The Consumer Financial Protection Bureau (“CFPB”) on July 10 issued its long-anticipated arbitration rule, with few surprises.
Recall that Dodd-Frank section 1028 directs the CFPB to study the use of PDAAs in contracts for consumer financial products and services and later report to Congress, and to ban, limit or impose conditions on their use if such action “is in the public interest and for the protection of consumers.” After issuing the required Report to Congress in March 2015, the CFPB in May 2016 published a proposed rule. The CFPB thereafter analyzed a staggering 113,617 comments contained in 6,449 comment letters, and issued on July 10th a 775-page Final Rule (12 CFR Part 1040) that will: 1) permit PDAAs; 2) ban class action waivers in predispute arbitration agreements in contracts for consumer financial goods and services; and 3) require regulated financial institutions to file customer claims and awards data with the CFPB, which the Bureau intends to publish in redacted form. As expected, the Final Rule carves out securities arbitration.
PDAAs are OK, but Class Action Waivers Are Banned
As described in a Press Release: “By so doing, the rule also deters companies from violating the law. When companies know they are more likely to be held accountable by consumers for any misconduct, they are less likely to engage in unlawful practices that can cause harm. Further, public attention on the practices of one company can more broadly influence their business practices and those of other companies. Under the rule, companies can still include arbitration clauses in their contracts. But companies subject to the rule may not use arbitration clauses to stop consumers from being part of a group action.” The rule also lays out acceptable language companies will need to use if they include an arbitration clause. Specifically, § 1040.4(a)(2) requires that the PDAA – including any delegation clause – state: “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.”
Record Submission Requirement
As described in the Release, “the rule also makes the individual arbitration process more transparent by requiring companies to submit to the CFPB certain records, including initial claims and counterclaims, answers to these claims and counterclaims, and awards issued in arbitration. The Bureau will collect correspondence companies receive from arbitration administrators regarding a company’s non-payment of arbitration fees and its failure to follow the arbitrator’s fairness standards. Gathering these materials will enable the CFPB to better understand and monitor arbitration, including whether the process itself is fair. The materials must be submitted with appropriate redactions of personal information. The Bureau intends to publish these redacted materials on its website beginning in July 2019.” The CFPB also notes that FINRA awards are made public without redaction.
SRO Arbitration Not Covered
The Final Rule generally covers “providers of certain consumer financial products and services in the core consumer financial markets of lending money, storing money, and moving or exchanging money....” but specifically exempts “entities regulated by the Securities and Exchange Commission or the Commodity Futures Trading Commission, which have their own arbitration rules; broker dealers and investment advisers overseen by state regulators; and state and tribal governments that have sovereign immunity from private lawsuits.” Also exempted from coverage are employers when offering consumer financial products or services for employees as an employee benefit.
A Bumpy Road Ahead
The Final Rule becomes effective 60 days after it is published in the Federal Register, and will be prospective, applying to contracts entered into more than 180 days after that date. But the road to rule implementation promises to be bumpy at best:
- First, we expect a vigorous industry legal challenge to the rule. Already the U.S. Chamber of Commerce said in a July 10 Press Release that it “will consider every approach to address our concerns….” Recall that the Chamber was one of the parties that sued to enjoin implementation of the DOL’s fiduciary rule (see SAA 2017-13).
- Also, Republicans have already started the disapproval and nullification process under the Congressional Review Act, 5 USC §§ 801-808 (“CRA”). Recall that in March, President Trump signed into law a bill nullifying an Obama-era Executive Order and regulation barring companies with federal contracts valued at over $1 million from mandating arbitration of Title VII or sexual harassment or assault claims (see SAA 2017-13). Under the CRA, nullification is retroactive, and a regulation in “substantially the same form” cannot be promulgated thereafter unless specifically authorized by Congress. House Financial Services Committee Chairman Jeb Hensarling (R-TX) issued a Statement July 10 sharply criticizing the Final Rule: “This bureaucratic rule will harm American consumers but thrill class action trial attorneys…. As a matter of principle, policy, and process, this anti-consumer rule should be thoroughly rejected by Congress under the Congressional Review Act.” And, Sen. Tom Cotton (R-AR) issued a Statement on July 11 announcing that he had started the CRA review process. As of press time, the Resolution of Disapproval had not been formally introduced.
- As reported elsewhere in this Alert, CFPB Director Cordray may face a contempt of Congress citation for publishing the final rule before responding to a House Financial Services Committee subpoena.
- As reported elsewhere in this Alert, section 930(a) of the draft Fiscal Year 2018 spending bill states: “Section 1028 of the Consumer Financial Protection Act of 2010 (12 U.S.C. 5518) is hereby repealed.”
- As we reported in SAAs 2017-25, -23 & -22, on June 8th the House of Representatives by a 233–186 party-line vote approved the Financial CHOICE Act (H.R. 10), which would repeal and replace Dodd-Frank, and would eliminate the authority granted to both the CFPB and SEC to limit or eliminate predispute arbitration agreements, or set conditions for their use.
As we said, “bumpy at best.”
(ed: *No surprises here. **If the Final Rule is permitted to go into effect, it will mirror in major respects the FINRA arbitration system, complete with a class action waiver ban, required language in PDAAs, fairness standards, and published Awards. FINRA’s arbitration system is cited with favor several times in the Final Regulation. ***The CFPB Website has a separate page, https://www.consumerfinance.gov/arbitration-rule/, devoted to the new rule, complete with a six-page Executive Summary and a short video. ****Liz Kramer offers a nice analysis in her July 10 Arbitration Nation blog.) (SAC Ref. No. 2017-26-01)
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