A Step in the Right Direction: The Proposed CFPB Rule Changes

June 23, 2016

12696032183_a92fbf5998_oLast month, the Consumer Financial Protection Bureau (CFPB) proposed rulemaking that would prohibit banks and certain other companies from including arbitration clauses in new contracts that prevent consumers of financial services from filing or taking part in class action litigation. The CFPB’s May 5 press release describes the inherent problem with arbitration clauses containing class action waivers in consumer agreements: “With this contract gotcha, companies can sidestep the legal system, avoid accountability, and continue to pursue profitable practices that may violate the law and harm countless consumers.”

Through these proposed rule changes, the CFPB seeks to regulate what it calls the “core” consumer financial markets—lending money, storing money, and moving or exchanging money. Subject to certain exceptions, the proposed regulation would reach, among other things: consumer banking products (e.g. credit cards and deposit accounts); consumer lending such as school, auto, and payday loans; debt collection and relief services; credit reporting and monitoring services; money transfers; payment processors and check-cashing; and mobile wireless carrier third-party billings services. The effects of the CFPB’s proposal, therefore, would be significant.  In fact, the CFPB estimates that it would prevent approximately 53,000 providers from continuing to completely avoid class action litigation through the use of arbitration clauses in their contracts for consumer financial services.

The CFPB’s proposed rule changes grew out of a March 2015 arbitration study—analyzing a number of topics relating to the prevalence and effect of consumer arbitration agreements—which the CFPB itself called “the most comprehensive analysis to date of the arbitration content of contracts for consumer financial products and services.” That 728-page study found, among other things, that hundreds of millions of consumers use financial products or services that are subject to arbitration agreements, including: credit cards (53% of outstanding credit card loans are subject to arbitration); checking accounts (58.8% of insured deposits); general purpose reloadable (GPR) prepaid-card contracts (92.3%); and storefront payday loan contracts (83.7%). And between 85% to 100% of arbitration agreements reviewed precluded arbitration of claims on a class basis.

The Proposed Regulation:

The proposed regulation has two main prongs: (1) class action provisions; and (2) provisions relating to the submission of arbitration documents to the CFPB.

1. Class Action Provisions

With regard to the class action provisions, the CFPB proposes to bar a large variety of companies from relying in any way on arbitration agreements to prevent a consumer from filing a class action or participating in a class action as an absent class member. The proposed regulation would also require providers 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.”

As the CFPB explained, the intended purpose of mandatory arbitration provisions is to allow companies to force arbitration as a way of avoiding class action litigation. But according to the CFPB, class actions are a necessary tool for enforcing consumer rights—especially in low-dollar-value cases—and individual claims are “insufficient as the sole mechanism available to consumers to enforce contracts and the laws applicable to consumer financial products and services.” In support of this statement, the CFPB cited its conservative estimate that, in a recent five-year period, at least 160 million consumers were eligible for relief in consumer financial class action settlements, which benefited consumers in an amount of $2.7 billion. Comparatively, the CFPB found that “only around 2 percent of consumers with credit cards who were surveyed would consult an attorney or otherwise pursue legal action as a means of resolving a small-dollar dispute.”

And despite the efforts of some to paint consumer class actions as tag-along suits that are merely derivative of government enforcement suits, the CFPB determined that in 68% of putative consumer class actions there was no overlapping enforcement action; and in those cases where there was overlap, consumer class actions preceded public enforcement actions two thirds of the time. The CFPB also pointed out that the Dodd-Frank Act banned arbitration clauses in residential mortgage contracts, and since 1992, the Financial Industry Regulatory Authority (FINRA) has required broker/dealers to include language in contracts disclaiming the application of the arbitration agreement to class actions filed in court.

Finally, while the CFPB acknowledges that this regulation may cost companies who currently invoke arbitration clauses to avoid class actions more, those costs were well-worth enhanced private enforcement of contracts and consumer protection law—and any increased costs would not result in a “noticeable impact on access to consumer financial products or services.”

2. Disclosure of Arbitration Information to the CFPB

Under the proposed regulation, banks and other covered companies could continue to insist on resolving individual (non-class action) claims through arbitration, but companies would now be required to submit arbitration records to the CFPB. More specifically, the CFPB proposal requires companies using arbitration agreements to submit, within 60 days of filing or receipt, records regarding arbitrations concerning covered products or services. Those disclosures would include information about claims or counterclaims, the arbitration agreement itself, judgments or awards (if any) issued by the arbitrator, and certain information regarding a company’s non-payment of arbitral fees and the arbitration agreement’s non-compliance with arbitral principles or rules. The CFPB may decide to publish this arbitration information on its website in some form to increase the transparency of the arbitration process. The CFPB also intends to use the information to determine whether the arbitral proceedings raise consumer protection concerns, and to monitor for unfair, deceptive, or abusive practices that harm consumers (e.g. “routinely not paying arbitration fees”).

The proposed regulation is currently subject to the 90-day comment period. If finalized, the regulation would apply prospectively to contracts entered into 180 days after the effective date of the regulation (30 days from publication of a final regulation in the Federal Register).

At Wexler Wallace, we believe that the CFPB’s proposed arbitration regulation represents a major—and welcomed—step toward ensuring that consumers of financial products receive their day in court.  But because of the CFPB’s limited scope, consumers will continue to be subject to unfair arbitration clauses for things like cable and cell phone contracts and click-wrap agreements for online services.  Arbitration clauses banning participation in class action suits appear in consumer contracts for practically all products and services, and those clauses are routinely enforced in federal courts across the country.  Every year, Senator Al Franken introduces the Arbitration Fairness Act, which would make any agreement requiring the arbitration of an employment, consumer, antitrust, or civil rights dispute void and unenforceable.  Congress should recognize the importance that private enforcement plays in ensuring that consumers receive these, and numerous other, necessary protections by finally passing a law of its own.

Photo Credit: Sean MacEntee

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