The Consumer Financial Protection Bureau (“CFPB”) made clear this week that, in its view, class action waivers should be on the chopping block in the agency’s upcoming rulemaking aimed at regulating the use of arbitration clauses in consumer financial agreements. In an October 7, 2015 release, CFPB Director Cordray expressed the agency’s critical stance on companies’ use of arbitration agreements that prohibit consumers from participating in class actions, calling such clauses a “free pass to sidestep the courts and avoid accountability for wrongdoing,” while announcing new proposals by the agency that would “ban arbitration clauses that block group lawsuits so that consumers can take companies to court to seek the relief they deserve.” The expectation that the CFPB would take steps to limit the use of class action waivers in consumer financial agreements was heightened by the March 2015 Arbitration Study Report the agency issued to Congress, pursuant to the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”). The CFPB Arbitration Study was particularly critical of companies’ use of arbitration agreements to dampen class action litigation, and noted that almost all of the arbitration clauses studied prohibited class arbitrations and some also precluded participation in class actions in court. You can read our previous post for additional information on the CFPB Arbitration Study. Despite calls from consumers and some federal legislators for a complete ban on the use of arbitration agreements in consumer financial contracts, the newly released CFPB proposals do not ban the use of arbitration agreements in consumer financial contracts altogether. Arbitration agreements still would be permissible, provided that they do not prohibit the filing of a class action in court. The CFPB proposals also seek to impose reporting requirements on companies regarding arbitration claims and awards.
The CFPB Proposals
Dodd-Frank already prohibits arbitration agreements in mortgage lending credit agreements. Dodd-Frank granted the CFPB authority to prohibit or limit the use of arbitration agreements in certain other consumer financial agreements, consistent with the public interest and the results of the CFPB Arbitration Study. The CFPB’s study was met with substantial criticism by industry, academics, and Members of Congress, and the agency was asked by Members of Congress to reopen the study to address several fatal flaws. Despite those criticisms, the CFPB committed to moving forward with a rulemaking on the arbitration issue in July 2015 at its Semi-Annual Report to Congress before the Senate Committee on Banking, Housing & Urban Affairs. The CFPB proposals announced this week were in preparation for the Small Business Review Panel, which is the first step in the rulemaking process and required by law to obtain input from small business representatives prior to issuing regulations on issues that may have a significant economic impact on small businesses. The CFPB’s Proposals have two main objectives: (1) the prohibition on the use of class action waivers, and (2) the gathering of information regarding arbitration claims and awards to increase transparency and accountability.
Class Action Waivers: The CFPB proposal requires any arbitration agreement included in a contract for a consumer financial product or service offered by a covered entity “to provide explicitly that the arbitration agreement is inapplicable to cases filed in court on behalf of a class unless and until class certification is denied or the class claims are dismissed.” The CFPB did note that “an arbitration agreement that allowed a consumer to choose whether the claim is filed in a class case in court or in arbitration would be permissible under the proposal (but one that permitted the claim to only be filed in arbitration would not be permissible).” In its proposal, the CFPB points to the Financial Industry Regulatory Authority’s (“FINRA”) Rule 2268(f) as a 20+ year precedent for its ban on the use of class waivers in consumer financial arbitration agreements. Similar to the CFPB proposal, FINRA Rule 2268(f) prohibits enforcement of an arbitration agreement against putative class members until “(i) the class certification is denied; or (ii) the class is decertified; or (iii) the customer is excluded from the class by the court.”
Submission of Claims & Awards: The CFPB proposal also requires covered entities “to submit initial claim filings and written awards in consumer finance arbitration proceedings to the Bureau,” and may require the publication of the claims or awards to its website to make them publicly available.
What Businesses Will Be Impacted?
The CFPB outlined the types of financial products and services businesses that may be impacted by the rulemaking as including, but not limited to, the following types of entities:
- Banks and credit unions,
- Credit card issuers,
- Certain auto lenders,
- Small-dollar or payday lenders,
- Auto title lenders,
- Installment and open-end lenders,
- Private student lenders,
- Providers of other credit in certain other contexts,
- Loan originators that are not creditors,
- Providers of credit in the form of deferred third-party billing services,
- Providers of certain auto leases for at least 90 days,
- Servicers of covered credit and auto leases,
- Remittance transfer providers,
- Providers of domestic money transfer services or currency exchange,
- General-purpose reloadable prepaid card issuers,
- Certain providers of virtual currency products and services,
- Check cashing providers,
- Credit service/repair organizations,
- Debt settlement firms,
- Providers of credit monitoring services, and
- Debt buyers
The CFPB also is considering expanding its coverage to additional consumer financial products and services, as well as carving out exclusions for several other categories of services and products. You can find additional information in the CFPB Outline of Proposals.
The agency has identified the following three categories of costs that it believes may be imposed on affected entities as a result of the proposal, two of which account for increased exposure to class litigation: (1) administrative costs incurred to update contractual arbitration agreement language; (2) “costs related to additional potential liability due to class litigation exposure (including defense costs, court costs, substantive settlement and damages exposure),” and (3) “increased cost of compliance with existing consumer finance and other laws and other costs due to entities attempting to minimize any such additional class litigation exposure in the future.” The CFPB is explicitly seeking input during the Small Business Review Panel on these and any other costs affected entities may incur. The CFPB also is seeking input on a list of questions addressing small entities’ experience with arbitration agreements and proceedings, experience with class litigation, investment in compliance with consumer protection laws, alternative proposals, the cost of credit to small entities, exposure to duplicative regulations, and costs associated with submitting claims and awards.
Hope for a Middle Ground?
We previously questioned whether the guarantee of a minimum recovery through individual arbitration would be enough to assuage the CFPB’s concern that consumers are restricted from accessing millions of dollars in class action relief. The U.S. Supreme Court seemed to put faith in the efficacy of guaranteed minimum recovery clauses, noting in AT&T Mobility v. Concepcion, 131 S. Ct. 1740 (2011) that in the face of such a clause, lower value claims are “most unlikely to go unresolved” and consumers could fare better under the arbitration agreement than participating in a class action that “could take months, if not years, and which may merely yield an opportunity to submit a claim for recovery of a small percentage of a few dollars.” Although the CFPB had not indicated its position at the time, the CFPB Arbitration Study had investigated the incidence of guaranteed minimum recovery clauses in consumer finance contracts, like the one in Concepcion, and noted arguments from proponents that the use of these clauses provides consumers with sufficient redress.
Nonetheless, the CFPB’s Outline of Proposals prepared for the Small Business Review Panel does not indicate that allowing the use of guaranteed minimum recovery provisions in conjunction with class waivers was an alternative proposal considered by the agency. The agency had considered allowing companies unilaterally to choose whether to resolve class claims through a class action in court or class arbitration, but rejected the idea “because it is not confident that class arbitration is a reliable setting for aggregated resolution of consumer finance claims” and because companies and industry groups have expressed that class arbitration is not a desirable alternative to class action litigation. The agency also considered banning the use of arbitration agreements outright. Ultimately, the agency proposed banning the use of waivers that prevent class action litigation in court.
The CFPB’s seemingly limited consideration of alternative proposals does not mean that industry has no opportunity to advocate for class action waivers, with or without guaranteed minimum recovery provisions, or other alternatives prior to the CFPB issuing a final rule. The CFPB Small Business Review Panel is the first step on the road to a final rule. The Small Business Review Panel will result in a Panel Report, to be issued within 60 days. The CFPB is required to consider the Panel Report and input from the small business representatives participating in the process before issuing a formal proposed rule, which then will be open for public comment. A final rule would be issued by the agency after considering the comments received. The CFPB stated that it anticipates a final rule would not apply to arbitration agreements entered into before 210 days after a final rule is published. Given the stakes for small and large companies, the CFPB’s rulemaking process on this issue should be a high priority for businesses offering consumer financial products and services.