For some time now we have been waiting for the CFPB to come forward with a proposed rule addressing mandatory, pre-dispute arbitration. On Thursday, May 5th, Director Cordray announced the proposed Regulation.

The proposal is contained in a 377 page release. Its essential ingredients are two:

  • The Regulation would prohibit covered providers of certain consumer financial products and services from using an agreement with a consumer that provides for arbitration of any future dispute between the parties to bar the consumer from filing or participating in a class action with respect to the covered consumer financial product or service.
  • The Regulation would require a covered provider that is involved in an arbitration pursuant to a pre-dispute arbitration agreement to submit specified arbitral records to the CFPB.

Under this proposed Regulation, financial services companies would still be able to include arbitration clauses in their contracts, provided, however, such contracts could not prohibit consumers from being part of a class action in court. And, the proposal includes the specified language that must be included to articulate this point.

The proposal would create a new Part 1040 of Title 12 of the Code of Federal Regulations. The important definition of a “covered provider” is one who offers or provides a “financial product or service” defined in the Dodd-Frank Act to include most products or services offered for personal, family or household purposes. Covered providers include, among others, ones who

  • extend consumer credit
  • act as a creditor under the Truth-in-Lending Act
  • service a covered financial product or service
  • extend an automobile lease
  • provide a consumer a consumer report
  • provide accounts or remittance transfers, or transmits or exchanges funds
  • cash checks
  • who are debt collectors

There are a host of excluded persons as well. This important determination of who would be a covered person and who would not be, is found in Section 1040.3 of the proposal.

The Regulation as proposed also includes the authority of the CFPB to adopt official interpretations.

There is much to digest in the 377 pages of explanation. However, we have already seen most of this proposal in the publication by the CFPB of an outline of the proposals under consideration back in October, 2015, prior to the time it convened a Small Business Review Panel to gather feedback. There is little, if anything different from what the CFPB floated earlier notwithstanding its extensive consultations. The public may make comments to the CFPB on the proposed Regulation for 90 days following publication in the Federal Register.

As of this time, we are not sure what the effective date of the Regulation may be. Based on history, it is likely that the CFPB will afford covered providers six months to one year to comply with the Regulation from the point in time that it becomes effective. And, the effective date cannot occur before the end of the comment period and the period of time that the CFPB takes to review the comments.