Financial Services Law—CFPB Bans Most Consumer Arbitrations
By Richard Gottlieb, Partner, Financial Services
Today, and to no one’s surprise, the Consumer Financial Protection Bureau (CFPB) announced a final rule that prevents banks and other covered providers of specified consumer financial products from incorporating or enforcing predispute mandatory arbitration to the extent that the clause bars “group” lawsuits (that is, class or mass actions), and bans those entities from using an agreement with a consumer that provides for arbitration of any future dispute between the parties to bar the consumer from filing or participating in a class action concerning the covered consumer financial product or service. Contrary to some of the findings of numerous studies (including its own), the CFPB has long argued that arbitration clauses with class action waivers are anticonsumer, and that mandatory arbitration clauses force consumers to surrender even though the alternative remedy, the putative class action, has been more a boon for the plaintiffs’ bar than a meaningful remedy for consumers. The final rule applies to agreements entered into 180 days after the effective date, which itself is 60 days after publication.
The Federal Arbitration Act broadly encourages arbitration, and multiple Supreme Court opinions have supported arbitration as a less expensive forum for dispute resolution. That said, in the past decade, Congress has addressed mandatory arbitration in a few key areas. In 2007, Congress passed the Military Lending Act, which disallows mandatory arbitration clauses in connection with certain loans made to servicemembers. Three years later, in the Dodd-Frank Wall Street Reform and Consumer Protection Act, Congress barred mandatory arbitration clauses in most residential mortgage contracts.
The Dodd-Frank Act also required the CFPB to study mandatory arbitration for consumer financial products and services. Before launching the study, the CFPB issued a Request for Information to obtain stakeholder input about the scope of the study and the available data. In November 2013, the CFPB issued the preliminary results of its study and described the scope of the remaining work. The study itself was published in March 2015. Last May, the bureau issued a request for public comment. The CFPB ultimately considered more than 110,000 responses from consumers, consumer groups, industry and other interested parties before finalizing the rulemaking.
Congress fully expected the study to lead to rulemaking, but only if the study suggested a need for reform. Congress therefore authorized the CFPB to promulgate regulations to limit or prohibit the use of predispute arbitration clauses for consumer financial products or services, but only if such a rule would be (1) in the public interest, (2) for the protection of consumers and (3) consistent with findings from the CFPB study. The CFPB claims to have conducted “the most comprehensive study of mandatory arbitration clauses ever undertaken,” but numerous industry groups have rejected its conclusions, relying in part on the very findings on which the CFPB likewise relies.
CFPB claims that its own research shows that arbitration clauses are bad for consumers, but largely ignores the results of many studies that suggest consumers are quite successful in consumer arbitrations and that the class action alternative is deeply flawed. The CFPB nevertheless claims that consumers are hurt by arbitration clauses because “many” consumers are less likely to get relief for the harms they have suffered. It also claims that consumers are likely to continue facing ongoing harm that does not get corrected, and that, even if some consumers were to bring individual arbitration actions and recoup their own losses, that does not stop the same practices from happening again to them or to others.
The new rule does not bar arbitration clauses outright, but it essentially bars the reason most companies include them (that is, to avoid class action suits). If included, arbitration provisions must use the specific language the CFPB requires, including that the provision cannot be used to stop consumers from banding together to pursue relief as a group. The new rule also requires companies to submit their claims, awards and other information about the arbitration of individual disputes to the bureau. While the CFPB argues that this will help it better monitor arbitrations to make sure the process is fair for individual consumers, its further purpose will be to spur additional enforcement actions and to serve as a bellwether for new class action filings. Indeed, starting in July 2019, the CFPB will post these filings on the bureau website, creating a further disincentive to including the clauses.
The regulations, commentary and prefatory material in today’s rule are an unwieldy 775 pages in length, a small portion of which is the actual rule and official commentary. The covered entity provisions are exceptionally broad and contain some new coverage areas not identified in the earlier proposed rule. The rule now applies to every entity that (1) extends consumer credit, participates in consumer credit decisions, or refers or selects creditors for nonincidental consumer credit, each when done by a creditor under Regulation B acquires or sells consumer credit, and services an extension of consumer credit; (2) extends or brokers automobile leases; (3) provides services to assist with debt management or debt settlement, to modify the terms of any extension of consumer credit, or to avoid foreclosure, and provides products or services represented to remove derogatory information from, or to improve, a person’s credit history, credit record or credit rating; (4) provides directly to a consumer a consumer report as defined in the Fair Credit Reporting Act, a credit score or other information specific to a consumer derived from a consumer file, except for certain exempted adverse action notices (such as those provided by employers); (5) provides accounts under the Truth in Savings Act and accounts and remittance transfers subject to the Electronic Fund Transfer Act; (6) transmits or exchanges funds (except when necessary to another product or service not covered by this rule offered or provided by the person transmitting or exchanging funds), certain other payment processing services, and check cashing, check collection or check guaranty services consistent with the Dodd-Frank Act; or (7) collects debt arising from any of the above products or services by a provider of any of the above products or services, their affiliates, an acquirer or purchaser of consumer credit, or a person acting on behalf of any of these persons, or by a debt collector as defined by the Fair Debt Collection Practices Act. Car dealers are perhaps the most obvious example of excluded entities, as these entities are plainly beyond the CFPB’s authority. That said, under the new rule, a covered entity that acquires a retail installment sales contract would be barred from enforcing the arbitration provisions contained therein, thereby allowing the CFPB to include auto dealers indirectly.
A copy of the new rule may be found here. It will be effective 60 days from publication in the Federal Register. Mandatory compliance with respect to predispute arbitration provisions will be effective 241 days after publication.
Why it matters
In light of the rule, covered companies that do not yet have arbitration provisions may be well advised to consult counsel immediately concerning whether to implement them in their consumer contracts before the rule’s prohibitions take effect. The pre-rule law is favorable on the question of class action waivers. Agreements made now are not covered by the rule, and may still be enforced even after the effective dates.