Financial Services Litigation and Regulatory Compliance Alert

As chair of DRI’s Class Action Task Force, Mike Pennington recently served as principal author of DRI’s public comment on a rule proposed by the Consumer Financial Protection Bureau (CFPB). The CFPB’s proposed rule (found here) would prohibit banks, lenders, credit card companies, and many other financial institutions from utilizing arbitration clauses to block class action lawsuits. The proposed rule would also impose new public reporting requirements upon covered financial institutions who choose to continue utilizing arbitration in individual cases. Mike recently presented on the CFPB’s proposal (and on currently proposed amendments to Rule 23) at DRI Class Actions 2016 in Washington, D.C.

The CFPB’s proposal takes an unusual approach. Rather than merely regulating the content of arbitration clauses, it purports to regulate in-court conduct of covered financial institutions in class action litigation. Specifically, the proposed rule states that covered financial institutions may not “rely in any way” on an arbitration clause with respect to “any aspect of a class action” involving a product or service covered by the rule. As DRI’s public comment points out, this approach, combined with the many ambiguities and uncertainties of the complex proposal, place defense counsel representing the covered financial institution in a serious dilemma—guessing wrong as to what is and is not allowed may place the client in regulatory jeopardy. For example, how can a defendant preserve the right to arbitrate if class certification is abandoned or denied without “relying in any way” on the arbitration clause in response to the class complaint? Can arbitration be invoked when a dispute arises with respect to an absent member of a putative but uncertified class, or would that be impermissible attempt to limit the size of the class by “relying in any way” on an arbitration agreement? Can an already concluded arbitration be pleaded as res judicata as to an absent class member without running afoul of the prohibition? Can the class defendant argue that individual arbitration is a superior alternative to class adjudication, as Rule 23 clearly contemplates, or would that too be impermissibly “relying in any way” on the arbitration clause?

The dilemma for class action defense counsel and their clients is all the more acute because the CFPB will not be a party to the class action, and therefore would not be bound by trial court rulings on these issues. Thus, even if the trial court finds defense counsel’s conduct appropriate, the defendant could still face regulatory consequences if the CFPB disagrees.

For all these reasons, the DRI comment urges the CFPB to reconsider its currently proposed approach even if it is bound and determined to do away with class waivers. In addition, the comment points out major flaws in the fundamental premise of the proposed rule—namely, that class litigation is an efficient deterrent against unlawful practices. The comment points out that many, if not most, class actions involve ambiguities in the law, not clear violations of the law, and often involve no actual present injury as a result of the technical violations claimed. These facts tend to result in class action settlements that provide little benefit to class members and may well “over deter” perfectly lawful conduct.

A complete copy of the DRI’s public comment can be found here.