements reflecting the rule’s limitations and to submit their claims, awards, and other information about the arbitration of individual disputes to the CFPB to help the agency monitor arbitrations.