Payments Blog

On May 5, 2016, the Consumer Financial Protection Bureau (CFPB) promulgated rules that, if enacted, would prohibit mandatory arbitration clauses. These clauses can prevent consumers from forming a class to sue a bank or financial institution for perceived wrongdoing, and have become an increasingly prevalent feature in consumer financial contracts. In the run-up to the promulgation, the CFPB’s Director Richard Cordray was quoted as saying:

“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. […] 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.”

As the CFPB sees it, the goal of the new rules was to provide:

• A day in court for consumers
• A deterrent effect to companies that may use arbitration clauses to avoid compliance
• Increased transparency

The CFPB was required to study the use of mandatory arbitration clauses by the Dodd-Frank Wall Street Reform and Consumer Protection Act. They released that study in March 2015 and promulgated the present rules in May 2016.

One of the major voices speaking out against the CFPB’s new rules against mandatory arbitration clauses are credit unions. The two largest representative bodies for credit unions, the Credit Union National Association (CUNA) and the National Association of Federal Credit Unions (NAFCU), have both commented negatively on the CFPB’s rules. Their criticisms have centered on a few factors:

The unique relationship between credit unions and their members

While credit unions are financial institutions that perform essentially the same functions as banks, they differ in one unique way: customers are considered members and part-owners of the institution. The idea is that by pooling resources, members of a credit union can provide the essential functionality of a bank (or other financial institution), but add a democratic layer through empowerment of participants as members and part-owners of the institution with a say in how it does business. While the distinction can seem trivial given the size of some credit unions, it is an essential difference that makes them unique.

Given this distinction, credit unions protested the way in which the CFPB got in the way of that unique relationship by imposing an unnecessarily contentious relationship between the credit union and its members.

In a May 17, 2016 letter opposing the CFPB’s promulgation, Brad Thaler, Vice President of Legislative Affairs for the NAFCU, said:

“Credit unions have a solid reputation of working with their members to resolve disputes when they arise. […] Many credit unions have found that voluntary arbitration agreements are often the most optimal solution for resolving disputes, both in terms of efficiency for the credit union, and fairness for the member.” [1]

A similar sentiment was expressed by Jim Nussle, President and CEO of CUNA, in a July 15, 2016 letter to the House Committee on Financial Services:

“It is hard to imagine a case in which class action litigation against a credit union would be a reasonable course of action for credit union members since it would put them in a position of essentially having to sue themselves, as they are member-owners of the credit union.” [2]

Credit unions are not like other large banks or financial institutions

This is a similar sentiment, but with a focus on the institution. As a customer of a bank, there is no murkiness about the “interests” of a customer versus the interests of the institution. Broadly, of course, customers do not want financial institutions to go out of business, but a customer with a claim against a financial institution can feel confident that, if their claim is valid, they can only benefit by bringing that claim.

However, that is not exactly the case with credit unions.

When a customer/member of a credit union brings a claim against the credit union, part of their own ownership/membership interest is on the side of the credit union. It is as if the famous Ms. Liebeck (the hot McDonald’s coffee case [3]) had also been a part-owner of McDonald’s when she sued them. If she collects, she also collects against herself. That relationship does pose unique problems.

Credit unions are not the source of the problems that the CFPB was intending to address

Finally, both major advocacy groups (NAFCU and CANU) argued that to the extent the CFPB rules were, in part, intended to provide deterrence for institutional malfeasance, they are misdirected at credit unions.

In an August 19, 2016 letter [4], Ann Kossachev, Regulatory Affairs Counsel for NAFCU wrote:

“Credit unions should be excluded from the final arbitration rule because they are not responsible for even a small fraction of the deceit and destructive behavior in the financial industry that the CFPB cites as motivation for this rule”

In addition to the philosophical disagreements with the CFPB’s application of this rule to credit unions, the NAFCU and CANU also criticized the process by which the CFPB came to its conclusions about the new rules. They said:

• The CFPB relied on an inadequate agency study (too few credit unions were counted in the study) for justification.
• The CFPB failed to gauge the impact the new rules would have on small financial institutions.

Comments on the proposed rules were due Monday, August 22, 2016, and there is no indication that the CFPB intends to exempt credit unions.