Special Report on Class Actions and Arbitration in Consumer Lending

Special Report on Class Actions and Arbitration in Consumer Lending

This past November, votes came down from the Executive Branch dismantling an agency rule that would have increased consumers’ access to the court system in cases of lender disputes. The would-be rule dealt specifically with mandatory arbitration agreements and class action lawsuits in the context of financial service providers. This proves to be a bit of a double-edged sword for businesses in the start-up and scale-up space, which deal heavily in business loans on the front end and consumer financing on the back end.

The Rule in Dispute. Back in July of 2017, the Consumer Financial Protection Bureau (CFPB) proposed a rule that would prohibit financial service providers such as lenders, brokers, and credit card companies, from using mandatory arbitration agreements to prevent consumers from filing or participating in class action lawsuits. In other words, without the rule lenders could keep consumers out of class actions by locking them into arbitration. With the rule in place, those arbitration agreements would have to make exceptions.

Congress’s Final Word. Congress relied upon procedures under the Congressional Review Act (CRA) to vote down the rule. Under the CRA, any proposed executive agency regulation can be killed by a simple-majority vote of both House and Senate and a veto by the President, the latest of which was inked in November.

Divided Public Opinion. The rule has polarized figures in business and politics. Proponents like Melissa Stegman, Senior Policy Counsel for the Center for Responsible Lending, vilifies the deregulation as “[removing] an indispensable check on corporate misconduct,” particularly lender fraud. Treasury Department reports came out on the other end, warning that the rule would “open the door to frivolous lawsuits by special interest trial lawyers.” Whatever the result, the ruling was destined to affect small businesses, veterans, and middle-class families who all tend to deal extensively with lending institutes.

Effects on Industry. Congress’s decision puts small businesses in the unique position of being beholden to their own machinations. Business loans, advances, financing, and lines of credit are all affected by the downvote, and the agreements governing those transactions more than likely already prohibit debtors from collective recovery in a class action.

On the other hand, businesses offering financing options and other loan vehicles should take advantage of the deregulation as a matter of self-protection. Arbitration is generally a more flexible, faster, and more cost-efficient alternative to litigation. Just be sure to employ fair trade practices: present the arbitration agreement to your customers for review and avoid fraud in the inducement by plainly laying out the terms; if you have a stand-alone arbitration agreement, incorporate it by reference in your purchase agreements. Be advised that arbitration proceedings are overseen by reputable groups such as the American Arbitration Association, and each has its own consumer protection procedures. You may need to submit your pre-dispute arbitration agreement to the body for approval, where it will ensure that there are no unconscionable provisions before commencing arbitration.