The Consumer Financial Protection Bureau (CFPB) recently announced the release of its final rule that prohibits the use of class action waivers in certain consumer finance arbitration agreements. This rule banning class waivers has been several years in the making, and has been widely followed and hotly contested. The CFPB reports that it received more than 110,000 comments on its proposed rule during the comment period, which raised concerns regarding “whether the effects of arbitration agreements are salient to consumers, whether arbitration has proved to be a fair and efficient dispute resolution mechanism, and whether arbitration agreements effectively discourage and limit the filing or resolution of certain claims in court or in arbitration.” In the CFPB’s view, the rule will prevent companies from “deny[ing] groups of people their day in court,” and “avoid[ing] accountability by blocking group lawsuits and forcing people to go it alone or give up.” Opponents of the CFPB’s rule consider it a detriment to consumers and criticize it as encouraging class action litigation that will benefit plaintiffs’ lawyers more than the consumers it purports to protect. 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 discuss the friction that the final rule has encountered below and highlight the key provisions of the rule. For additional detail regarding the final rule’s requirements, read our companion post.
The Final Front – FSOC Safety & Soundness Concerns and Congressional Disapproval
It was clear on the day the CFPB’s final rule was announced that it would not become effective without pushing through a final front of opposition. Under Dodd-Frank, the Financial Stability Oversight Council (FSOC) has the responsibility to identify and respond to risks to the stability of the country’s financial system. FSOC has the authority to set aside a final regulation issued by the CFPB if it will “put the safety and soundness of the United States banking system or the stability of the financial system of the United States at risk.” On the cusp of the CFPB releasing the final rule, the Office of the Comptroller of the Currency (OCC), an FSOC member agency, initiated an exchange of letters with the CFPB that thrust concerns regarding the impact of the rule on the federal banking system to the forefront. On the day the CFPB released the final rule, Acting Comptroller of the Currency Keith Noreika sent a letter to the CFPB that raised safety and soundness concerns regarding the rule, including concerns that “[t]he increased cost associated with litigation and the loss of arbitration as a viable alternative dispute resolution mechanism could adversely affect reserves, capital, liquidity, and reputations of banks and thrifts, particularly community and midsize institutions.” The OCC requested the data the CFPB had relied upon in drafting the rule. CFPB Director Cordray responded to Noreika, indicating his “surprise” that the OCC raised these concerns so late in the multi-year rulemaking process and just two weeks after the OCC stated that it had no comments on the draft text and commentary to the rule. Director Cordray set forth several points refuting the validity of any safety and soundness concerns, and indicated that CFPB staff would be made available to review the data and rulemaking analysis with OCC staff.
The following week, Acting Comptroller Noreika followed up with another letter again requesting the data the CFPB had used and requesting that the CFPB delay publication of the final rule in the Federal Register to give the agency ample time to study the data and fulfill its duty under Dodd Frank § 1023. Noreika pointed out that he took his current position with the OCC in May 2017, initiated a review of the final proposed rule shortly thereafter, and was just asked by his staff in early July to request the CFPB data. Acknowledging the lengthy rulemaking process, Noreika stated “I know that significant time has been spent in developing the Final Rule during the past several years. A few additional weeks to address the prudential concerns that I have raised seem a sound investment.” Cordray quickly responded, assuring Noreika that the data would be made available while further dismissing the validity of the OCC’s concerns. Cordray noted that “Congress explicitly banned arbitration agreements in the mortgage market, which is larger than all these other consumer finance markets combined. Yet nobody suggests that outcome poses a safety and soundness issue,” and he beseeched Noreika not to “distort the FSOC process” to raise these “plainly frivolous” claims. The final rule, which the CFPB already had sent to the Federal Register, was published the next day, July 19, 2017.
The day after the final rule was published in the Federal Register, Congress took steps to nullify it with the issuance of joint resolutions under the Congressional Review Act (chapter 8 of title 5, United States Code). On July 20, 2017, the House Financial Services Committee introduced H.J. Res. 111 and the Senate Banking Committee introduced S.J. Res. 47, both of which state:
That Congress disapproves the rule submitted by the Bureau of Consumer Financial Protection relating to Arbitration Agreements (82 Fed. Reg. 33210 (July 19, 2017)), and such rule shall have no force or effect.
The CFPB rule was criticized, among other reasons, for being based on a flawed data and the result of the agency overreaching. The House approved H.J. Res. 111 on July 25, 2017 and sent it to the Senate for consideration.
Under Dodd-Frank § 1023, the OCC could have petitioned FSOC to set aside or delay the CFPB rule by filing a petition within 10 days of the rule’s publication in the Federal Register. However, on July 31, 2017, Acting Comptroller Noreika issued a statement explaining the OCC’s decision to forgo filing the petition. Noreika noted the insufficiency of the timeframe in which the agency would have to review and analyze the CFPB’s data and placed his hope in the ongoing Congressional effort to nullify the rule under the Congressional Review Act. Although the OCC passed on the opportunity to further challenge the CFPB rule, the rule could be nullified by Congress with a simple majority vote. The Senate has yet to act on either of the Congressional resolutions.
If the Final Rule Takes Effect – To Whom Does it Apply & 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 1040.3 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.” 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 also makes provisions for providers of prepaid cards to sell old packages that have arbitration agreements that do not conform to the rule’s requirements.
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. The rule sets out specific language that must be included in arbitration agreements. Under Section 1040.4, providers also must submit to the CFPB certain records regarding their arbitrations. 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. See our companion post for additional details regarding the final rule’s requirements.
We will keep you posted on developments regarding the implementation of the CFPB rule. 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.