On May 24, 2016, the Consumer Financial Protection Bureau’s (CFPB) long-anticipated Proposed Rule prohibiting the use of class action waivers in consumer finance arbitration agreements was published in the Federal Register and opened for public comment. The Proposed Rule has been expected following the CFPB’s previous study and statements regarding the impact that arbitration agreement class action waivers have on consumers. The CFPB took 370+ pages to explain and justify its proposal, which boils down to consumers of financial products do not typically pursue redress via individual means of enforcement due to costs and lack of knowledge, so the class action mechanism must be preserved in order to ensure that companies do not insulate themselves from compliance with the law or shield themselves from liability from wrongdoing. What that means for the nearly 53,000 entities that the CFPB estimates will be affected by its Proposed Rule is increased exposure to the glories of class litigation and increased regulatory compliance requirements.
The CFPB announced the proposal earlier in May with a statement from Director Cordray that was highly critical of companies using class action waivers in their arbitration agreements: “Many banks and financial companies avoid accountability by putting arbitration clauses in their contracts that block groups of their customers from suing them. Our proposal seeks comment on whether to ban this contract gotcha that effectively denies groups of consumers the right to seek justice and relief for wrongdoing.” Despite the agency’s obvious penchant for preserving access to consumer finance-based class litigation, those companies potentially affected by the Proposed Rule still have an opportunity to be heard. We highlight key components of the CFPB’s proposal and estimated impact on the entities subject to the rule if approved as proposed. Comments on the Proposed Rule must be submitted by August 22, 2016.
Prohibition on Use of Class Waivers & Required Submission of Arbitration Data to CFPB
The CFPB has “preliminarily” concluded from its arbitration study and analysis that “the primary reason many companies include arbitration agreements in their contracts is to discourage the filing of class actions and block those that are filed. While companies might perceive other benefits of maintaining arbitration agreements for individual disputes, for many, those benefits seem ancillary to their ability to limit class actions.” As a result, the CFPB’s Proposed Rule has two main components:
- 1040.4(a): A prohibition on the use of arbitration agreements to block class actions
- 1040.4(b): A requirement to submit certain arbitration records to the CFPB, which might be made available to the public.
No Class Waivers. Under the Proposed Rule, providers
shall not seek to rely in any way on a pre-dispute arbitration agreement entered into after the date set forth in § 1040.5(a) with respect to any aspect of a class action that is related to any of the consumer financial products or services covered by § 1040.3 including to 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, and, if the ruling may be subject to interlocutory appellate review, the time to seek such review has elapsed or the review has been resolved.
Six examples of prohibited reliance on an arbitration agreement are provided in the Proposed Rule comments to clarify the rule’s operation:
- seeking dismissal, deferral, or stay of any aspect of a class action;
- seeking to exclude a person or persons from a class in a class action;
- objecting to or seeking a protective order intended to avoid responding to discovery in a class action;
- filing a claim in arbitration against a consumer who has filed a claim on the same issue in a class action;
- filing a claim in arbitration against a consumer who has filed a claim on the same issue in a class action after the trial court has denied a motion to certify the class but before an appellate court has ruled on an interlocutory appeal of that motion, if the time to seek such an appeal has not elapsed and the appeal has not been resolved;
- and filing a claim in arbitration against a consumer who has filed a claim on the same issue in a class action after the trial court has granted a motion to dismiss the claim where the court has noted that the consumer has leave to refile the claim on a class basis, if the time to refile the claim has not elapsed.
Providers covered by the Proposed Rule would be required to include the following language in their arbitration agreements:
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.
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. We agree that neither we nor anyone else will use this agreement to stop you 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. This provision applies only to class action claims concerning the products or services covered by that Rule.
Class Arbitration. The CFPB explained in the proposal that the use of arbitration agreements generally and the use of class arbitration are not prohibited by the Proposed Rule. The CFPB stated that “a pre-dispute arbitration agreement that allows a consumer to choose whether to file a class claim in court or in arbitration would be permissible under proposed § 1040.4(a), although an arbitration agreement that permits the claim to only be filed in class arbitration would not be permissible.” Further, class arbitration would be permissible “so long as the consumer chooses arbitration as the forum in which he or she pursues the class claims and the applicable arbitration agreement does not prohibit class arbitration.” Accordingly, providers must be aware that class arbitration is still an issue that may need to be addressed in their contracts and they may be able to shield themselves from the disadvantages of class arbitration procedures by prohibiting it in the arbitration agreement.
Records Submission. Under the Proposed Rule, providers also must submit (themselves or through an agent or administrator) several records related to arbitrations to the CFPB within 60 days of filing or receipt, based on the CFPB’s expressed need to monitor consumer finance arbitrations to ensure fairness for consumers and to monitor the consumer finance industry for risks to consumers. These records include:
- The initial claim and any counterclaim;
- The pre-dispute arbitration agreement filed with the arbitrator or arbitration administrator;
- The judgment or award, if any, issued by the arbitrator or arbitration administrator;
- If an arbitrator or arbitration administrator refuses to administer or dismisses a claim due to the provider’s failure to pay required filing or administrative fees, any communication the provider receives from the arbitrator or an arbitration administrator related to such a refusal; and
- Any communication the provider receives from an arbitrator or an arbitration administrator related to a determination that a pre-dispute arbitration agreement for a consumer financial product or service covered by § 1040.3 does not comply with the administrator’s fairness principles, rules, or similar requirements, if such a determination occurs.
Prior to submission of records, specific identifying information must be redacted. The CFPB is considering whether to make the records publicly available in individual or aggregate form.
Compliance Timeline. The CFPB explained its proposal regarding compliance deadlines to “establish an effective date of 30 days after publication of a final rule in the Federal Register.” As such, “[w]ere this 30-day period finalized, the requirements of the proposed rule would apply beginning on the 211th day after publication of the rule in the Federal Register.”
Who is Subject to the Proposed Rule?
As described by the CFPB, the Proposed Rule applies to most of the products and services subject to the agency’s oversight, including “those related to the core consumer financial markets that involve lending money, storing money, and moving or exchanging money.” The Proposed Rule identifies in § 1040.3 the financial products and services subject to the rule, which include:
- extending and servicing consumer credit;
- extending and brokering automobile leases;
- assisting with debt management or debt settlement; providing a consumer report or credit score to a consumer;
- providing accounts subject to the Truth in Savings Act;
- accepting financial or banking data or providing a product or service to accept that data directly from a consumer for the purpose of initiating a payment or credit card/ charge card transaction for the consumer, except when also selling or marketing the nonfinancial good or service for which the payment/card transaction is being made;
- providing accounts or remittance transfers subject to the Electronic Fund Transfer Act;
- check cashing, check collection, or check guaranty services;
- and collecting debt from any of the covered products.
There are several entities not covered by the Proposed Rule, including but not limited to, certain government entities, certain merchants and retailers, certain providers of general-purpose reloadable prepaid cards, and persons who provided an otherwise covered product to no more than 25 consumers in the current and preceding calendar years. Refer to § 1040.3 and § 1040.5 for a more detailed description of the products and services covered and excluded from the Proposed Rule.
In developing the proposal, the CFPB conducted a Small Business Review Panel meeting in October 2015 and considered concerns raised through the Panel process. Although not currently exempt from the Proposed Rule’s requirements, the CFPB has requested comments regarding whether an exception should be made for small entities from some or all requirements of the Proposed Rule and whether certain causes of action (e.g. claims under the TCPA) should be excluded from the rule due to the risk that small entities would face unlimited statutory damages in class actions.
Estimated Impact of the Proposed Rule?
The CFPB estimated that 53,000 providers would be opened up to class action exposure by the Proposed Rule, resulting in an estimated 103 additional federal class settlements annually that would pay out $342 million to consumers, $66 million to plaintiff’s attorneys, and generate an additional $39 million in defense costs for providers. The agency estimates that the additional federal class settlements would ultimately equal less than $1 per account per year when averaged across all markets affected by the Proposed Rule, thereby minimizing any concern regarding the impact on consumers if the increased costs are passed through by the affected providers. The CFPB also estimates an additional 501 federal class cases that do not settle on a class basis that would result in $76 million per year in defense costs, and approximately the same number of state class actions. The costs to providers for complying with the Proposed Rule’s reporting requirements is estimated at $400, based on the CFPB’s estimate of 2 hours of attorney/staff time. Overall, the CFPB believes that the Proposed Rule will have a deterrent effect on providers, incentivizing them to increase compliance in order to avoid exposure to class actions.
CFPB Justification/Analysis – What About a Middle Ground?
The CFPB has found it “in the public interest” and “for the protection of consumers” to prohibit the use of class waivers as suggested in the Proposed Rule (the CFPB is seeking comment on its two-pronged approach to this applicable Dodd-Frank standard). The CFPB made several preliminary conclusions supporting its proposal to preserve access to class litigation in the consumer finance arena, including that the low number of individual claims filed can be attributed to the small amount at stake in the claims and the fact that consumers may not be able to identify legal harm without the aid of an attorney. The CFPB’s analysis purports to consider whether defendant companies are subjected to meritless class action claims that force settlements, negating objections that the proposal would result in windfalls to class plaintiffs by claiming “the Study showed that certification almost invariably occurs coincident with a settlement and thus is not typically the force that drives settlement” and “Congress and the courts also continue to calibrate class action procedures to discourage frivolous litigation.” It seems readily apparent, however, that the risk of class certification and the potential costs of defending against even meritless class action claims through protracted certification and later-stage procedures influence a company’s decision to settle class litigation. Moreover, the low-value claim justification to invalidate class waivers is precisely the argument that the U.S. Supreme Court rejected in its Concepcion line of cases. Still, the CFPB has found it sufficient impetus to exercise its federal statutory authority to prohibit, not just restrict, the usage of class waivers in the consumer finance context.
Before subjecting providers to the increased costs and risks associated with class litigation, why not seek a middle-ground and place some restrictions on the use of class waivers, such as requiring minimum recovery provisions that guarantee consumers would receive a specified minimum recovery via arbitration if an arbitrator awards the consumer more than the amount of the company’s last settlement offer? In conjunction with the increased consumer awareness suggested as an alternative through the Small Business Review process, could this be sufficient to protect consumers’ interests? The U.S. Supreme Court put faith in the efficacy of guaranteed minimum recovery clauses, noting in Concepcion 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.” The CFPB’s Study did assess whether arbitration agreements included contingent minimum recovery provisions, finding that they occur in 28.6% or less of agreements in markets other than student loans. Therefore, might requiring such a provision in arbitration agreements that include class waivers moving forward have a marked impact on the recovery that consumers see without subjecting providers to the costs and risks associated with class litigation?
The CFPB’s Proposed Rule is based on its “preliminary” conclusions and assessments – many more than we could highlight in this post. The full Proposed Rule is available here. The opportunity to influence the ultimate fate of the consumer finance class waiver may be narrow; nonetheless, it is open until August 22nd. Please feel free to contact us if you have questions regarding the CFPB proposal and how it may affect your business.