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In May, the CFPB issued its much anticipated and much dreaded proposed arbitration rules. Quoting from the proposal, the CFPB recommends “rules that would prohibit mandatory arbitration clauses that deny groups of consumers their day in court.” The proposal includes 355 pages of justification before concisely presenting the rule within 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 prohibits covered entities from including arbitration clauses that ban class actions for all contracts entered into 211 days post 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 2015 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).
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. It also requires covered providers 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.
Concerning 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).
Concerning 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:
Additionally, the provider is required to redact non-public personal information from the records before submission.
The CFPB also has indicated that it intends to use the collected information for further analysis and will publish it in some form.
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 very 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.
Taking into 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 ensure 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 before 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.
Caren Enloe leads Smith Debnam’ s consumer financial services litigation and compliance group. In her practice, she defends consumer financial service providers and members of the collection industry in state and federal court, as well as in regulatory matters involving a variety of consumer protection laws. Caren also advises fintech companies, law firms, and collection agencies regarding an array of consumer finance issues. An active writer and speaker, Caren currently serves as chair of the Debt Collection Practices and Bankruptcy subcommittee for the American Bar Association’s Consumer Financial Services Committee. She is also a member of the Defense Bar for the National Creditors Bar Association, the North Carolina State Chair for ACA International’s Member Attorney Program and a member of the Bank Counsel Committee of the North Carolina Bankers Association. Most recently, she was elected to the Governing Committee for the Conference on Consumer Finance Law. In 2018, Caren was named one of the “20 Most Powerful Women in Collections” by Collection Advisor, a national trade publication. Caren oversees a blog titled: Consumer Financial Services Litigation and Compliance dedicated to consumer financial services and has been published in a number of publications including the Journal of Taxation and Regulation of Financial Institutions, California State Bar Business Law News, Banking and Financial Services Policy Report and Carolina Banker. ...LEARN MORE