On October 7, 2015, the Consumer Financial Protection Bureau (CFPB or Bureau) took its latest step toward promulgating rules regulating the use of arbitration agreements by releasing an outline of proposals under consideration (Outline). Arbitration agreements frequently govern the resolution of consumers' disputes with providers of consumer financial products and services, and the CFPB, as required by Section 1028(a) of the Dodd-Frank Act, is continuing its inquiry into such agreements and their role in consumer financial services. The Outline's two main proposals seek to ban the application of pre-dispute arbitration agreements in class action litigation and require submission to the CFPB of all arbitral disputes and awards for review and possible publication.
The CFPB released the Outline, in part, to seek input from industry participants at a Small Business Review Panel, as prescribed under the Small Business Regulatory Enforcement Fairness Act (SBREFA). SBREFA directs the Bureau to convene a panel when it is considering a proposed rule that could have a significant economic impact on a substantial number of small entities. This step in the CFPB's administrative rulemaking process, which was similarly taken in March with respect to the CFPB's payday lending rule, follows the CFPB's release of an arbitration study earlier this year. Our analysis of the arbitration study may be found here.
Both of the Outline's main proposals would apply to pre-dispute arbitration agreements between a "covered person" and a consumer for a "consumer financial product or service." Importantly, the CFPB's Outline does not contemplate an absolute prohibition on the use of pre-dispute arbitration agreements. Nonetheless, the Outline details restrictions and requirements that could significantly impair the use of pre-dispute arbitration as an effective dispute-resolution mechanism for these customer relationships.
I. Proposal to Prohibit Contracts in Which Consumers Forfeit Their Right to Join a Class Action
Recognizing that few consumers file individual claims against consumer financial service companies, the CFPB is contemplating rules that would facilitate aggregate relief to harmed consumers through private class action litigation. Even though class action litigation is often the subject of criticism and can be expensive and cumbersome for all parties involved, the CFPB stated that, on balance, consumers would be significantly better protected from harm by consumer financial service providers if they were able to aggregate claims. In furtherance of this belief, the CFPB is considering requiring "any arbitration agreement included in a contract for a consumer financial product or service offered by [a covered person] to provide explicitly that the arbitration agreement is inapplicable to cases filed in court on behalf of a class unless and until class certification is denied or the class claims are dismissed."1
II. Proposal to Require Submission to the CFPB of Arbitral Disputes and Awards
The CFPB is also contemplating a proposal to collect and possibly publish information on arbitral disputes and awards. One of the generally accepted benefits of arbitration is that it is confidential in nature. In the agency's view, though, increased transparency would deter unfair arbitrations and expose any unfairness, which the CFPB believes may result from biased arbitrators. Specifically, the CFPB is considering a proposal to require covered entities that use arbitration clauses in their consumer contracts to submit initial claim filings and written awards in consumer finance arbitration proceedings to the CFPB. In addition, the CFPB is considering whether to publish those claims or awards to its website, making them available to the public. Similar to the CFPB's existing consumer complaint database, the proposed collection would allow the CFPB to monitor arbitral developments and identify issues affecting consumers.
Impact on Consumers and Industry. Although the proposals outlined by the CFPB are well-intentioned, they will result in a relatively minor benefit to individual consumers, if any benefit at all. Indeed, as conceded in the CFPB's Outline, class action litigation may only aggregate "relatively paltry potential recoveries into something worth someone's (usually an attorney's) labor." Moreover, the CFPB suggests that encouragement of class action litigation may ultimately reduce the likelihood of public enforcement actions, as settled class action cases would provide finality and bind consumers who have not opted out of the class. In reality, given the duration of class action suits (from class formation to settlement or judgment), combined with the CFPB's likely collection of arbitral disputes and awards as a means to develop enforcement leads, consumer financial services companies may face parallel enforcement actions and class action lawsuits.
Consumers may also be negatively affected as a result of the difficult business decisions companies might be forced to make as a result of the proposals. Faced with increased litigation risk and the potential for significant legal expense, consumer financial services companies required to allow class action suits for minor consumer disputes may simply adjust the prices of their products and services. In addition, companies may decide to abandon arbitration clauses altogether to avoid developing costly compliance systems equipped to handle multiple avenues to dispute resolution. Ultimately, consumers may lose the opportunity to individually resolve disputes, be forced into protracted class resolutions, and pay more for products and services.
Relation to Federal Arbitration Act. It is worth noting that the effect of the proposed rules would conflict with the intended purpose of the Federal Arbitration Act (FAA), which serves as the primary statutory foundation for arbitration agreements. In 1925, through enactment of the FAA, Congress declared a national policy favoring arbitration and withdrew the power of the states to require a judicial forum for the resolution of claims that the contracting parties agreed to resolve by arbitration.2 Indeed, the legislative history of the FAA indicates that, in addition to ensuring judicial enforcement of privately made agreements to arbitrate, Congress recognized that arbitration clauses may assist in cleaning up judicial dockets and avoiding the "costliness and delays of litigation."3
Timing.The Outline demonstrates the CFPB's intention to move forward with a rule limiting the financial service industry's use of arbitration clauses. The CFPB's Outline is one of several administrative steps that must be taken by the CFPB prior to new arbitration rules becoming effective, and which may ultimately mean a rule is not finalized under the current presidential administration. In addition to conducting an SBREFA panel meeting, the CFPB must draft and publish in the Federal Register a proposed rule. The CFPB must then reserve a period for public comments and review those comments before publishing a final rule. By statute, any final rule published by the CFPB would only apply to contracts entered into between a business and consumer 180 days after the effective date of the final rule.
In our view, the CFPB, industry participants attending the Small Business Review Panel, and all consumers and consumer financial services companies should carefully evaluate the potential impact of the proposals presented in the Outline.