On May 5, 2016, the Consumer Financial Protection Bureau (CFPB) announced the issuance of a Notice of Proposed Rulemaking (NPRM) soliciting comments on a proposed rule to prohibit covered institutions from including, in most core consumer contracts, “pre-dispute arbitration agreements” that contain class waivers.1 The proposed regulations would explicitly require the inclusion of the following disclaimer in a pre-dispute arbitration agreement: “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.”2 The regulations would govern all agreements entered into after the regulations took effect (211 days after adoption of the final rule).3

The rule applies to any pre-dispute arbitration agreement between consumers and providers of consumer financial products or services as well as any affiliate of a provider that is acting as a service provider to the provider.4 The rule covers most core banking depository and credit products, including:

  • Banks
  • Credit unions
  • Credit card issuers
  • Certain auto lenders
  • Auto title lenders
  • Payday lenders
  • Private student lenders
  • Debt collectors
  • Other installment lenders
  • Certain credit repair organizations
  • Entities that arrange for consumer loans
  • Providers of certain automobile leases
  • Loan servicers
  • Debt settlement firms
  • Loan originators
  • Certain payment processors
  • Credit monitoring service providers
  • Payment advance companies
  • Debt buyers
  • Check-cashing providers
  • Remittance transfer providers
  • Domestic money transfer or currency exchange service providers
  • Consumer credit report and score providers5

The rule also applies to general-purpose reloadable prepaid cards, but provides special transition rules for those cards based on whether the institution has the means to contact the cardholders.6

Excluded from the rule are entities that do not provide specified consumer financial products or services, such as certain Securities and Exchange Commission-regulated broker-dealers and merchants, retailers, or other sellers of nonfinancial goods or services.7

Separately, for all new pre-dispute arbitration agreements entered into after the effective date of the proposed regulation, the entity will be required to submit to the CFPB records governing each individual-level arbitration, including a copy of the arbitral claim and any counterclaim, a copy of the pre-dispute arbitration agreement, any award, and certain other materials.

The proposed rule flows from the CFPB’s March 2015 study which found that few consumers bring actions against financial services companies and claimed that few understood how arbitration clauses worked.8 The CFPB found that between 2010 and 2012, consumers filed roughly 400 arbitration cases and 1,200 individual federal lawsuits on average each year in the six markets studied: credit cards, checking accounts, prepaid cards, payday loans, private student loans and mobile wireless contracts.9 By contrast, on average, approximately 34 million consumers were eligible for relief through class action settlements in federal court each year.10

Based on this research, the CFPB concluded that “pre-dispute arbitration agreements are being widely used to prevent consumers from seeking relief from legal violations on a class basis, and that consumers rarely file individual lawsuits or arbitration cases to obtain such relief.”11 For instance, when credit card issuers with class action arbitration waivers were sued in a class action, the companies invoked the arbitration clauses and blocked the class action 65 percent of the time.[12] Of the 1,200 individual lawsuits filed between 2010 and 2012, by contrast, the CFPB found that companies exercised their arbitration clauses less than 1 percent of the time.13

Ultimately, the CFPB took the position that class actions provided an effective means for consumers to challenge problematic practices and to bring monetary relief to consumers.14 According to the CFPB, benefits of the proposed rule include providing a “day in court” to consumers, deterring misconduct by covered institutions and increasing transparency with respect to how individual arbitrations are conducted.15

Indeed, during a field hearing on May 5, 2016, CFPB Director Richard Cordray, in announcing the NPRM, characterized mandatory arbitration agreements as “legal lockouts,” arguing that they preclude consumers from bringing group claims against financial services companies.16 Director Cordray emphasized the CFPB’s belief that class action waivers prevent consumers from seeking “meaningful relief” because many consumer claims concern dollar amounts too low to warrant filing individual lawsuits over.17

Notably, industry advocates dispute much of the CFPB’s findings. For instance, during panel testimony following the May 5 field hearing, Travis Norton of the U.S. Chamber of Commerce pointed out that in some cases arbitration is beneficial for consumers because it is cheaper than litigation, is a more efficient means to resolve disputes and the costs are often borne by the institution and not the consumer. Industry advocates have also claimed that eliminating class action waivers is just a boon to plaintiffs-side class action attorneys, who are typically rewarded far more in class litigation than in any individual plaintiff litigation.

The proposal states that compliance is required only for agreements entered into after the regulations become effective, which is consistent with Dodd-Frank, so the rule should not retroactively apply.18 But how courts will treat the enforceability of mandatory arbitration clauses (including class waivers) where the contract was executed before the effective date of the rule remains to be seen.

Industry stakeholders have three months to comment on the proposed rule. We are monitoring this issue closely for any developments.