The Consumer Financial Protection Bureau (CFPB) issued its long-anticipated final rule on pre-dispute arbitration agreements on July 10. Clocking in at 775 pages, the final rule prohibits consumer financial services providers from including terms in arbitration agreements that limit a consumer’s ability to join or initiate a class action. While the rule falls short of prohibiting the use of all arbitration agreements in consumer financial services contracts, the rule’s class action waiver restriction will likely cause a sea change in how consumers, their attorneys, and the financial services industry resolve disputes. In announcing the rule, CFPB Director Richard Cordray opined that “this rule throws open [those courtroom] doors and allows harmed consumers to band together and seek justice for themselves and all others affected in the same way.”
Consumer financial services providers, like companies in a multitude of other industries, have long relied on pre-dispute arbitration agreements in consumer contracts to provide a degree of predictability as to how disputes with consumers would be settled. A hallmark element of many of these arbitration agreements is a clause that prevents a consumer from joining any class action arising out of the provider’s services. Proponents of arbitration agreements tout the fact that these clauses lead to lower costs for consumers as anticipated litigation expenses do not need to be baked into the cost of consumer financial products. Opponents believe arbitration agreements prevent consumers from having their day in court when the amount of one consumer claim is not significant enough to justify the expense of hiring an attorney.
Once the rule takes effect, providers will be prohibited from including language in pre-dispute arbitration agreements that restricts a consumer’s ability to join a consumer class action. Covered providers will not only need to strip class-action restrictions from consumer financial services agreements, but will also need to expressly state in those agreements that consumers have the right to join class actions and are not required to settle their disputes solely through arbitration.
In addition to the class action restriction, providers that use pre-dispute arbitration agreements will be required to submit certain records from arbitrations and court proceedings to the CFPB. The CFPB will use these records to monitor how the rule is affecting consumers and will also publish redacted versions of the records on a public website. Providers will be required to report to the CFPB: 1) any court or arbitration filings that reflect that a party relied on a pre-dispute arbitration agreement entered into on or after the compliance date; 2) communications from an arbitrator to the provider that reflect the arbitrator’s determination that a pre-dispute arbitration agreement does not comply with the arbitrator’s due process or fairness standards; and 3) communications from an arbitrator to the provider regarding a dismissal of or refusal to administer a claim due to the provider’s failure to pay required filing or administrative fees.
The arbitration rule will generally apply to persons, and any of their affiliates, who offer or service a covered consumer financial product. While certain entities, including auto dealers, attorneys, merchants, and retailers are technically exempt from the CFPB’s rules, a covered person who services those entities’ products will not be able to enforce any terms in those entities’ arbitration agreements that limit consumers’ class action rights. Practically, this may cause organizations not actually covered by the CFPB’s rulemaking authority to comply with the arbitration rule so that their covered person providers can continue to service their contracts. As a point of example, the Bureau highlighted that indirect automobile lenders and debt collectors, who are covered persons, could not enforce any prohibited terms of an arbitration agreement issued by an automobile dealer, a non-covered person.
When does the rule take effect?
The final rule goes into effect 60 days from the date the rule is published in the Federal Register, but providers will not need to change the terms of their pre-dispute agreements until 241 days, or about eight months, from the date the rule is published. By providing a 60-day window between the date of publication and the effective date, the CFPB is acknowledging Congress’s authority to review the arbitration rule through the Congressional Review Act (CRA), without leaving a single additional day for opponents of the rule to postpone the effective date through other measures.
What to expect next
In the coming weeks and months, expect to hear vocal opposition from the financial services industry and vigorous statements of support from consumer advocacy groups. The upcoming debate about the merits and future of the arbitration rule is likely to become something of a partisan Rorschach test for members of Congress who will likely use the rule as a platform to hold a much larger debate over the merits of regulation and the future of the CFPB.
Through the CRA, Congress can disapprove of any regulations issued by executive agencies within 60 days of publication. If a disapproval resolution is enacted, the arbitration rule would not take effect and the Bureau would be prohibited from passing a similar rule in the future. While Congress did not utilize the CRA earlier this year to disapprove of the CFPB’s final prepaid rule, given the much broader effect the arbitration rule will have on the financial services industry, there may be much louder and more frequent calls for Congress to use the CRA to disapprove of the CFPB’s final arbitration rule. There will also likely be a renewed focus on whether the Administration can take any steps to address this or future CFPB actions.