CFPB Finalizes Arbitration Rule, Paving the Way for More Class Action Litigation

by Goodwin

On July 10, 2017, the Consumer Financial Protection Bureau (CFPB) announced the release of its anticipated Arbitration Rule, opening the door for more consumer class actions against financial institutions concerning financial products and services.  Many consumer contracts, such as credit card and bank agreements, contain mandatory arbitration clauses.  These clauses typically require consumer disputes to be arbitrated rather than litigated in court, and they work to prevent class action lawsuits from being filed.  Consumer advocacy groups have long complained about such clauses, posturing that individuals are unlikely to endure the costs of arbitration to resolve what are typically low dollar value cases.  Their position is that if consumers were able to band together and file class action lawsuits, consumers would be more apt to challenge allegedly unlawful conduct against financial institutions, and companies would be held accountable.

The new Arbitration Rule prohibits the use of mandatory arbitration clauses in consumer financial products and services contracts to prohibit class action lawsuits.  To be certain, financial institutions can still include arbitration clauses, but these clauses cannot be used to stop consumers from filing class actions.  If companies want to include an arbitration clause in a consumer contract, the Rule requires that the clause incorporate the following language: “We agree that neither we nor anyone else will rely on 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 filed by someone else.”  12 C.F.R. § 1040.4(a)(2)(i).  If an arbitration clause applies to several products or services, only some of which are covered by the Arbitration Rule, then the language must specify that the aforementioned language applies to conduct covered by the Rule.  § 1040.4(a)(2)(ii).

The Rule also requires companies that include arbitration clauses in consumer financial products and services contracts to produce certain records to the CFPB.  § 1040.4(b).  These records include (1) claims, counterclaims, answers, arbitration agreements, judgments or awards, and dismissals concerning arbitration claims filed; (2) communications with arbitrators concerning a determination that an arbitration agreement “does not comply with the administrator’s fairness principles [or] rules;” and (3) court filings that rely on arbitration agreements in support of a company’s request for dismissal, deferral or stay, and the arbitration agreement relied upon.  § 1040.4(b)(1)(i)-(iii).  In its announcement of the release of the final Rule, the CFPB stated that “[g]athering these materials will enable the CFPB to better understand and monitor arbitration, including whether the process itself is fair.”  Redacted versions of the materials produced to the CFPB by the companies will be published on the CFPB’s website beginning in July 2019.

The Rule becomes effective 60 days after its publication in the Federal Register, and applies only to contracts entered into by consumers 180 days after the effective date.  It remains to be seen what kind of challenges are brought in an effort to stop the Rule from becoming effective, but such challenges can be expected.  Already, members of Congress are indicating that they intend to move forward with a Congressional Review Act challenge.  U.S. House of Representatives Financial Services Chairman Jeb Hensarling (R-TX) stated that “[t]his bureaucratic rule will harm American consumers but thrill class action trial attorneys” and urged Congress to reject the Arbitration Rule pursuant to its authority under the Congressional Review Act.  Similarly, U.S. Senate Banking Committee member Tom Cotton (R-AR) issued a statement promising to move forward with rescinding the Rule under the Act.  And prior to the Rule being unveiled by the CFPB, acting Comptroller of the Currency, Keith Noreika, is reported to have denounced the Rule, citing the Dodd-Frank Act as his Office’s authority to strike it down.  LenderLaw Watch will provide updates on progress made to challenge the Arbitration Rule as they arise.

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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