Today the Consumer Financial Protection Bureau proposed the rules that it previewed last fall, following up on its Arbitration Study. Those rules would essentially ban class action waivers from consumer financial agreements, as well as requiring arbitral institutions to provide data on consumer financial disputes to the CFPB. (As an aside, the proposal is 377 pages long. Are all proposed notices of rulemaking so long?? If so, I am very happy not to practice in administrative law.)

There will be lots of analysis of the rules and their potential impact in the coming days, but for now here are the deets on the proposal, with direct quotes from it where appropriate:

What Do the Proposed Rules Say? Two things.

  • First, financial consumers will be entitled to participate in class actions in court, even if the governing agreements call for arbitration generally:

“A provider shall not seek to rely in any way on a pre-dispute arbitration agreement . . . with respect to any aspect of a class action that is related to any of the consumer financial products or services covered by § 1040.3 including to seek a stay or dismissal of particular claims or the entire action, unless and until the presiding court has ruled that the case may not proceed as a class action and, if that ruling may be subject to appellate review on an interlocutory basis, the time to seek such review has elapsed or the review has been resolved.”

The arbitration agreement must clarify:

“We agree that neither we nor anyone else will use this agreement to stop you from being part of a class action case in court. You may file a class action in court or you may be a member of a class action even if you do not file it.”

  • Second, providers of arbitration services must submit redacted copies of the following documents to the CFPB for its continuing monitoring:

“In connection with any claim filed in arbitration by or against the provider concerning any of the consumer financial products or services covered by § 1040.3;

  1. The initial claim and any counterclaim;
  2. The pre-dispute arbitration agreement filed with the arbitrator or arbitration administrator;
  3. The judgment or award, if any, issued by the arbitrator or arbitration administrator”

CFPB’s Authority: “In the Dodd-Frank Act, Congress also authorized the Bureau, after completing the [Arbitration] Study (hereinafter Study), to issue regulations restricting or prohibiting the use of arbitration agreements if the Bureau found that such rules would be in the public interest and for the protection of consumers.” In particular, the Bureau relies on sections 1022(b) and (c), and 1028(b) of the Dodd-Frank Act.

Why CFPB is Proposing the Rule (in its own words):

“The Bureau preliminarily concludes, consistent with the Study and based on its experience and expertise, that: (1) the evidence is inconclusive on whether individual arbitration conducted during the Study period is superior or inferior to individual litigation in terms of remediating consumer harm; (2) individual dispute resolution is insufficient as the sole mechanism available to consumers to enforce contracts and the laws applicable to consumer financial products and services; (3) class actions provide a more effective means of securing relief for large numbers of consumers affected by common legally questionable practices and for changing companies’ potentially harmful behaviors; (4) arbitration agreements block many class action claims that are filed and discourage the filing of others; and (5) public enforcement does not obviate the need for a private class action mechanism.”

Which entities are affected: “[P]roviders of certain consumer financial products and services in the core consumer financial markets of lending money, storing money, and moving or exchanging money.” This includes entities that provide credit to consumers (banks, credit card issuers), extend auto leases, provide debt relief services, collect debts, provide check cashing services, and provide credit reports.

When would the rule take effect? “Compliance with this part is required for any pre-dispute arbitration agreement entered into after” 211 days after the final rule is published in the federal register. (So, affected entities likely have about a year to prepare.)

What Other Agencies are Doing on Arbitration: CFPB spends three pages of its proposal explaining what other agencies have done, or are doing, to protect consumers in the context of arbitration. The most recent examples are from the Centers for Medicare and Medicaid Services (in the context of long-term health care facilities) and the Department of Education (in the context of college enrollment agreements).

Deadline for comments: The public has 90 days to comment on this proposed rule.

These proposed rules are a continuation of the battle between the executive and judicial branches of the federal government over arbitration. If passed, they will undoubtedly lead to a significant increase in consumer financial class actions. It will be interesting to see if they also affect the willingness of companies to include arbitration agreements at all.