The federal financial consumer watchdog agency, as we all know as the CFPB (Consumer Federal Protection Bureau), has issued a rule prohibiting the use of arbitration agreements in group cases.  Many independent, in-house and third party finance institutions as well as Buy Here Pay Here companies across the United States have incorporated the use of an arbitration agreement.  Its purpose is to provide some protection from frivolous class action law suits that can potentially put even those with the right intentions of losing everything.

In early 2013, a Buy Here Pay Here (BHPH) in the state of Missouri sold a car to a customer.  The BHPH had a related finance company  (RFC).  The sales lot sold the credit contract to the RFC.  Within the first six months of the credit contract, the account went over 90 days past due.  In the state of Missouri, a Right to Cure process must be followed prior to repossession.  This dealer followed the correct Right to Cure procedures and executed the repossession.  After the vehicle was on-hand, an Intent to Sell was sent to the customer notifying them the vehicle would be going to auction.  The document disclosed what date and time the vehicle would be sold, the physical address and official name of the auction, the amount past due, the balance of the contract along with many other required details instructing the customer of the process to redeem their vehicle.  However, one page of the document contained two check boxes.  Those check boxes specified if the finance company intended to sell the vehicle privately or publicly.  The dealer left both of the boxes blank by error.

The vehicle was sold at the auction listed on the intent to sell.  A followup document was sent to Jim after the sale confirming the car was indeed sold on that date and time, the sale price and the remainder of the balance on the contract after the sale.

Several weeks later, this dealer was sifting through the mail and noticed a letter from a law office in Southern Missouri.  The dealer read the letter with great anxiety as he realized he was being sued by Jim (who owed thousands of dollars to the dealer for not making his car payments).  The basis of the law suit was one of those check boxes were not checked.  The letter also outlined the intent to file a class-action lawsuit.

This particular case lasted over 18 months.  During those 18 months, there were many meetings with attorneys, significant attorney fees, much duress and the threat of losing years and years of work.  In the end, the case was settled for a small and reasonable amount.  The class action was not formed and a significant reason was Jim had signed an arbitration agreement when he purchased the vehicle.

These types of gut-wrenching law suits are initiated all the time.   This real-life story, of a dealer with good intentions but forgot to check a box could turn out very differently in the near future.

Consumer advocates have provided intense pressure advocating for tighter federal regulation of arbitration agreements and other types of like clauses.  Arbitration will still be used in individual cases, but the regulation will ban banks from using arbitration agreements when a case involves a group of customers.

“Arbitration clauses in contracts for products like bank accounts and credit cards make it nearly impossible for people to take companies to court when things go wrong.” said CFPB Director Richard Cordray.  “These clauses allow companies to avoid accountability by blocking group lawsuits and forcing people to go it alone or give up.  Our new rule will stop companies from sidestepping the courts and ensure that people who are harmed together can take action together.

The rule will take effect 60 days after its published in the Federal Register and applies to contracts entered into more 180 days after that.

Keep in mind, I am not an attorney (as my attorney always seems to remind me) and this is not legal advice and you should consistently have your document package(s) and practices reviewed by a qualified attorney.  This arbitration agreement rule is worth knowing and understanding as well.

What are your thoughts on this new rule?  As always, feel free to write me at justin@niada.com with your stories and feedback.

For more information about the CFPB’s arbitration rule CLICK HERE

For the text of the arbitration rule CLICK HERE

For the CFPB video explaining the arbitration rule CLICK HERE 

 

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