The debates rage on, in a variety of forms, regarding the level of regulation that should be imposed by the U.S. Consumer Financial Protection Bureau.
At recent field hearings held in Dallas by CFPB Director Richard Cordray, consumer advocates and members of the banking community debated the role and impact of standard arbitration clauses contained in financial services contracts. Specifically, alleged wrongful foreclosures have been impacted when an arbitration clause is present, HousingWire reported.
Inviting public perspective
Most evident from the Dallas discussions was the still-wide divide between the two groups. Opinions from bankers and consumer advocates regarding how consumer contract disputes should be handled continue to be vastly different. The hearings, designed by the CFPB to encourage public consumer engagement, are indicative of the polarizing nature of the bureau's regulatory jurisdiction, as well. From the perspectives of many banks and credit unions, CFPB regulation is often encroaching and too all-encompassing.
Arbitration clauses, the topic of this most recent hearing, are essentially standard agreements contained in financial services contracts stipulating that future disputes between consumer and lender, or consumer and collector, will be presided over by an arbitrator. They are intended to offer an out-of-court alternative to messy and often lengthy legal disputes.
Federal law specifically prohibits arbitration clauses from being written into the majority of home loan contracts. Yet the CFPB has been persistent in its efforts to hear from consumers who have been impacted by the existence of such clauses in financial services agreements. The bureau has increasingly focused on the issue since the beginning of 2013, culminating with its invitation for consumer advocates and banking professionals to offer their perspectives at the Dallas forum. The hearing, according to Cordray, served as a sort of half time between two phases of study, designed engage those most immediately affected by the issue.
"In the second phase of our study, we will seek to obtain a better understanding of what explains the incidence and nature of arbitration claims, including small-dollar claims," Cordray said. "We will look to see what happens to arbitration filings and endeavor to compare what we see happening in arbitration to what we see happening in litigation, including class litigation."
Among the primary complaints banks - particularly smaller ones - have expressed with the CFPB is that its regulation typically applies to all banking institutions uniformly. Many industry professionals contend that distinctions need to be made between larger and smaller banks and credit unions, with regulatory measures reflecting their operational differences.
Shannon Phillips, deputy general counsel for the Independent Bankers Association of Texas, told the Dallas gathering that the broader requirements for the use of arbitration agreements are detrimental to smaller banks already hamstrung by excessive regulation. Phillips stated that many have been "caught in the backwash" of regulations primarily aimed at the practices of their larger counterparts. Any increased regulation for arbitration clauses, he argued, would only further strain these smaller entities in terms of their compliance costs and bottom lines.
"Not having arbitration clauses when they're needed is going to increase their costs," Phillips said.
Consumer advocates present at the hearing claimed the clauses serve to bar consumers who seek relief. Ellen Taverna, senior legislative associate for the National Association of Consumer Advocates, referenced a case in which an active military officer had his property wrongfully foreclosed upon while overseas, but the matter was handled via a pre-drafted arbitration clause that kept the case from going to court.
Narrowing the focus
Jesse Sharp, managing director at the U.S. Chamber of Commerce's Center for Capital Markets Competitiveness, argued that the focus of any study conducted by the bureau or any other regulator should be on measuring different types of dispute resolution against each other.
"We need to focus more narrowly on the outputs," Sharp told the forum, adding that consumers typically fare as well or better in arbitration cases compared with when they head to court.
Phillips echoed Sharp's sentiments, noting that arbitration is generally a far less complex matter. He cited in particular one consumer case that remains in litigation, despite having been initiated 10 years ago.
"To say that arbitration is more complicated than litigation means you have never been in litigation," said Phillips.
Sharp also contended that class-action disputes were typically not beneficial to consumers, telling the hearing that there is "very little recovery" through such litigation. In response, Richard Frankel, an associate law professor at Drexel University in Philadelphia, noted the unique role of such cases.
"[Class actions] are an important means for changing business practices … and that spreads out to the entire community," Frankel said.
In determining where to extend regulation as it pertains to arbitration clauses, the CFPB will continue to study arbitration agreements and eventually advise Congress to either keep, end or limit these agreements in contracts going forward. The bureau retains the regulative authority to impose limitations on clauses if it deems such an action to be in the best interest of the public.