No More Mandatory Arbitration for Consumer Financial Products?

CFPB Proposal Would Effectively Eliminate Most Pre-Dispute Consumer Arbitrations

To no one's surprise, the Consumer Financial Protection Bureau (CFPB) proposed rules on May 5, 2016 that will effectively, if promulgated as expected, eliminate most pre-dispute arbitrations arising out of the sale of consumer financial products. As detailed below, the proposed rules would, among other things: (1) ban covered entities from imposing a pre-dispute arbitration clause if it bars the consumer from filing or participating in a class action, (2) require covered entities to submit records of their consumer arbitrations arising out of pre-dispute provisions to the CFPB, and (3) ban the use or enforcement by anyone of prior pre-dispute arbitration clauses that were entered into by other parties unless modified to permit the consumer the same class action rights.

When Congress passed the Dodd-Frank Wall Street Reform and Consumer Protection Act, it directed the CFPB to study pre-dispute arbitration agreements. Further, Congress also authorized the CFPB thereafter to promulgate rules restricting or prohibiting the use of arbitration agreements if deemed in the public interest and for the protection of consumers. In October 2015 the CFPB released that study, and it purported to show multiple consumer disadvantages to arbitration, and argued that class actions benefited consumers. The study argued, among other things, that "pre-dispute arbitration agreements are being widely used to prevent consumers from seeking relief from legal violations on a class basis, and that consumers rarely file individual lawsuits or arbitration cases to obtain such relief."

Under the CFPB proposal, companies would not only be banned from placing mandatory arbitration clauses in new contracts that prevent customers from suing them in court, but the proposal will also force companies that acquire or are third-party beneficiaries to preexisting arbitration agreements to allow such customers to avoid these preexisting agreements.

The new rules would be set forth in a new federal regulation at 12 CFR Part 1040. The arbitration ban would apply to providers of most consumer financial products and services in the core consumer financial markets of lending money, storing money, and moving or exchanging money, including nearly all providers that are engaged in the following core categories:

1. Lenders and servicers. Entities that extend or regularly participate in decisions regarding consumer credit under Regulation B implementing the Equal Credit Opportunity Act (ECOA), as well as those that engage primarily in the business of providing referrals or selecting creditors for consumers to obtain such credit, and the acquisition (such as by auto finance companies), purchase, sale, or servicing (such as mortgage servicers) of such credit;

2. Auto finance. Those extending or brokering of automobile leases as defined in CFPB regulation, plus auto finance contracts purchasers of retail installment sales contracts;

3. Debt management and settlement services. Those that provide services to assist with debt management or debt settlement, modify the terms of any extension of consumer credit, or avoid foreclosure;

4. Credit bureaus. Those entities that provide directly to a consumer a consumer report as defined in the Fair Credit Reporting Act, a credit score, or other information specific to a consumer from a consumer report, except for adverse action notices provided by an employer;

5. Savings accounts and remittance transfers. Those offering savings accounts and remittance transfers: providing accounts under the Truth in Savings Act and accounts and remittance transfers subject to the Electronic Fund Transfer Act;

6. Check cashing firm and similar providers. Transmitting or exchanging funds (except when integral to another product or service not covered by the proposed rule), certain other payment processing services, and check cashing, check collection, or check guaranty services consistent with the Dodd-Frank Act;

7. Debt collectors and purchasers of consumer credit. Entities that collect debt arising from any of the above products or services by a provider of any of the above products or services, their affiliates, an acquirer or purchaser of consumer credit, or a person acting on behalf of any of these persons, or by a debt collector as defined by the Fair Debt Collection Practices Act.

The CFPB is not leaving any room for creative contract language. Under the proposed rule, nearly all new pre-dispute arbitration provisions in covered contracts would be required to include this exact language: "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."

Further, a covered entity would be prohibited from even seeking to rely in any way on a pre-dispute arbitration agreement entered into a covered arbitration agreement with respect to any aspect of a class action that is related to covered consumer financial products or services, and may not seek a stay or dismissal of particular claims or the entire action, unless and until the presiding court has ruled that the case may not proceed as a class action. Further, even after such ruling, the covered entity would be permitted to take no action to enforce arbitration if the ruling is subject to appellate review on an interlocutory basis until the time to seek such review has elapsed or the review has been resolved.

While the rule purports to have prospective effect only, i.e., it generally does not restrict the enforcement of arbitration agreements before its effective date 180 days after the rule itself takes effect, the proposed rule attacks preexisting arbitration agreements in two critical ways: First, it requires covered entities to provide detailed reports on any arbitrations based on preexisting provisions, thereby allowing the CFPB to more closely monitor the disputes for systemic practices. Second, it prohibits non-parties to the original, otherwise permissible, preexisting agreement from enforcing its terms: (1) by including anyone who acquires consumer contracts, and (2) by requiring non-parties seeking to enforce arbitration to include the required new language, thereby allowing consumers who executed valid class action waivers to avoid arbitration and seek class action relief. That is, under the proposed rule, "[w]hen the pre-dispute arbitration agreement existed previously between other parties and does not contain [the required provision concerning class action rights], the [covered entity] shall either ensure the agreement is amended to contain the provision … or provide [written notice of these rights]…. The provider shall ensure the agreement is amended or provide the notice to consumers within 60 days of entering into the pre-dispute arbitration agreement" (emphasis added).

If you have questions about these developments, please contact Richard Gottlieb, Donna Wilson, or any member of Manatt's financial services practice.