On May 5, the Consumer Financial Protection Bureau (Bureau) issued a proposed rule that would prohibit covered providers of certain consumer financial products and services from using an agreement with a consumer that provides for arbitration of any future dispute between the parties to bar the consumer from filing or participating in a class action with respect to the covered consumer financial product or service. Specifically, the rule would prohibit providers from using a pre-dispute arbitration agreement to block consumer class actions in court and would require providers to insert language into their arbitration agreements reflecting this limitation. The proposed rule also would require a covered provider that is involved in an arbitration pursuant to a pre-dispute arbitration agreement to submit specified arbitral records to the Bureau. The Bureau stated that it intends to use the information it collects to continue monitoring arbitral proceedings to determine whether there are developments that raise consumer protection concerns that may warrant further action.

According to the Bureau, the proposal applies to providers 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 most providers that are engaged in:

  • extending or regularly participating in decisions regarding consumer credit under Regulation B implementing the Equal Credit Opportunity Act, engaging primarily in the business of providing referrals or selecting creditors for consumers to obtain such credit, and the acquiring, purchasing, selling, or servicing of such credit;
  • extending or brokering of automobile leases as defined in Bureau regulation;
  • providing services to assist with debt management or debt settlement, modify the terms of any extension of consumer credit, or avoid foreclosure;
  • providing directly to a consumer a consumer report as defined in the Fair Credit Reporting Act, a credit score or other information specific to a consumer from a consumer report, except for adverse action notices provided by an employer;
  • providing accounts under the Truth in Savings Act and accounts and remittance transfers subject to the Electronic Fund Transfer Act;
  • transmitting or exchanging funds (except when integral to another product or service not covered by the proposed rule), certain other payment processing services, and check cashing, check collection, or check guaranty services consistent with the Dodd-Frank Wall Street Reform and Consumer Protection Act; and
  • collecting debt arising from any of the above products or services by a provider of any of the above products or services, their affiliates, an acquirer or purchaser of consumer credit, a person acting on behalf of any of these persons, or by a debt collector as defined by the Fair Debt Collection Practices Act.

Finally, the Bureau stated that providers would be required to insert language into such arbitration agreements to explain the effect of the rule. The proposal would permit providers of general-purpose reloadable prepaid cards to continue selling packages that contain non-compliant arbitration agreements if they give consumers a compliant agreement as soon as consumers register their cards and the providers comply with the proposed rule’s requirement not to use an arbitration agreement to block a class action. The Bureau explained that the proposed rule would only apply to agreements entered into after the end of the 180-day period beginning on the regulation’s effective date, which would be 30 days after a final rule is published in the Federal Register.

The proposal was criticized by the American Bankers Association, which issued a statement from its president and CEO that stated, “Consumers will get less and pay more if the [Bureau’s] proposal to sideline arbitration and promote class actions is ultimately adopted. Banks resolve the overwhelming majority of disputes quickly and amicably.” The statement continued, “When needed, arbitration is an efficient, fair and low-cost method of resolving disputes in a fraction of the time––and at a fraction of the cost––of expensive litigation. This helps keep costs down for all consumers.”

Further, the Bureau issued a required final report from its Small Business Review Panel (Panel), which also expressed concerns about the proposal. The Panel, chaired by the Bureau, includes representatives from the Bureau, the Small Business Administration’s Office of Advocacy, and the Office of Information and Regulatory Affairs in the Office of Management and Budget. Comments of the proposal will be due 90 days after its publication in the Federal Register.

To read the proposed rule, click here.

To read the Panel’s final report, click here.