October 8, 2015

CFPB Proposes Limitations and Requirements for Arbitration Agreements

3 min

On October 7, the Consumer Financial Protection Bureau (CFPB) released an outline of its proposal for a possible rule regarding arbitration clauses in consumer financial product and service agreements.

There are two elements to the CFPB's proposal: (1) Elimination of agreements blocking consumer participation in class actions and (2) submission to the CFPB (and potentially public posting) of arbitral claims and awards.

Enable Consumer Access to Civil Class Actions

The proposal would prohibit the application of arbitration agreements to class action cases. Specifically, the proposal would require that any contract or agreement for a covered consumer financial product or service explicitly state that the arbitration agreement is inapplicable to cases filed in court on behalf of a class unless and until class certification is denied or the class claims are dismissed.

The CFPB's proposal indicates that the Bureau would likely provide form or model language, which would act as a safe harbor for companies that choose to employ the model language in their agreement.

Require Submission of Arbitral Claims and Awards

The second proposal would require covered entities that use arbitration agreements in their contracts with consumers to submit to the CFPB initial claim filings and written awards in consumer finance arbitration proceedings. The Bureau is also considering whether to publish the claims or awards to its website. This requirement would apply whether or not the arbitration administer publishes claims or rewards.

The proposal to submit arbitral claims and awards would apply to all arbitration proceedings involving a covered business, including individual and class arbitrations.

Scope of the Proposal

Companies affected by the proposal include those defined as covered entities in Sections 1002, 1027, and 1029 of the DFA. The CFPB is also considering whether to cover additional consumer financial products and services, such as payment processing.

Consumer financial products or services that may be excluded from the arbitration rule include those that are:

  • Already subject to arbitration rules issued by the Securities and Exchange Commission or the Commodity Futures Trading Commission;
  • Provided by persons when not regularly engaged in business activity (e.g., an individual who may loan money to a friend);
  • Provided by the federal government;
  • Provided by state, local, or tribal governments or other government entities to persons in their jurisdiction, or to persons outside their jurisdiction, if it is not credit that is subject to the Truth in Lending Act or Regulation Z; and
  • Credit that a business extends for the consumer's purchase of its own nonfinancial goods or services when covered by Section 1027(a)(2)(B)(ii).

Next Steps

Small Business Review Panel will review and provide feedback on the potential economic impacts of the proposals. The CFPB has posted a list of questions for small businesses participating in the Panel to determine the impact that the proposals would have on small businesses. Comments on the proposal and alternatives will inform the rule ultimately proposed by the CFPB.