CFPB’s Proposal Marks Government’s Latest - and Largest - Step Regulating Arbitration Clauses

by McGuireWoods LLP

Last week at a field hearing in Albuquerque, New Mexico, the Consumer Financial Protection Bureau (CFPB) announced a proposed rule that would prohibit providers of certain consumer financial products and services from including arbitration provisions in consumer contracts that bar the consumer from filing or participating in a class action with respect to the product or service.  The announcement comes as no surprise − as we previously reported here, here, and here, the Bureau has forecast for more than a year its intentions to engage in rulemaking that would prohibit such clauses.

The proposed rule bans only the use of arbitration provisions precluding class actions; companies may still mandate arbitration for consumers pursuing claims individually.  For most providers that continue to use arbitration clauses, the proposed rule further requires that providers include the following language highlighting the right to pursue or join a class action: “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 would also require providers using arbitration clauses to submit to the Bureau certain records from arbitration proceedings, including records relating to claims, counterclaims, the arbitration agreement and any judgment or award.

The proposed rule would apply to providers of a wide range of financial products and services, including those involved in consumer credit, debt relief and foreclosure assistance, consumer debt collection, credit reporting, checking and deposit accounts, prepaid cards, money transfer services, certain auto and auto-title loans, payday and installment loans, and student loans.  The rule would not apply to federal and state governments and their affiliates and smaller companies that provide similar products and services to fewer than 25 consumers in consecutive years.

The Bureau’s proposed rule marks the next − and perhaps largest − step in the trend of government regulation and restriction of arbitration clauses.  As we reported last week, Senators Franken and Blumenthal recently urged the Federal Communications Commission to adopt a similar ban in telecommunications contracts.  In March, the Department of Education released a proposal to prohibit schools that receive federal funding from using such clauses.  The Centers for Medicare & Medicaid Services is also considering similar restrictions in long-term care facility contracts.  Federal law already bars the use of mandatory arbitration agreements in certain transactions involving military service members, including payday loans and auto-title loans.  And, in 2013, the CFPB’s amendment to The Truth in Lending Act that banned mandatory arbitration provisions in certain mortgage loans took effect.

In remarks accompanying the announcement, Director Cordray criticized the use of mandatory arbitration in consumer contracts, stating that such clauses “leave consumers with no choice but to seek relief on their own − usually over small amounts.”  Director Cordray also cited the CFPB’s 2015 study of mandatory arbitration clauses, which he said found that class actions recover “hundreds of millions of dollars in relief to millions of consumers each year.”

The business community’s response to the CFPB’s proposal has been swift and acerbic.  Both the U.S. Chamber of Commerce and the American Bankers Association (ABA) decried the proposal as a boon to plaintiffs’ lawyers.  The U.S. Chamber of Commerce called the proposal “the biggest gift to plaintiffs’ lawyers in a half century.”  The ABA echoed that sentiment in expressing its hope that the CFPB would reverse course following the comment period and stick to its core mission “that puts consumers − not class action lawyers − first.”

These bodies also noted the inconsistency between the CFPB’s proposal and its 2015 study that touted the benefits of arbitration.  For example, the Consumer Bankers Association commented that, according to the CFPB’s study, a consumer recovers on average $5,389 through arbitration compared to $32.35 when participating in a class action.  The U.S. Chamber of Commerce fears that the CFPB’s proposal jeopardizes the future of consumer arbitrations, thereby depriving consumers of a quick and efficient way to resolve disputes.  Whether that fear proves true, the ABA noted that the proliferation of class actions will drive up companies’ costs, which will mean increased costs to consumers.  We expect the sentiments of the U.S. Chamber of Commerce and ABA will be repeated time and again and fleshed out during the comment period.

Comments to the proposed rule must be in writing and received by the CFPB within 90 days after the proposed rule is published in the Federal Register.  Comments can be submitted by email, over the Internet, or by mail or courier.  The 90-day comment period and the CFPB’s proposal that a final rule take effect 30 days after its publication in the Federal Register mean that a final rule is not expected to take effect until the middle of next year at the earliest.  Any final rule would only apply to agreements entered into more than 180 days after the rule’s effective date.

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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