On Monday, July 10, the Consumer Financial Protection Bureau (CFPB or Bureau) issued a final rule – the "Arbitration Agreements Rule" – regulating arbitration agreements in contracts for certain core consumer financial products and services. Venable has been monitoring the development of this rule, and our past coverage can be seen in a webinar and a blog post.
In prepared remarks, CFPB Director Richard Cordray explained the Bureau's reasons for ultimately promulgating this regulation, and he stated that such clauses "force consumers either to give up or to go it alone – usually over relatively small amounts that may not be worth pursuing on one's own. Including these clauses in contracts allows companies to sidestep the judicial system, avoid big refunds, and continue to pursue profitable practices that may violate the law and harm large numbers of consumers."
The final rule prohibits financial products "providers," including credit card companies, credit unions, lenders, and their "affiliates" and "service providers," from relying on pre-dispute arbitration clauses in consumer contracts to prevent consumers from bringing class actions in court. The rule requires companies to include specific language in arbitration clauses in new consumer contracts, and in the case of certain existing contracts, companies must either amend agreements by removing class action bars, or provide notice to consumers that they will not be precluded from bringing class actions. The rule also requires providers to submit specific arbitration records to the Bureau.
Summary of the Final Rule.
- Scope. The final rule applies to providers of certain consumer financial products and services, such as companies that lend, store, move, or exchange money. The rule also applies to companies that extend consumer credit, participate in credit-making decisions, extend or broker automobile leases, provide debt management and settlement services, provide funds and exchange transmission services (such as payment processing services, check cashing, check collection, and check guaranty services), or collect debt on any of these services. Importantly, the rule also covers credit unions, despite that industry's requests for exemption from the rule.
- Prohibition of class action lawsuit bar in pre-dispute arbitration agreements. While the rule does not ban arbitration clauses outright, it does bar covered providers from "rely[ing] on in any way" class action bans in arbitration clauses, including by seeking a stay or dismissal of a class action (with certain very limited exceptions).
- Required disclosures. The Bureau's new rule requires financial products "providers" to include certain specific language in arbitration clauses, the standard form of which reads: "We agree that neither we nor anyone else will rely on 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 filed by someone else." Providers have the option to include additional specific language clarifying that it only applies to consumer agreements involving new parties or new products, or that it only applies to certain products when the consumer is offered multiple products and only some of them are covered by the rule.
- Entering Pre-Existing Dispute Agreements. For providers who "enter into" pre-dispute arbitration agreements that previously existed between other parties (e.g., if Bank A acquires Bank B after the rule goes into effect and Bank A "enters into" the preexisting agreements of Bank B), then the provider (e.g., Bank A) must either amend the existing agreement or provide notice to consumers that includes the specific language described above.
- Record submission. The final rule requires providers that use pre-dispute arbitration agreements to submit certain records relating to arbitral and court proceedings to the Bureau, including the initial claim and counterclaim, answers to complaints and counterclaims, pre-dispute agreements filed with the arbitrator, and judgment awards. This information will be used by the Bureau to monitor the arbitration so that it can determine whether the dispute settlement might warrant an intervention by the Bureau.
- Effective Date. The rule's effective date will be 60 days after its publication in the Federal Register. Then, the rule only applies to agreements entered into 180 days after that initial 60-day period.
- "Entering into" an agreement. The rule applies to pre-dispute arbitration agreements "entered into" after the compliance date. The term "entered into" includes the following scenarios:
- Providing to a consumer a new covered product or service;
- Acquiring or purchasing a product or service that is subject to a pre-dispute arbitration agreement and becomes a party to it; and
- Adding a pre-dispute arbitration agreement.
Compliance and Practical Challenges and Heightened Scrutiny.
- Non-compliant prepaid card sellers. The final rule permits providers of general-purpose reloadable prepaid cards to continue selling packages that contain now "non-compliant" arbitration agreements, as long as they give consumers a compliant agreement as soon as the card is registered.
- Mobile and digital providers. Mobile and digital providers will need to address how to implement the rule's requirements electronically.
- Proper procedures for new and existing contracts. The new regulations will likely require covered providers to work with legal counsel to implement the required language in new consumer contracts going forward and also to ensure that affected pre-existing contracts are properly amended (or consumers are notified).
What's Next and Possible Legal Challenges to the Rule.
Although the rule will likely not be effective until September 2017 and will likely only apply to new consumer agreements "entered into" after March 2017, there are several legal challenges that may be filed preemptively against the new rule. For example, the rule may be subjected to the Congressional Review Act (CRA) process, which could nullify the rule through a joint congressional resolution within 60 days. If the rule is nullified by the CRA process, the Bureau would be precluded from issuing a similar rule in the future. Other potential legal challenges include:
- Whether the final rule is "consistent with" the Bureau's arbitration study;
- Whether the rule is, in fact, "in the public interest and for the protection of consumers";
- Whether the rule adheres to the Supreme Court's 2015 decision in Michigan v. EPA requiring agencies to conduct a proper analysis of the rule's costs and benefits; and
- Smaller-scale challenges to specific provisions or applications of the rule (for example, how the rule actually applies to specific consumer financial products or services).
Nonetheless, companies affected by the new rule should begin making preparations to implement these new requirements and should expect the Bureau to closely monitor compliance. Providers and their affiliates should be prepared to highlight their progress as they implement the new required language in pre-dispute arbitration agreements and as they disclose arbitral records to the Bureau. The key to passing a CFPB examination lies in careful preparation – preferably before the Bureau targets a company for scrutiny.