The Consumer Financial Protection Bureau (CFPB) recently announced the release of its final rule prohibiting the use of class action waivers in certain consumer finance arbitration agreements. The rule has been several years in the making, and has been widely followed and hotly contested. The final rule was announced on July 10, 2017 and published in the Federal Register on July 19, 2017. Accordingly, it is set to take effect on September 18, 2017 (60 days following publication) and to apply to contracts entered into on or after March 19, 2018 (180 days after the effective date). Opposition by members of Congress and concerns raised by the Office of the Comptroller of the Currency (OCC), however, have threatened the viability of final rule. We outline the requirements of the final rule below and discuss the friction that the final rule has encountered in a companion post, available here.
What is Prohibited/Required?
The final CFPB arbitration rule imposes two main requirements on affected providers: (1) that they refrain from the use of waivers in consumer finance arbitration agreements that prevent consumers from participating in class actions and (2) that they submit data to the CFPB so the agency can monitor and assess the effectiveness and fairness of arbitration moving forward. You can read our previous posts for a review of the progression of the rule’s development. Ultimately, Section 1040.4 of the final rule prohibits providers from relying on arbitration agreements for seeking to stay or to dismiss any class action, or for any other aspect of a class action, unless and until the trial court and/or appellate court have determined that the case cannot proceed as a class action. Providers will need to include the following language in their arbitration agreements:
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.
Or in the alternative:
We are providing you with more than one product or service, only some of which are covered by the Arbitration Agreements Rule issued by the Consumer Financial Protection Bureau. The following provision applies only to class action claims concerning the products or services covered by that Rule: 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.
Under Section 1040.4, providers also must submit to the CFPB certain records regarding their arbitrations, including pleadings, any judgments/awards by an arbitrator, communications regarding an arbitrator’s perceived lack of fairness of any arbitration agreement, communications regarding a provider’s failure to pay arbitrations fees, and filings in which a provider relies upon an arbitration agreement in any court cases involving the products subject to the rule. The rule specifies information to be redacted from these records prior to submission, as the CFPB intends to make records publicly available by July 1, 2019 and annually each year thereafter.
To Whom Does the Rule Apply?
Section 1040.3 of the final rule sets forth the providers who are subject to the rule, which fall largely into the broader categories of those that “lend money, store money, and move or exchange money.” The activities and products covered by the rule include:
- Extending credit: Providing an “extension of credit” that is “consumer credit” when performed by a “creditor” as defined in Regulation B, 12 CFR 1002.2, issued pursuant to the Equal Credit Opportunity Act;
- Credit Decisions: Participating in credit decisions, within the meaning of 12 CFR 1002.2(l), when performed by a “creditor” with regard to “consumer credit” as defined in 12 CFR 1002.2;
- Referring/Selecting Creditors: Referring applicants or prospective applicants for “consumer credit” to creditors when performed by a “creditor” as defined in 12 CFR 1002.2; or Selecting or offering to select creditors to whom requests for “consumer credit” may be made when done by a “creditor” as defined in 12 CFR 1002.2; Except that this does not apply when the referral or selection activity by the creditor described is incidental to a business activity of that creditor that is not covered by this section;
- Acquiring/Selling/Servicing Extension of Credit: Acquiring, purchasing, or selling an extension of consumer credit covered by paragraph (a)(1)(i) of this section; or Servicing an extension of consumer credit covered by paragraph (a)(1)(i) of this section;
- Automobile Leases: Extending automobile leases as defined by 12 CFR 1090.108 or brokering such leases;
- Debt Management/Settlement: Providing services to assist with debt management or debt settlement, modify the terms of any extension of consumer credit covered by paragraph (a)(1)(i) of this section, or avoid foreclosure;
- Credit History Repair: Providing products or services represented to remove derogatory information from, or improve, a person’s credit history, credit record, or credit rating;
- Consumer Report/Credit Score: Providing directly to a consumer a consumer report, as defined by the Fair Credit Reporting Act, 15 U.S.C. 1681a(d), a credit score, as defined by 15 U.S.C. 1681g(f)(2)(A), or other information specific to a consumer derived from a consumer file, as defined by 15 U.S.C. 1681a(g), in each case except for a consumer report provided solely in connection with an adverse action as defined in 15 U.S.C. 1681a(k) with respect to a product or service that is not covered by this section;
- TISA: Providing accounts subject to the Truth in Savings Act, 12 U.S.C. 4301 et seq., as implemented by 12 CFR part 707 and Regulation DD, 12 CFR part 1030;
- EFTA: Providing accounts or remittance transfers subject to the Electronic Fund Transfer Act, 15 U.S.C. 1693 et seq., as implemented by Regulation E, 12 CFR part 1005;
- Transmitting/Exchanging Funds: Transmitting or exchanging funds as defined by 12 U.S.C. 5481(29) except when necessary to another product or service if that product or service is offered or provided by the person transmitting or exchanging funds and is not covered by this section;
- Accepting Financial/Banking Data: Accepting financial or banking data or providing a product or service to accept such data directly from a consumer for the purpose of initiating a payment by a consumer via any payment instrument as defined by 12 U.S.C. 5481(18) or initiating a credit card or charge card transaction for the consumer, except by a person selling or marketing a good or service that is not covered by this section, for which the payment or credit card or charge card transaction is being made;
- Check Services: Providing check cashing, check collection, or check guaranty services; or
- Debt Collection: Collecting debt arising from any of the consumer financial products or services described in paragraphs (a)(1) through (9) of this section when performed by a person offering or providing the product or service giving rise to the debt being collected, an affiliate of such person, or a person acting on behalf of such person or affiliate, or by a person purchasing or acquiring an extension of consumer credit covered by paragraph (a)(1)(i) of this section, an affiliate of such person, or a person acting on behalf of such person or affiliate; or a debt collector as defined by 15 U.S.C. 1692a(6).
There are several entities not covered by the Rule, including but not limited to, certain government entities, certain merchants and retailers, certain employers providing benefits to employees, and persons who provided an otherwise covered product to no more than 25 consumers in the current and preceding calendar years. The final rule makes provisions for providers of prepaid cards to sell old packages that have arbitration agreements that do not conform to the rule’s requirements, as long as consumers are provided a copy of an agreement containing the required language once their card is registered.
Companies that may be affected should consult with counsel to assess the impact of the rule on their business operations and dispute resolution strategy, and to determine the best course of action to ensure compliance if the rule survives. We will keep you posted on developments regarding the implementation of the CFPB rule.