As we reported last year, in October 2015 the Consumer Financial Protection Bureau published an outline of proposals that would limit the use of arbitration provisions in contracts for consumer financial products. On May 5, 2016, the CFPB followed up by releasing a proposed rule that would ban consumer financial services providers such as banks, credit card issuers, and small-dollar lenders from using mandatory arbitration clauses to prohibit consumers from filing or joining class actions against them.

If adopted, the CFPB’s proposal would prohibit consumer financial services companies from relying on pre-dispute arbitration clauses in new contracts to prevent class action lawsuits, but would stop short of banning them. Specifically, the proposed rule states that a company may not rely on an arbitration provision in a contract entered into after publication of the CFPB’s final rule “with respect to any aspect of a class action” related to covered consumer financial services “unless and until the presiding court has ruled that the case may not proceed as a class action.” The proposed rule also sets out specific language that companies would have to use in any arbitration clause expressly stating that the clause may not be used to prevent consumers from participating in class actions.

The CFPB’s proposed rule also would require consumer financial services providers to submit records to the agency reporting claims, awards, and other related information regarding any arbitration cases involving the provider. The submitted information may be subject to publication in some form by the CFPB.

If the proposed rule takes effect, it likely would end, or at least severely limit, the use of arbitration provisions in the consumer financial services industry. Such a result would represent a substantial change to the current legal landscape. In AT&T Mobility LLC v. Concepcion, the U.S. Supreme Court held that the Federal Arbitration Act preempted application of a state common law doctrine of unconscionability to invalidate an arbitration agreement containing a class action waiver. Since that 2011 decision, courts have generally upheld such class action waivers. The CFPB’s proposed rule is designed to overturn Concepcion in consumer financial cases. The inevitable result, if the proposed rule takes effect, will be an increase in class action litigation against companies that provide such services.

The rule is expected to take effect next year, after expiration of the 90-day public comment period and drafting of the final rule. It is possible – perhaps likely – that the final rule will be challenged in court on any number of theories. Nevertheless, companies providing consumer financial services should assume in their planning that the rule will survive.