Credit unions may find themselves in court more often if the CFPB acts on a newly proposed ban on class-action waivers in arbitration clauses.

Some industry experts said the move could inflate compliance costs, and eliminate products and services.

The proposed rules, announced Oct. 7, would make it illegal for contracts for many types of consumer financial products to have arbitration clauses that prevent members from participating in class-action lawsuits. In the CFPB’s cross-hairs are credit unions, banks, card issuers, auto lenders, private student lenders, loan originators, money transfer providers and a host of other financial services firms. The CFPB said it may also add payment processors to the list.

“Consumers should not be asked to sign away their legal rights when they open a bank account or credit card,” CFPB Director Richard Cordray said. “Companies are using the arbitration clause as a free pass to sidestep the courts and avoid accountability for wrongdoing.”

Arbitration clauses, which typically require an arbitrator rather than the court system to resolve disputes between parties, are common. But according to the CFPB, the clauses are buried in many contracts and few consumers realize they prohibit joining others in suing an institution in court. More than 75% of credit card consumers didn’t know they were subject to arbitration clauses, for example, according to a three-year study the CFPB issued to Congress in March.

To be clear, the CFPB’s proposals would not ban arbitration clauses. However, the clauses would have explicitly state they don’t apply to cases filed as class actions unless a court denies class certification or dismisses the complaint.

“What I think they’re getting at is they’re trying to address situations where an organization has a policy or procedure that, let’s say, harms a whole group of people in the same way, for the same reasons,” CUNA Mutual Group Vice President of Wealth Management Kevin Thompson explained. “It could be a pricing thing or something like that. Any one individual might not be harmed enough to be incented to take action, but a group may be so inclined.”

If the CFPB finalizes the proposed rules, many credit unions would have to update their member agreements, loan documents and other contracts. But that may be the least of their worries.

“Credit unions are already spending much more on legal fees than they were five, 10 years ago,” said attorney Dustin DeVore, who leads the credit union practice at Kaufman & Canoles in Williamsburg, Va. “Now they’re going to be spending even more. Whether this is a good thing or not, there’s no question it’s going to drive up costs. As you know, that leads to fewer member services, high loan rates, you name it.”

Though FINRA already publishes arbitration awards in disputes between customers and broker-dealers, and states such as California publish some data about consumer finance arbitrations, arbitration is largely a confidential affair.

The proposals would significantly change that, however, by requiring institutions to tell the CFPB about arbitration claims and awards issued. By publishing the information on its website, the CFPB argued, it can expose unfair arbitrators and show attorneys which kinds of cases are most successful.

Another big concern with allowing more class actions, the experts said, is that credit unions and other institutions could become targets, forcing them to spend more time and money on liability mitigation.

“Everyone likes to sue a financial institution because they’re ‘the bad guy,’” Patty Corkery, an attorney specializing in credit union law at Holzman Corkery in Southfield, Mich., said. “I think that this would put this on the radar of a lot of plaintiffs’ attorneys that that’s all they do is class action, because they make a ton of money.”

According to the CFPB study, 6.8 million consumers received $220 million in payments from class-action settlements per year, which works out to about $32.35 per person. Roughly 18% of the $540 million awarded in class settlements by federal courts per year between 2008 and 2012 went to expenses and attorneys’ fees, it said.

“It may sound funny, me saying this as a lawyer, but the only winners in class actions are the lawyers,” DeVore said. “The people that this will most help are not consumers. The people this will most help are lawyers, and that is the truth.”

He added, “One of the complaints of the consumer-advocate types is [consumers] have this right of arbitration in some of these contracts but they don’t ever exercise it. Then maybe the answer is more education so that they do start to exercise it.”

“[The CFPB's] claim that by having arbitration, somehow these financial institutions are sidestepping the legal system and really almost rephrasing it like they’re avoiding any sort of liability – I disagree,” Corkery said. “From representing credit unions in the arbitration process, I mean, you don’t sidestep anything. If you get nailed in arbitration, it’s financially just as harmful as it would be in a court of law.”

But for Corkery, the issue is bigger than that.

“It’s really them stepping in and dictating the contractual terms between a financial institution and its borrower,” she said. “That’s really what this proposal would do.”

Whatever happens, it will likely happen quickly. The CFPB is considering setting an effective date of 30 days after the rule is published, and credit unions would then have 180 days to comply. Existing arbitration agreements already entered would not need to be changed or amended, it added.

In the meantime, the best defense is a good offense, Thompson warned.

“You treat people with respect and honesty and make sure you’re doing business the right way, because there are people out there watching, whether that’s the CFPB or the class-action lawyers,” he said. “The best way to deal with this always is to be honest and upfront and do business correctly. Then all of this sort of fades into the background.”

Arbitration Clauses Are Common

The CFPB’s study, released in March, analyzed more than 850 consumer finance agreements, more than 1,800 consumer finance arbitration disputes filed over three years, a sample of the nearly 3,500 individual consumer finance cases filed in federal court within the same time frame, 562 consumer finance class cases filed in federal and selected state courts during the same time period, 40,000 small claims filings over a single year, more than 400 consumer financial class settlements in federal courts over five years, and more than 1,100 state and federal public enforcement actions relating to consumer finance. The study also included a national survey of more than 1,000 credit card consumers. Here’s who had arbitration agreements, according to the study:

  • 53% of the total credit card market

  • 75% of the largest 50 credit card issuers

  • 42% of small and mid-size credit card issuers

  • 44% of insured deposits in the checking account market

  • 46% of checking accounts from the largest 100 banks

  • 7% of checking accounts from small and mid-size banks

  • 99% of the mobile wireless market