In May 2016, the Consumer Financial Protection Bureau (“CFPB”) took another step in its effort to ban class action waivers in certain pre-dispute arbitration agreements for consumer financial products and services, formally publishing the proposed rule that it had indicated last fall was forthcoming. In addition to banning class action waivers, the proposed rule would mandate new disclosures in pre-dispute arbitration agreements and would require providers of covered products or services to submit documentation to the CFPB relating to arbitration proceedings. The CFPB estimates that, if the proposed rule is finalized in its current form, it would result in an additional 6,042 class action lawsuits every five years, causing thousands of covered providers to incur billions of dollars defending the increased litigation.
Given the potential impact of the CFPB’s proposal, it has unsurprisingly prompted significant criticism. By the close of the comment period on August 22, 2016, more than 12,000 comments had been submitted to the CFPB. Those in favor of the proposal have argued that class action litigation is consumers’ only viable option for obtaining redress for what would otherwise be small-dollar individual claims. Those opposing the proposal, on the other hand, contend that the primary beneficiaries of the CFPB’s proposed rule would not be consumers, but rather the lawyers who file class action lawsuits. In fact, commenters opposing the rule argue that the study that the CFPB published in 2015, in advance of promulgating the proposed rule, demonstrates that consumers reap little reward from class action litigation and that, on average, consumers fare better in the arbitration proceedings that the CFPB’s proposal seeks to eliminate.
The CFPB now will review the comments submitted and determine whether to proceed with the rule as proposed or to modify, and possibly even withdraw, its proposal. If the CFPB proceeds with the rule as contemplated, it would not apply retroactively and would affect only certain pre-dispute arbitration agreements entered into with consumers following a 180-day grace period after the effective date. And in light of the significant criticism that the proposal already has received, it appears likely that court challenges will commence if the CFPB decides to proceed with the rule as currently drafted.
Background
The current proposal derives from authority granted to the CFPB under the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”). Dodd-Frank specifically directed the CFPB to study the effect of pre-dispute arbitration agreements relating to consumer financial products or services. In March 2015, the CFPB completed its study and presented the results to Congress, which authorized the CFPB to issue regulations restricting or prohibiting the use of pre-dispute arbitration agreements if the CFPB found such regulations to be in the public interest, for the protection of consumers, and consistent with the study’s findings.
With its study completed, in October 2015, the CFPB issued an “outline” of proposals that it intended to implement regarding pre-dispute arbitration agreements, which contemplated a proposal to ban class action waivers. On May 24, 2016, the CFPB published its contemplated rule in the Federal Register, triggering a 90-day comment period on the CFPB’s contemplated rule.
The CFPB’s Proposal
The proposed rule essentially consists of three parts. First, the rule would ban the use of class action waivers in certain pre-dispute arbitration agreements for consumer financial products or services. Such waivers previously have proven effective in avoiding or halting consumer class action litigation for claims that arise out of written agreements. Typically, these waivers require the parties to submit any disputes arising from the written agreement to arbitration and include an express ban on aggregating claims in any form, including filing class action lawsuits. The proposed rule would strip the effect of these provisions for those covered agreements entered into following a grace period after the rule’s effective date.
Second, the rule would require that any covered pre-dispute arbitration agreement disclose to the consumer that the agreement does not prohibit the consumer’s ability to initiate or participate in class action litigation. The required disclosure would state: “We agree that neither we nor anyone else that later becomes a party to this pre-dispute arbitration agreement will use it 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.”
Finally, the rule would require certain providers of consumer financial products or services to submit documentation to the CFPB regarding arbitration proceedings taking place pursuant to agreements with consumers entered into following the compliance date. Specifically, the rule would require covered providers to submit (1) the initial claim and any counterclaim in the arbitration; (2) the pre-dispute arbitration agreement; (3) the award issued, if any; (4) “any communications from the arbitrator . . . relating to a refusal to administer or dismissal of a claim due to the provider’s failure to pay required fees”; and (5) “any communications related to a determination that an arbitration agreement does not comply with the administrator’s fairness principles.” The CFPB would publish this information on its website (in redacted form) and monitor the information for purposes of potentially taking further action against covered providers of consumer financial products or services.
Agreements Covered by the Proposal
The proposed rule would apply to agreements with consumers for a broad range of financial products or services. The CFPB’s announcement states that the rule is intended to apply to consumer agreements “in the core consumer financial markets of lending money, storing money, and moving or exchanging money.” This would include consumer agreements for checking or savings accounts, credit cards, certain non-mortgage consumer loans, and money transfer services. The rule also would cover consumer agreements with entities engaged in consumer debt management, collection, and settlement, as well as to consumer agreements with entities providing directly to consumers any consumer reports, credit scores, or other information from a consumer report (with certain exceptions).
These listed categories, of course, are just examples of the agreements covered by the broad definition in the proposed rule. The full scope of the covered agreements is described in the CFPB’s lengthy proposal.
Comments on the Proposal
The CFPB’s proposal garnered over 12,000 comments, ranging from individual consumer feedback to 100-page submissions by industry representatives and organizations. The comments focus primarily on the first aspect of the CFPB’s proposal—the ban on class action waivers in pre-dispute arbitration agreements—as well as the fundamental question underlying the proposed ban: whether class action litigation serves to benefit consumers in ways that arbitration does not.
Those submitting comments in favor of the proposal include a group of 18 state attorneys general; more than 100 congressional Democrats; a collection of law professors; and a number of consumer, civil rights, labor, community, and non-profit organizations. Among other arguments, these commenters have asserted that the proposal will benefit consumers by removing a restriction on their right to seek redress for small-dollar claims that are only viable through class actions. In their view, few consumers would be willing to pursue such claims through individual arbitration proceedings, where the costs of hiring an attorney and paying arbitration fees likely would exceed any possible recovery. Thus, according to these commenters, pre-dispute arbitration agreements with class action waivers effectively result in consumers foregoing their right to pursue small-dollar claims. These commenters argue that the class action device has proven to yield real and meaningful benefits to consumers and that consumers must have an option to pursue their claims on a class basis in order to deter corporate misconduct.
The comments submitted in opposition to the CFPB’s proposal provide a starkly contrasting view. These comments, which were submitted by groups such as the U.S. Chamber of Commerce and industry associations, argue that class action litigation benefits the lawyers who bring the lawsuits far more than the consumers on whose behalf the claims are brought. Consumers, according to these commenters, typically fare better through individual arbitration proceedings than they do as members of class claims. Relying in large part on the CFPB’s 2015 study, as well as a published critique of that study by two prominent law professors, these commenters argue that the CFPB’s own data proves that a ban on class action waivers in pre-dispute arbitration agreements is unwarranted, if not counterproductive. For instance, according to the CFPB’s study, (i) almost 90 percent of the consumer class action lawsuits that the CFPB analyzed resulted in no benefit to consumers; (ii) when class action settlements were achieved in those cases, typically only 4 percent of the class members even filed a claim; (iii) even for those claimants who did receive compensation, the average recovery to the consumer was only $32, while the attorneys received an average of more than $1 million; and (iv) the average consumer class action took approximately two years to resolve. Consumer arbitration proceedings, on the other hand, typically are completed in a matter of months and result in an average consumer recovery of over $5,000—i.e., 17,000 percent better than the average consumer award in class action litigation.
The commenters opposing the rule make a number of other arguments. They point out that it usually costs consumers less to complete an arbitration than it would even to file a complaint in federal court—and, in many instances, arbitration agreements provide that the company will cover the consumer’s share of any arbitration fees. Commenters also argue that the CFPB’s proposed rule effectively would eliminate a proposed avenue for recovery (arbitration) that is the only real option for many claims, which would not meet the requirements to proceed on a class basis in federal or state court. And they take issue with the suggestion that class actions are necessary to deter corporate wrongdoing, given the extensive deterrence factors that already exist in individual proceedings (where consumers can receive attorneys’ fees in many states) and the deterrent effect of possible regulatory action at the state and federal level, including by the CFPB itself. Indeed, these commenters have argued that the CFPB’s analysis largely ignores the success of the CFPB’s own programs that have been initiated to resolve consumer disputes. In short, the CFPB’s proposal ignores the costs that its ban will have on society as a whole, as the increased costs ultimately will be passed onto consumers and the overall increase in class action litigation will further clog an already overburdened judicial system.
Next Steps
If the CFPB decides to proceed with its proposal without modification, it will publish the proposed rule in final form. Even then, however, it would not take immediate effect. Under Dodd-Frank, the CFPB’s regulations apply only to “agreement[s] between a consumer and a covered person entered into after the end of the 180-day period beginning on the effective date of the regulation.” The current proposed effective date is 30 days following publication of the final rule. Thus, the proposed rule would only be in effect for agreements within its scope that are entered into after 210 days following publication of the final rule in the Federal Register.
Given the extensive comments submitted in opposition to the proposed rule, it is possible that the CFPB will reconsider its proposal, either in whole or in part. If the CFPB promulgates the rule in its current form, it is almost certain to be challenged in court. Commenters already have argued that the proposal violates the procedural and substantive limits on the CFPB’s authority imposed by Dodd-Frank and the Administrative Procedure Act. The CFPB’s proposal also could face legislative hurdles, as some lawmakers already are seeking to prevent the CFPB from implementing the contemplated rule. One way or another, the fight over the CFPB’s proposed ban on class action waivers is likely to continue.
