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New rule to prohibit mandatory arbitration in consumer banking

The Consumer Financial Protection Bureau has just made a new rule official that would prohibit mandatory arbitration clauses in consumer banking and financial services contracts. However, the official publication of the rule may merely serve to expose it to attack from those who prefer arbitration or who believe the rule will be disruptive.

According to Reuters, now that the rule has been published in the federal register, any member of a council of top financial regulators could ask for the rule to be delayed by 10 days. The acting comptroller of the currency has already begun putting together a petition.

The acting comptroller says that his office has not been able to review the data underpinning the rule, but the CFPB’s director insists that the original rulemaking proposal released a year ago contained extensive data.

Congress could also attempt to nullify the rule using the Congressional Review Act, which allows Congress to veto the actions of federal agencies. Congress could take action to kill the rule anytime in the next six months. A group of Senate Republicans, including the chairman of the Banking Committee, have suggested they may undertake a resolution to do so.

A third way the rule might be defeated is through litigation by the U.S. Chamber of Commerce or other non-governmental groups that oppose it.

Arbitration is a form of alternative dispute resolution in which an experienced and neutral third party acts as a judge in a process that is similar to, but slightly less formal than courtroom litigation. One of its advantages is that the result of binding arbitration is generally not appealable, so there is less risk of the issue becoming protracted.

Business groups claim that arbitration is less costly for both consumers and companies, so it should be preferable. However, consumer advocates say that mandatory arbitration clauses are mostly meant to prevent consumers from being able to pool their money and resources by binding together in class action lawsuits. Moreover, some claim that businesses are in a position of power over arbitrators, since they use them most frequently.

Do you think banks and financial services companies should be able to require consumers to engage in arbitration?

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