On July 10, 2017, the Consumer Financial Protection Bureau formally issued its long-anticipated final rule banning class waivers in future arbitration agreements for banks, lenders, debt counselors, credit card issuers, certain types of automobile leasing businesses, and many other financial institutions. The CFPB’s rule will take effect March 18, 2018, unless nullified by Congress in the next few weeks, or enjoined by a court in the next few months. The ban on class waivers would apply generally to pre-dispute arbitration agreements entered into after that date by many categories of financial service providers, such as banks, lenders, debt collectors and credit card companies.
The proposed rule would essentially forbid a covered financial product or service provider sued in a class action lawsuit from relying “in any way” on a pre-dispute arbitration agreement that does not explicitly allow the consumer to choose between class arbitration and class litigation, unless and until the presiding court has ruled that the case may not proceed as a class action and any interlocutory appeals of that ruling have been exhausted. The ban on reliance applies to “any aspect” of the class litigation related to a covered product or service.
The proposed rule would also require every pre-dispute arbitration agreement entered into after the effective date of the rule to include specific language acknowledging the consumer’s right to sue using the class action device and to participate in any class action filed by someone else despite the arbitration agreement. And both for individual arbitrations and for arbitrations commenced by any party to a class action after the denial of class certification, the CFPB will require companies with covered agreements to publicly file with the CFPB various documents and data related to the arbitration proceeding, including, among other things, the claim documents and the arbitral award.
Congress has a filibuster-proof way to nullify the rule under the Congressional Review Act, 5 U.S.C. §801, et seq. While the House has already voted to nullify, it is unclear whether 51 Republican votes for nullification can be mustered in the Senate. Financial service providers who prefer individual arbitration to class litigation should be voicing that opinion to the Senate loudly and soon, because the Congressional Review Act allows only 60 legislative days for nullification, and that clock runs out in early November.
If that nullification effort fails, then efforts to nullify the rule will likely turn to the courts. Efforts to declare the CFPB unconstitutional are already pending (see, e.g., PHH Corporation v. Consumer Financial Protection Bureau, 839 F.3d 1, 2016 WL 5898801 (D.C. Cir. 2016); opinion vacated, rehearing en banc granted Feb. 16, 2017). And just days ago, the U.S. Chamber of Commerce, the American Bankers Association, and others filed suit in Texas federal court seeking to block the rule on the theory that the CFPB’s pre-rule arbitration study mandated by the Dodd-Frank Act was statutorily insufficient and does not support the rule actually promulgated, violating both Dodd-Frank’s limits on CFPB rulemaking regarding arbitration and the Administrative Procedures Act.
Those in the business of lending, storing, collecting or moving money should also be preparing for the effective date of the rule, just in case. First, they would need to consider whether, after the effective date, new arbitration agreements are desirable at all following the effective date of the rule. By definition, this rule would mean that such arbitration clauses will have no application to the largest and most costly cases—those brought as class actions. Worse yet, it would create implicit incentives for plaintiffs to bring as purported class actions claims that would otherwise have been brought individually, simply to avoid arbitration while utilizing the specter of class discovery as leverage for settlement. Indeed, the mandated language that now must be included in a post-effective date arbitration agreement all but invites class allegations as a means of avoiding arbitration. In the smaller individual cases in which arbitration clauses would still have potential effect, efficiencies once available through arbitration will now be undermined by a new layer of regulatory reporting and compliance costs, the requirement that litigation proceed through denial of class certification and exhaustion of interlocutory appeal, and the elimination of the confidentiality that businesses are accustomed to enjoying from arbitration.
Businesses that decide to continue using arbitration clauses anyway would need to start planning for the new regime sooner rather than later. This will involve not only drafting new pre-dispute arbitration agreements that comply with the new rule and contain the required language, but also hiring or training personnel to fulfill the new reporting obligations created by the rule and determining which product and service offerings are and are not subject to the new rule.
Most importantly, covered providers would need to prepare for an increase in class action litigation if the rule goes into effect. There is no other way to spin it—if this rule goes into effect, class action filings against covered companies will go up. This will affect litigation legal budgets, in-house legal and compliance staffing needs, and the bottom line of covered companies’ financial statements.
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