CFPB Issues Final Arbitration Rule; Efforts to Nullify Are Underway

by Pepper Hamilton LLP
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Although the CFPB’s final rule does not explicitly ban arbitration agreements in contracts involving consumer financial products or services, it greatly diminishes their value.

On July 10, the Consumer Financial Protection Bureau (CFPB) issued a final rule prohibiting a broad range of covered parties from including class action waivers in their pre-dispute arbitration agreements. The rule also requires those parties to provide the CFPB with certain records regarding their arbitral proceedings, including copies of arbitration claims and arbitrator-issued judgments or awards. The final rule substantially mirrors the proposed rule that was published for comment in May 2016. The rule will become effective 60 days after publication in the Federal Register and will apply to arbitration agreements entered into or modified 241 days after publication.

The rule applies broadly to most forms of consumer credit, certain automobile leases, consumer deposit accounts, remittance transfers, check cashing, guaranty and collection services, as well as debt collection involving debts arising from a covered product or service. With respect to consumer credit, the rule covers parties who refer applicants or prospective applicants to a creditor and encompasses the servicing, acquiring, purchasing or selling of consumer credit accounts.

Tribal lenders are exempt if the provider of the subject product or service constitutes an “arm” of the tribe under federal sovereign immunity law and the provider’s immunities “have not been abrogated” by Congress. Those who are exempt from the rule must include specific language in their contract terms and conditions to inform the customer that they “may claim they cannot be sued” in the event of a class action lawsuit.

Arbitration records must be disclosed to the CFPB within 60 days of their filing with an arbitrator. Covered records include the arbitration agreement, the initial claim and counterclaims, answers to claims, and the judgment or award issued by the arbitrator. If an arbitrator refuses to proceed with an arbitration based on his or her finding that the agreement “[does] not comply with an arbitral administrator’s fairness principles,” the finding must be reported to the CFPB. Records reported to the CFPB will be redacted and published on the CFPB’s website beginning on July 1, 2019.

In its comments on the proposed rule, the CFPB estimated that the rule will cause approximately 53,000 providers of consumer financial products and services to pay an additional $447 million to $656 million per year to settle federal class action lawsuits. Furthermore, providers will incur major financial costs in revising their existing practices. In this regard, the CFPB noted that “what is most important from an economic standpoint is that the violator be confronted with the costs of his violations—this preserves the deterrent effect of litigation.” This goal of deterring bad behavior was reiterated in the CFPB’s press release announcing the final rule, where it stated, “When companies know they are more likely to be held accountable by consumers for any misconduct, they are less likely to engage in unlawful practices that can cause harm.” 

In response to the final rule, Alabama Senator Tom Cotton has begun the process to block the rule using the Congressional Review Act (CRA), a law that allows both houses of Congress to vote on a resolution within 60 days of a new rule being published in the Federal Register, and only requires a simple majority to stop a rule from becoming law. If the president signs the resolution, the regulator proposing the rule is also barred from creating a “substantially similar” regulation unless specifically authorized by Congress to create one.

Another potential avenue for preventing the final rule from being enforced is the Financial Stability Oversight Council’s (FSOC’s) power to review CFPB regulations. Upon a written petition from one its members (i.e., the SEC, FINRA, CFTC, FRB, FDIC, OCC and NCUA), the FSOC may stay or set aside a CFPB proposed regulation if two-thirds of the members vote that the regulation “would put the safety and soundness of the United States banking system or the stability of the financial system of the United States at risk.”

Pepper Points

  • Although the CFPB’s final rule on arbitration does not explicitly ban arbitration agreements in contracts involving consumer financial products or services, it greatly diminishes their value.
  • The costs of complying with the rule will be enormous. The CFPB recognizes this fact but believes that significantly higher costs for failures to comply with consumer financial protection laws will result in more diligent efforts to comply.
  • The potential adverse effects of the rule with respect to the availability of consumer financial products and services may result in its nullification through either the CRA process or action by the FSOC.

Research assistance for this article was provided by Avinoam Erdfarb, an associate in Pepper’s Princeton office.

 

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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