On May 5, 2016, the Consumer Financial Protection Bureau (CFPB) released a notice of proposed rulemaking (NPRM) that would ban consumer financial companies from using mandatory pre-dispute arbitration clauses in consumer financial contracts.
Similar to the framework proposed by the CFPB in October 2015 (see our overview here), there are two major elements to the CFPB's proposed rule: (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.
Scope of the Proposed Rule
The rule applies to "pre-dispute arbitration agreements" used by "providers." Under the proposed rule, providers include a broad swath of companies offering or providing consumer financial products or services, including, without limitation, banks, credit unions, credit card issuers, certain automobile lenders, auto title lenders, small-dollar or payday lenders, private student lenders, payment advance companies, other installment and open-end lenders, loan originators and other entities that arrange for consumer loans, providers of certain automobile leases, loan servicers, debt settlement firms, foreclosure rescue firms, certain credit service/repair organizations, providers of consumer credit reports and credit scores, credit monitoring service providers, debt collectors, debt buyers, check cashing providers, remittance transfer providers, domestic money transfer or currency exchange service providers, and certain payment processors.
Certain payment processing services are also included, such as payment processing conducted in connection with covered providers like debt relief services, remittance transfers, money transmitters, or debt collection. However, merchants, retailers, or sellers of nonfinancial goods or services would be excluded from the NPRM if they provide payment processing services for the purpose of initiating payments instructions by the consumer to pay for a purchase for nonfinancial goods or services.
The CFPB continues to analyze the nature of products or services tied to virtual currencies.
Proposed Requirements
A. No Class Action Waiver
Class-action waiver ineffectual: After the rule takes effect, "providers" would be prohibited from relying "in any way" on arbitration agreements entered into after the compliance date. Specifically, the rule would prevent "providers" from seeking a stay or dismissal of particular claims or the entire action "unless and until the presiding court has ruled that the case may not proceed as a class action" (including the resolution of any appellate review or expiration of time to seek review).
Required language: "Providers" agreements would be required to state: "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." The proposed rule also contains required language for companies that provide consumers multiple services, but only some of these would be covered by the rule.
Certain existing agreements may be affected: In certain situations, pre-existing agreements and contracts may need to be amended to conform to the required language under the rule; alternatively, affected companies can provide a notice to consumers indicating that the arbitration clause in the contracts will not be used to prevent the consumer from joining a class action. The scope of the proposed rule's effect on pre-existing agreements relates to the interpretation of the rule's phrase, "entering into a pre-dispute arbitration agreement," as well as the situations in which a new provider becomes a party to a contract that existed previously between other parties, such as through a merger or acquisition.
B. Public Submission of Arbitral Claims and Awards
The rule would require that providers submit to the Bureau certain information about arbitration by or against the provider that concerns covered products. Specific information pertaining to individuals is required to be redacted. The information needed to be disclosed includes:
- The initial claim and any counterclaim
- The pre-dispute arbitration agreement filed with the arbitrator or arbitration administrator
- The judgment or award
- Communications pertaining to an arbitrator's refusal to administer or dismissal of a claim due to the provider's failure to pay required filing or administrative fees
- Communications pertaining to an arbitrator's determination that an arbitration agreement does not comply with the administrator's fairness principles, rules, or similar requirements
Source of Authority
The CFPB claims multiple points of authority in support of its rulemaking. While the initial proposal cited only Section 1028 of the Dodd-Frank Act, which permits rulemaking if it would be in the public interest and for the protection of consumers, the NPRM proposes the rule under both Section 1028 and Section 1022 (the CFPB's general rulemaking authority). Section 1022 is also cited as support for the CFPB to undertake this rulemaking as part of its role in monitoring consumer financial products or services for risks to consumers.
Compliance
Providers would be required to comply with the rule 211 days after publication of any final rule in the Federal Register. However, the proposed rule would affect all covered arbitration clauses, since providers would be required to amend existing agreements or provide notice vis-à-vis the rule "[w]hen the pre-dispute arbitration agreement existed previously between other parties."
Opportunities for Comment
The NPRM requests comment on nearly every aspect of the proposed rule. There are numerous consumer financial industries that may be excluded from the final rule, depending on public comment. These include credit counseling organizations, certain credit monitoring services, and certain stored-value cards. Even if an industry is captured by the NPRM, the CFPB seeks comment on whether certain sectors of that industry should be excluded. Comments are due 90 days after the publication of the NPRM in the Federal Register.
CFPB Field Hearing
On May 5, the same day the CFPB released the NPRM, it held its 34th field hearing in Albuquerque, New Mexico. Director Corday emphasized in his opening statement that the mandatory pre-dispute arbitration clauses "deny…consumers the right to band together to seek justice and meaningful relief from wrongdoing." He went on to explain that the NPRM provides consumers a more effective means to pursue relief, deters wrongdoing on a broader scale, and requires arbitration filings and awards to be submitted to the CFPB for further study and possible public release.
The panel discussion and public comment session provided both support for and criticism of the NPRM. In support, panelists and commenters explained that prohibiting class actions prevents most consumers from having their claims addressed, and the current state of affairs results in a power imbalance between companies and consumers. Against the NPRM, panelists and commenters noted that the NPRM would effectively eliminate arbitration as a dispute resolution avenue for consumer financial products and services, and would actually be more costly for consumers, resulting only in more money for plaintiffs' attorneys.
Next Steps
As noted above, the public comment period will be open for 90 days after the NPRM is published in the Federal Register. The CFPB is seeking guidance on the scope of much of the proposed rule. Comments on the NPRM will inform the final rule that will be issued by the CFPB.
We will discuss the proposed rule in-depth during our webinar on June 15, 2016. Please contact the authors if you have questions or concerns regarding how the proposed rule impacts your company.