Last week, the Consumer Financial Protection Bureau (“CFPB”) issued a proposed rule which would prohibit mandatory arbitration provisions in millions of banking contracts, including contracts with consumers for credit cards and bank accounts. While financial institutions would still be allowed to offer arbitration as an option to customers individually, they would no longer be able to require it be done individually for claims brought as class actions. The intended, and drastic, result of the rule is that consumers would be free to join together in class action suits against their financial institutions for grievances which they had previously only been able to negotiate individually.

The rule is currently in a comment period, but if it is finalized, banks and other institutions can expect a huge wave of class actions suits from consumers. According to the CFBP, the proposed rule would apply to “most consumer financial products and services that the CFPB oversees, including those related to the core consumer financial markets that involve lending money, storing money, and moving or exchanging money.” Arbitration provisions had already been banned from residential mortgage contracts in 2013, but this new rule could extend into the realm of auto loans, payday loans, private student loans, and money transfers, on top of credit and debit cards and bank accounts.

The prospect of a class action lawsuit is a scary thought for most financial institutions, conjuring up horror stories of protracted litigation, astronomical legal bills, and gigantic settlements. While the new rule is pending, financial institutions should familiarize themselves with the following tips for handling class actions, which can mean the difference between potentially crippling liability and an early and comparatively inexpensive victory:

  1. Hire experienced class action lawyers. Defeating class certification is often the death knell for these types of cases and experienced class counsel can help frame the case so that the chances of certification are as slim as possible.
  2. Institute a litigation hold immediately. Promptly instituting a comprehensive litigation hold is imperative.  Not only will you avoid the potentially case-determinative consequences of the destruction of relevant and discoverable information, but a properly scoped hold can help ensure that you don’t lose documents that are essential to your defense.
  3. Do a deep dive into the facts early. It is imperative to assemble the relevant documents and conduct in-depth interviews of key employees. One of the ultimate goals at the class certification phase will be to show that common questions do not predominate.  In your investigation and interviews, look for ways to show differences among the class members.  Did they receive different agreements or marketing material?  Did some of your customers benefit or prefer the actions of your institution?
  4. Fix your mistakes . . . immediately. Prompt corrective action mitigates potential damages and may make it harder for the plaintiff to portray you as a bad guy.  Do not avoid change simply because you fear it might be construed as an admission.
  5. Consider an early motion to dismissFiling a motion to dismiss may end the case in its early stages.  Even if your motion to dismiss is not granted in full, it can still narrow the claims and reduce your potential exposure.