Credit unions may find themselves in court more often if theCFPB acts on a newly proposed ban on class-action waivers inarbitration clauses.

Some industry experts said the move could inflate compliancecosts, and eliminate products and services.

The proposed rules, announced Oct. 7, would make it illegal forcontracts for many types of consumer financial products to havearbitration clauses that prevent members from participating inclass-action lawsuits. In the CFPB's cross-hairs are creditunions, banks, card issuers, auto lenders, private student lenders,loan originators, money transfer providers and a host of otherfinancial services firms. The CFPB said it may also add payment processors to the list.

“Consumers should not be asked to sign away their legal rightswhen they open a bank account or credit card,” CFPB DirectorRichard Cordray said. “Companies are using the arbitration clauseas a free pass to sidestep the courts and avoid accountability forwrongdoing.”

Arbitration clauses, which typically require an arbitratorrather than the court system to resolve disputes between parties,are common. But according to the CFPB, the clauses are buried inmany contracts and few consumers realize they prohibit joiningothers in suing an institution in court. More than 75% of creditcard consumers didn't know they were subject to arbitrationclauses, for example, according to a three-year study the CFPBissued to Congress in March.

To be clear, the CFPB's proposals would not ban arbitrationclauses. However, the clauses would have explicitly state theydon't apply to cases filed as class actions unless a court deniesclass certification or dismisses the complaint.

“What I think they're getting at is they're trying to addresssituations where an organization has a policy or procedure that,let's say, harms a whole group of people in the same way, for thesame reasons,” CUNA Mutual Group Vice President of WealthManagement Kevin Thompson explained. “It could be a pricing thingor something like that. Any one individual might not be harmedenough to be incented to take action, but a group may be soinclined.”

If the CFPB finalizes the proposed rules, manycredit unions would have to update their member agreements, loandocuments and other contracts. But that may be the least of theirworries.

“Credit unions are already spending much more on legal fees thanthey were five, 10 years ago,” said attorney Dustin DeVore, wholeads the credit union practice at Kaufman & Canoles inWilliamsburg, Va. “Now they're going to be spending even more.Whether this is a good thing or not, there's no question it's goingto drive up costs. As you know, that leads to fewer memberservices, high loan rates, you name it.”

Though FINRA already publishes arbitration awards in disputesbetween customers and broker-dealers, and states such as Californiapublish some data about consumer finance arbitrations, arbitrationis largely a confidential affair.

The proposals would significantly change that, however, byrequiring institutions to tell the CFPB about arbitration claimsand awards issued. By publishing the information on its website,the CFPB argued, it can expose unfair arbitrators and showattorneys which kinds of cases are most successful.

Another big concern with allowing more class actions, theexperts said, is that credit unions and other institutions couldbecome targets, forcing them to spend more time and money onliability mitigation.

“Everyone likes to sue a financial institution because they're'the bad guy,'” Patty Corkery, an attorney specializing in creditunion law at Holzman Corkery in Southfield, Mich., said. “I thinkthat this would put this on the radar of a lot of plaintiffs'attorneys that that's all they do is class action, because theymake a ton of money.”

According to the CFPB study, 6.8 million consumers received $220million in payments from class-action settlements per year, whichworks out to about $32.35 per person. Roughly 18% of the $540million awarded in class settlements by federal courts per yearbetween 2008 and 2012 went to expenses and attorneys' fees, itsaid.

“It may sound funny, me saying this as a lawyer, but the onlywinners in class actions are the lawyers,” DeVore said. “The peoplethat this will most help are not consumers. The people this willmost help are lawyers, and that is the truth.”

He added, “One of the complaints of the consumer-advocate typesis [consumers] have this right of arbitration in some of thesecontracts but they don't ever exercise it. Then maybe the answer ismore education so that they do start to exercise it.”

“[The CFPB's] claim that by having arbitration, somehow thesefinancial institutions are sidestepping the legal system and reallyalmost rephrasing it like they're avoiding any sort of liability –I disagree,” Corkery said. “From representing credit unions in thearbitration process, I mean, you don't sidestep anything. If youget nailed in arbitration, it's financially just as harmful as itwould be in a court of law.”

But for Corkery, the issue is bigger thanthat.

“It's really them stepping in and dictating the contractualterms between a financial institution and its borrower,” she said.“That's really what this proposal would do.”

Whatever happens, it will likely happen quickly. The CFPB isconsidering setting an effective date of 30 days after the rule ispublished, and credit unions would then have 180 days to comply.Existing arbitration agreements already entered would not need tobe changed or amended, it added.

In the meantime, the best defense is a good offense, Thompsonwarned.

“You treat people with respect and honesty and make sure you'redoing business the right way, because there are people out therewatching, whether that's the CFPB or the class-action lawyers,” hesaid. “The best way to deal with this always is to be honest andupfront and do business correctly. Then all of this sort of fadesinto the background.”

Arbitration Clauses Are Common

The CFPB's study, released in March, analyzed more than 850consumer finance agreements, more than 1,800 consumer financearbitration disputes filed over three years, a sample of the nearly3,500 individual consumer finance cases filed in federal courtwithin the same time frame, 562 consumer finance class cases filedin federal and selected state courts during the same time period,40,000 small claims filings over a single year, more than 400consumer financial class settlements in federal courts over fiveyears, and more than 1,100 state and federal public enforcementactions relating to consumer finance. The study also included anational survey of more than 1,000 credit card consumers. Here'swho had arbitration agreements, according to the study:

• 53% of the total credit card market

• 75% of the largest 50 credit card issuers

• 42% of small and mid-size credit card issuers

• 44% of insured deposits in the checking account market

• 46% of checking accounts from the largest 100 banks

• 7% of checking accounts from small and mid-size banks

• 99% of the mobile wireless market