The proposed rule has broad implications for the financial industry, which has relied on class action waivers in consumer agreements to ensure that arbitration is a cost-effective way of resolving disputes with customers.

On May 5, 2016, the Consumer Financial Protection Bureau (CFPB) proposed a rule prohibiting the use of class action waivers in the arbitration provisions of consumer contracts. The proposed rule has broad implications for the financial industry, which has relied on class action waivers in consumer agreements to ensure that arbitration is a cost-effective way of resolving disputes with customers. If the rule becomes final, that safety net will be removed, and the industry could soon be faced with a proliferation of class action suits that reportedly could cost it billions of dollars.

Arbitration clauses have become standard in consumer finance agreements. Banks and lenders argue that arbitration is a simplified and efficient means of resolving consumer claims. Class action waivers have been added to these arbitration clauses in order to prevent consumers from attempting to circumvent arbitration provisions by filing a class action.

Recent U.S. Supreme Court opinions have repeatedly upheld the enforceability of these class action waivers. The Supreme Court has addressed class action waivers in three cases since 2011: AT&T Mobility v. Concepcion, 131 S. Ct. 1740 (2011); American Express v. Italian Colors Restaurant, 133 S. Ct. 2304, 2307 (2013); and, most recently, DIRECTV v. Imburgia, 136 S. Ct. 463 (2015). In each of these cases, the Court upheld the validity of the class action waiver at issue, even in the face of directly contrary state law invalidating the class action waivers. As a result, most consumer financial contracts require arbitration and prevent class actions, ensuring that any dispute is handled one on one and outside of the courts.

In the wake of these Supreme Court opinions, consumer advocates argued that this practice has effectively insulated banks and lenders from the consequences of noncompliance with applicable laws and regulations because consumers are unlikely to pursue such claims individually. Late last year, The New York Times published a three-part series featuring individual consumers who reportedly did not pursue claims due to mandatory arbitration provisions.

The CFPB has sided with the consumer advocates. In so doing, it has relied on authority granted under the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank). Specifically, section 1028 of Dodd-Frank required the CFPB to both report and issue regulations on the use of arbitration as a means of providing adequate relief in consumer disputes. In March 2015, the CFPB issued a report finding that “arbitration clauses restrict consumers’ relief for disputes with financial service providers by allowing companies to block group lawsuits.”1 The proposed rule is the natural consequence of that finding. Banks and lenders would no longer be able to rely on class action waivers in arbitration clauses to require that individual consumer claims be resolved individually.

The proposed rule will shortly be published in the Federal Register. Once it is published, there will be a 90-day period for those interested to comment on the rule. During this period, industry participants are likely to argue that the proposed rule spells the end of arbitrating any consumer dispute because they will not want to face exposure both in arbitration and the courtroom. They are also likely to argue that the proposed rule will hurt consumers more than it will help them because the ensuing class action litigation will ultimately only provide a windfall for plaintiffs’ lawyers (while effectively ending consumers’ rights to arbitrate smaller claims). Regardless of the persuasiveness of the arguments, it will be difficult to stop the train at this point in the process.

Accordingly, assuming the CFPB’s proposed rule stands, the battle will likely shift to the courts. Potential questions could include the extent of the administrative CFPB’s authority and whether the Dodd-Frank delegation is sufficient to effectively amend the Federal Arbitration Act without further Congressional action.

From a practical standpoint, as currently worded, the CFPB’s proposed rule will only apply to agreements entered into 180 days after the rule takes effect, which itself will only be 30 days after final publication in the Federal Register. Accordingly, the rule is not expressly grandfathered into prior contracts, and companies will be afforded sufficient time to adjust their standard agreements. Nonetheless, others have posed questions as to whether prior arbitration agreements that include waivers will survive in light of the change in circumstances after the effective date.