CFPB Arbitration Rule Could Slow Specialty Finance M&A

New rule that would make it easier for consumers to join class-action lawsuits against providers of financial services could be a significant headwind to merger activity in the specialty finance industry.

Thursday, October 12, 2017

In July, the Consumer Financial Protection Bureau (CFPB) finalized a rule that would prevent credit card providers, banks, and other consumer finance companies from including clauses in their contracts that force consumers to use arbitration, rather than joining class-action lawsuits, to settle disputes with the company. The rule is set to take effect in March 2018.

The CFPB, Congressional Democrats, and consumer advocates are hailing the rule as a necessary tool for deterring wrongdoing by consumer finance companies. Meanwhile, most Republicans and consumer finance trade groups claim that the rule would result in higher costs and fewer choices for consumers and higher litigation costs for consumer finance companies. As a result, Congressional Republicans are looking to pass a resolution that would repeal the CFPB’s rule, but the resolution’s prospects of passing the Senate, where the Republicans hold a slim majority, are uncertain.

Although the CFPB rule’s potential net impact on consumers is debatable, the rule’s impact on M&A activity in the specialty finance sector is clear—increased litigation risk for banks and lenders, which would have a significant chilling effect on merger volume and valuations in the space.

Highlights include:

  • Overview of new CFPB arbitration rule
  • Update on GOP efforts to repeal the rule
  • Potential impact on specialty finance M&A activity
Specialty Finance-October-2017

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