The Consumer Finance Protection Bureau created a rule banning mandatory arbitration agreements in contracts used by the entities it oversees, which includes auto creditors and buy-here, pay-here dealers.
The move opens up these firms to class-action lawsuits. The existing agreements specified that consumers must settle disputes via arbitration and were barred from joining class-action suits.
"These clauses allow companies to avoid accountability by blocking group lawsuits and forcing people to go it alone or give up,” said CFPB Director Richard Cordray. “Our new rule will stop companies from sidestepping the courts and ensure that people who are harmed together can take action together."
Supporters of the bill consider it a blow to big banks. Some point to the recent Wells Fargo credit card scandal as reason to ban arbitration.
“We fought for this rule because it provides a valuable check against corporate misconduct and are pleased that the CFPB has adopted it to protect the public interest,” said Massachusetts Attorney General Maura Healey.
However, the rule covers all firm overseen by the CFPB, regardless of size.
"This rule will force small businesses to bear additional costs in defending class-action litigation, particularly meritless suits," said Steve Jordan, CEO of the National Independent Automobile Dealers Association. "Those costs will ultimately be borne by consumers, and in the case of those who are credit-challenged, it could prove to be too much."
Industry insiders have been waiting for this rule since Congress passed the Dodd-Frank Act that created the CFPB. The Act specifically called for a study into the impact of arbitration on consumers.
The CFPB released the findings of that study in 2015 and a rule has been expected ever since.
But many thought that might change with the election of Donald Trump and an anti-regulatory climate in Washington.
The Republicans in Congress can still squelch the rule before it takes effect in three months by invoking its Congressional Review Act authority.
This would kill the rule and bar the CFPB from creating a replacement.
Attorney Michael Benoit said dealers should start contacting their Senators and Congressmen to push for the CRA.
Benoit said affected parties could also take the CFPB to court, arguing that it lacks the authority to interfere in private contractual agreements.
Until the matter is settled one way or another, Benoit recommends continuing with business as usual.
“It’s a little early for dealers and finance companies to take any action other than exploratory actions into what they might do,” he said.