Last month, the CFPB issued its much anticipated and much dreaded proposed arbitration rules. In its own words, the CFPB proposes “rules that would prohibit mandatory arbitration clauses that deny groups of consumers their day in court.” The proposed rule includes 355 pages of justification prior to presenting the rule in a concise 10 pages. The content of the supplementary information appears to be a lengthy attempt to justify the rule as being in the “public interest” and “the protection of consumers”. The proposal bans covered entities from including arbitration clauses which ban class actions in contracts entered into 211 days after the publication of the final rule.
The proposed rule comes as no surprise to anyone who read the CFPB’s 2015 arbitration report which was hugely critical of class action bans in arbitration clauses. The 215 report attempted to make a case that few consumers ever bring individual actions against financial service institutions and that class actions provide a more effective means to challenge and deter prohibited financial service practices. Before publishing the proposed rule, the CFPB convened a Small Business Regulatory Enforcement Fairness Act (“SBREFA”) panel where it outlined its proposal. The proposed rule is virtually identical to the SBREFA proposal and ignores concerns raised by small entity representatives, including the concern that the proposed rule will encourage lengthy and expensive class actions over faster, less costly individual actions (a finding supported by the CFPB’s own 2015 Arbitration Report).
What You Need to Know
The Rule in a Nutshell. While the rule does not outlaw arbitration clauses in their entirety, it makes them considerably less desirable by prohibiting class action waivers and by requiring providers to report individual arbitration results to the CFPB. In a nutshell, the proposed rule has two parts. First, it prohibits covered providers of certain consumer financial products and services from using arbitration clauses to bar consumers from initiating or participating in class actions after the compliance date. Secondly, it places onerous reporting requirements on covered providers regarding their participation in arbitration proceedings and requires them to submit to the CFPB certain documentation, including: the initial claim and any counterclaim, a copy of the arbitration clause filed with the arbitrator, the judgment or award, if any, issued by the arbitrator, and certain communications with the arbitrator. The CFPB makes it clear 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 Bureau action” and that it intends to publish the information on its website in some form.
What’s Covered? Contracts entered into 211 days after the final rule is published.
Who’s Covered? Almost all service products and services regulated by the CFPB would be subject to the new rules. Proposed 12 CFR 1040.3 includes consumer financial products including broadly the “extension of consumer credit”, as well as automobile leases, deposit accounts, debt management and settlement, check cashing and payment processing services, debt collection, credit reporting, and remittance transfers subject to the Electronic Funds Transfer Act. The rules do carve out certain exceptions for certain products provided by governmental entities, tribal governments providing products to consumers who reside in the tribe’s territorial jurisdiction and merchants and retailers under certain conditions when they are not acting as creditors.
Limitations on the use of Pre-Dispute Arbitration Agreements.
- General Rule: Providers may not seek to rely in any way on a pre-dispute arbitration agreement entered into after the compliance date (more about that later) with respect to any aspect of a class action, including seeking a stay or dismissal unless and until the court has ruled that the case may not proceed as a class action and the decision of the court is final. Proposed 12 CFR 1040.4(a)(1).
- Required Language: To the extent providers continue to use arbitration clauses, they must contain the following provision in new contracts: “We agree that neither we nor anyone else will use 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 even if you do not file it.” Proposed 12 CFR 1040.4(a)(2)(i). Where the arbitration agreement covers multiple products, some of which may not be covered by the Rules, the provider may include this provision in place of the previous set forth clause: “We are providing you with more than one product or service, only some of which are covered by the Arbitration Agreements Rule issued by the Consumer Financial Protection Bureau. We agree that neither we nor anyone else will use 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 even if you do not file it. This provision applies only to class action claims concerning the products or services covered by the Rules.” Proposed 12 CFR 1040.4(a)(2)(ii).
- Pre-existing Arbitration Clauses: The proposed rule only applies to agreements entered into 211 days after the publication of the final rules; however, contracts that are transferred to third parties (for instance, portfolio sales) after the effective date of the rule would be covered. Additionally, there is a limited exception for general purpose reloadable prepaid cards that are on the shelf when the rule takes effect.
With regard to assignees/transferees of accounts, they will be covered by the rule and required to amend the arbitration clause to include the required language or a standalone notice communicating the same information as set forth specifically in the regulations. See Proposed 12 CFR 1040.4(a)(2)(iii).
With regard to general purposes reloadable prepaid cards that are on store shelves as of the compliance date, the providers are bound by the class action waiver but may not be required to provide the notice if they provider does not have a means to communicate with the consumer. See Proposed 12 CFR 1040.5(b).
Reporting Requirements. For entities that continue to use arbitration agreements for individual actions, the proposed rule subjects them to onerous reporting requirements. Proposed 12 CFR 1040.4(b).
The proposed rules require the provider to submit copies of the following documents to the CFPB:
- The arbitration demand and any counterclaim;
- The pre-dispute arbitration agreement filed with the arbitrator or arbitration administrator;
- The judgment or award, if any, issued by the arbitrator;
- If the arbitrator or arbitration administrator refuses to administer or dismissed the claim due to the provider’s failure to pay any required filing or administrative fees, a copy of the relevant communications received by the provider from the arbitrator or arbitration administrator;
- Any communications related to a determination that the arbitration agreement does not comply with the administrator’s fairness principles, rules or similar requirements.
Additionally, the provider is required to redact non- public personal information from the records prior to submission.
The CFPB also has indicated that it intends to use the collected information for further analysis and will publish it in some form.
Implications of the Rule.
It is likely the rule will be challenged under Dodd Frank and early indications are that a fight may come from within Congress as well as private litigation. Section 1028(b) of Dodd Frank authorizes the CFPB to prohibit or impose conditions or limitations on the use of agreements between consumers and covered persons providing arbitration only if the CFPB finds that such a prohibition or limitation is in the public interest and for the protection of consumers. The problem for the CFPB is that its own study does not substantiate either finding. In its Report, the CFPB acknowledged that its analysis of arbitration outcomes was subject to certain limitations which “made it quite challenging to attempt to answer even the simple question of how well do consumers (or companies) fare in arbitration. See Arbitration Study: Report to Congress, pursuant to Dodd-Frank Wall Street Reform and Consumer Protection Act 1028(a), Section 5, p. 7. Moreover, the CFPB Report supported a finding that arbitration is quicker and cheaper than class actions.
What should Covered Entities Do?
Taking in account the administrative procedures required, it is unlikely that a final rule will take effect until the second or third quarter of 201t. In the meantime, covered entities should review their loan products and assess the extent they rely upon arbitration clauses and prepare for a bifurcated system where existing contracts may have arbitration clauses which include class waivers and future contracts will not. Entities relying on arbitration clauses, with or without class waivers, should begin considering a compliance management system to insure all reporting requirements are met. To the extent covered entities are not employing arbitration provisions with class waivers and desire to do so, they should consider amending their contracts prior to the effective date of the final rule since agreements entered into prior to the effective date will be grandfathered under existing law. Finally, covered entities have until August 22, 2016 to submit comments regarding the rule. To the extent entities use arbitration provisions, with or without class waivers, they should consider commenting on the rule.