The Consumer Finance Protection Bureau swept the industry earlier this month with a set of proposed rules that would prohibit mandatory arbitration clauses that deny groups of consumers their day in court.
Moody's Investors Service released a report recently that the risks associated with the rule come twofold for lenders and securitizations if the CFPB adopts the arbitration rule: The fact that the proposed rule would not affect contracts outstanding before it is finalized would lessen its effects initially, as well as over the longer term for contracts on products that typically have long lives. If adopted, the rule would expand legal risks for banks and other financial companies, and could adversely affect some securitizations. Some of the negative effects, however, would be offset if the rule leads to improved borrower credit quality by ending practices that weaken consumers’ finances.
The U.S. Supreme Court issued a ruling that is likely to affect mortgage servicers. In the case of Spokeo Inc. vs. Robins, the Court ruled that consumers must prove that they have suffered concrete harm in order to bring a class action suit under the Fair Credit Reporting Act, and that consumers cannot bring suits based solely on a bare violation of statutes. While the Supreme Court ruled that a plaintiff must prove to have suffered concrete harm, at the same time, the Court left it entirely up to lower courts to determine exactly what constitutes concrete harm—and implied that it doesn’t necessarily have to be tangible harm.