The Consumer Financial Protection Bureau (CFPB) released a much anticipated proposed rule regarding mandatory arbitration clauses in consumer financial services agreements on May 5, 2016. While the proposed rule does not wholly ban the use of arbitration clauses, it prohibits financial companies from including class action waivers in arbitration agreements, thereby allowing consumers to collectively sue companies such as banks or credit card issuers. If finalized in its current form, the proposed rule could lead to a dramatic increase in class action litigation against financial services providers.

Under the proposed rule, companies that include arbitration clauses in their contracts must explicitly state that the clause cannot prevent consumers from being part of a class action lawsuit. The proposed rule provides specific language reflecting this limitation that must be included in arbitration agreements. The proposed rule also requires companies that use arbitration agreements to submit records regarding arbitral proceedings to the CFPB.

The proposed rule would apply broadly to all financial companies that lend, store, move or exchange money; including banks, credit card issuers, payday lenders, automobile lessors, debt collectors, student loan lenders and other types of companies involved in consumer credit. The CFPB already prohibits mandatory arbitration clauses related to certain consumer credit products such as mortgage and home equity loans and certain transactions involving military service members. 

Financial services companies argue that the proposed rule will be a windfall for plaintiffs’ attorneys and lead to a proliferation of frivolous class action lawsuits while not providing much benefit for individual consumers. Many in the industry believe the current use of mandatory arbitration clauses that bar class actions provides a quicker and cheaper way of settling individual disputes while providing adequate compensation for consumers.

The proposed rule could face a possible legal challenge because it contradicts U.S. Supreme Court precedent favoring the use of arbitration clauses. In AT&T Mobility v. Concepcion, the Supreme Court upheld the use of arbitration clauses in consumer contracts that preempt class action lawsuits. In that case, the Court noted that consumers are often better off with arbitration provisions than as participants in class action lawsuits. In two cases that followed, American Express Co. v. Italian Colors Restaurant and DIRECTV, Inc. v. Imburgia, the Supreme Court continued to uphold the use arbitration clauses to prevent class actions. 

Another potential legal challenge to the proposed rule involves the CFPB’s 2015 Arbitration Study on which the CFPB relied when drafting the proposed rule. The industry claims the study was fundamentally flawed and that conclusions made by the CFPB are not supported by data in the study. The U.S. House of Representatives Financial Services Committee recently notified CFPB Director Richard Cordray that the Committee is investigating the CFPB’s examination and regulation of arbitration agreements in consumer financial services agreements. 

Comments on the proposed rule are due within 90 days after it is published in the Federal Register. The proposed rule would apply to agreements entered into after a 180-day period following the effective date of the regulation, and the CFPB has proposed an effective date of 30 days after a final rule is published. Accordingly, any final rule likely will not go into effect until mid-2017. 

What This Means to You

If the proposed rule goes into effect, it will have a huge impact on financial services litigation and financial services companies will see a significant increase in class action lawsuits. Although it is not clear that the rule will survive legal challenge, companies should prepare for the likelihood that the ways in which they use arbitration clauses may change.  

Companies that currently use arbitration clauses should consult with counsel to consider whether they should redraft any portion of their arbitration clauses. Companies also should consider actions they could take to reduce their class action litigation risk. 

Since arbitration agreements entered into before 180 days after the rule’s effective date will not be subject to the rule’s restrictions, financial services companies that do not presently use arbitration agreements should consider including such clauses in their current agreements.