The CFPB issued proposed rules Thursday that would prohibit mandatory arbitration clauses in consumer financial products.

The agency said such clauses in contracts prevent consumers – including credit union members – from joining together in a suit to accuse financial institutions of wrongdoing.

The proposal does not prohibit arbitration clauses, but it specifies the language that may be used in clauses and emphasizes the fact that consumers can file suit.

“With this contract gotcha, companies can sidestep the legal system, avoid accountability, and continue to pursue profitable practices that may violate the law and harm countless consumers,” the agency said in a statement. “The CFPB’s proposal is designed to protect consumers’ right to pursue justice and relief, and deter companies from violating the law.”

CFPB Director Richard Cordray added, “Signing up for a credit card or opening a bank account can often mean signing away your right to take the company to court if things go wrong. Many banks and financial companies avoid accountability by putting arbitration clauses in their contracts that block groups of their customers from suing them. Our proposal seeks comment on whether to ban this contract gotcha that effectively denies groups of consumers the right to seek justice and relief for wrongdoing.”

CUNA said because of their unique structure, credit unions should be exempt from the rules.

CUNA Chief Advocacy Officer Ryan Donovan said the rules are not appropriate for credit unions since they are member-owned, non-for-profit financial institutions with different incentives for resolving problems than for-profit institutions may have. 

“Credit unions are owned by their members, and, as not-for-profit financial cooperatives, have incentive to and a long history of prioritizing the needs of their members,” Donovan said. “As a result, credit unions face different dispute resolution dynamics, and we believe the CFPB should take these differences into account by exempting credit unions when it releases its final rule.”

He added that as voting members of their credit union, a group of members can oust directors and officers by voting against them.

As part of its roll out of the proposed rules, the CFPB was scheduled to hold a field hearing Thursday in Albuquerque, N.M., on arbitration clauses. Attorney Kevin Hammar of Aldridge, Hammar, Wexler & Bradle was expected to testify on behalf of CUNA.

In reaction to the proposed rules, NAFCU Director of Regulatory Affairs Alexander Monterrubio urged the CFPB to avoid any rules that would unreasonably limit the use of arbitration or create burdensome reporting requirements.

“NAFCU is especially concerned with the CFPB’s plan to publish the arbitration data it collects as such actions would present system-wide reputational risk, meddle in the arbitration process, and create significant privacy issues,” Monterrubio said.

The proposed rules would only allow arbitration clauses if they stated that they cannot be used to keep consumers from joining in a class action suit. The CFPB proposed specifying the language that credit unions must use. In addition, the rules would require companies that have arbitration clauses to file information regarding awards, claims and other material that are filed as part of arbitration agreements. The agency said it may consider making information it would collect in that process public in an effort to allow consumers to monitor the process.

In a study released last year, the CFPB said more than 75% of credit card consumers didn’t know they were subject to an arbitration clause.

Late last year, CUNA pushed Congress to require the CFPB to conduct a new study that would be “new, fair and comprehensive.” However, Congress ultimately did not include such language in the omnibus appropriations measure that funded much of the federal government.