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CFPB Permanently Bans Arbitration Company from Arbitrating Consumer Financial Disputes

By A.J. Dhaliwal, Mehul Madia & Beineng Zhang on October 11, 2024
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On October 10, the CFPB settled an action against a California-based private arbitration company permanently banning it from arbitrating disputes related to consumer financial products or services. The company operates an online dispute resolution platform that connects debtors with creditors for the purpose of resolving disputes and debts.

The enforcement action arose from the company’s role as a service provider to a student income share agreement (“ISA”) provider, which the CFPB and several state attorneys general shut down in 2023 for illegal lending practices. When the loan provider was under investigation, it unilaterally altered its contract terms to force consumers into arbitration with the company.

The Bureau found that the company misled student borrowers about its neutrality and initiated sham arbitration proceedings in violation of the Consumer Financial Protection Act (CFPA). The CFPB’s consent order enumerates the company’s violations, which include:

  • Initiating arbitration proceedings without consumers’ consent, knowing that it lacked jurisdiction, as the ISAs had no arbitration clause allowing the company’s involvement;
  • Misleading borrowers regarding its neutrality and failing to disclose its affiliation with the ISA provider and that its financial interests were aligned with the provider;
  • Misrepresenting the nature of the proceedings and the consequences for borrowers’ actions or inactions; and
  • Attempting to bind borrowers to its terms of service and platform rules, which restrict borrowers’ means of legal defense.

Putting It Into Practice: The CFPA empowers the CFPB to enforce, not only against institutions offering consumer financial products or services, but also against their third-party service providers. This action underscores federal regulators’ commitment to going after service providers as well as the provider of the consumer financial product or service. Notably, the defendant did not pay a civil money penalty beyond a nominal $1 fine which allows consumers to access relief from the Bureau’s victim relief fund. 

Photo of A.J. Dhaliwal A.J. Dhaliwal

A.J. is a partner in the Finance and Bankruptcy Practice Group in the firm’s Washington, D.C. office.

Read more about A.J. DhaliwalEmail
Photo of Mehul Madia Mehul Madia

Mehul Madia, special counsel in the firm’s Washington, D.C. office, provides deep consumer finance and fintech expertise to clients, leveraging more than 15 years’ of public and private sector experience.

Read more about Mehul MadiaEmail
Photo of Beineng Zhang Beineng Zhang

Beineng Zhang is an associate in the Finance and Bankruptcy Practice Group in the firm’s Orange County office.

Read more about Beineng ZhangEmail
  • Posted in:
    Banking, Finance and Securities
  • Blog:
    Consumer Finance and Fintech Blog
  • Organization:
    Sheppard, Mullin, Richter & Hampton LLP
  • Article: View Original Source

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