Surprising no one, the CFPB has announced a proposed rule that would effectively ban mandatory arbitration clauses in covered consumer financial services contracts.  The rule continues to ignore the legislative and judicial findings embodied in the Federal Arbitration Act and the cases interpreting it, the well-documented abuses associated with class action litigation, and the methodological and analytical flaws in the Bureau’s arbitration study.  Stay tuned for a MoFo client alert with all the details.  In the meantime, here’s a quick summary.  You can also catch up by reading our alert on the CFPB’s earlier announcement about the rulemaking and listen to Director Cordray’s speech on the proposed rule.

The rule is not technically an outright ban, like the one related to residential mortgages.  But it is designed to severely limit the ability for many companies to include arbitration clauses in consumer financial contracts.   It would apply to many core areas the CFPB oversees, including financial products related to lending money, moving money, storing money or transferring money.  The covered providers would be prohibited from including in any arbitration provision with consumers a clause that bans consumers from joining class action litigation related to the financial product or service.  The proposed rule also adds a controversial reporting requirement:  covered providers would have to report to the CFPB about applicable arbitration claims and damage awards.

The CFPB confirmed in the proposal that “[c]onsistent with the Dodd-Frank Act, the proposed rule would apply only to agreements entered into after the end of the 180-day period beginning on the regulations’ effective date.”   The effective date will be 30 days after the final rule is published in the Federal Register, likely in the second or third quarter of 2017.  Thus, arbitration clauses that exist in contracts prior to the effective date of the rule would be grandfathered in, and would not be subject to the new rule.  Businesses may want to consider closely reviewing existing consumer contracts and consider whether to add or amend arbitration clauses before the rule goes into effect, while keeping in mind the CFPB’s hostility to such arbitration clauses.

Industry participants and consumers will have 90 days to comment on the rule, once it’s published in the Federal Register.