The comment period for the Consumer Financial Protection Bureau’s (“CFPB”) proposed rule banning class action waivers closed on August 22nd with a massive number of comments.
As we have reported many times, the CFPB on May 5th released a proposed rule that would: 1) ban class action waivers (“CAWs”) in predispute arbitration agreements (“PDAAs”) in contracts for consumer financial goods and services; and 2) require regulated financial institutions to file customer claims and awards data with the CFPB, which the Bureau may choose to publish. A staggering 12,809 comments contained in 4,205 comment letters (ed: many letters had multiple signatures), were filed by the close of the comment period, with more than 1,000 letters received on August 22nd alone. We will not attempt here a comprehensive analysis; that’s a daunting task we leave to the folks at the CFPB. Suffice it to say there were many passionate views expressed on both sides of the debate. We present below a summary of some key institutional comments, including an expression of concern by a fellow federal regulator.
Congressional Democrats: In separate August 3rd letters, over 100 Democratic members of Congress express strong support for the proposed rule. The 38 Senators say in their letter: “As the CFPB has demonstrated with its comprehensive study, forced arbitration shields corporations from accountability for abusive, anti-consumer practices, which only encourages unscrupulous business practices by allowing violations of the law to go unchecked. This comes at the expense of consumers, small businesses, and -- just as importantly – law-abiding businesses…. We, the undersigned, strongly support the CFPB's proposal and urge the Bureau to move forward quickly to finalize this proposed rule to protect American consumers.” The 65 Representatives express similar views in their comment letter.
Attorneys General: Nineteen state attorneys’ general in an August 11th letter also support the proposed rule. The AGs view the ban on class action waivers as a good first step, but suggest that a total ban on predispute arbitration agreements would be better. The AGs also suggest a change: “To the extent the Proposed Rules would not also prohibit clauses that have the same effect as class action waiver provisions, such as clauses that prohibit a consumer from serving as a lead plaintiff or class representative, we recommend that the Bureau consider incorporating this additional clarification.”
Joint Letter from Consumer Advocates: An August 22nd letter submitted by more than 280 national, state, and local consumer, civil rights, labor, community, and non-profit organizations, including major players like the Consumer Federation of America, “strongly supports the Consumer Financial Protection Bureau (CFPB)’s proposed rule to limit pre-dispute binding mandatory (or forced) arbitration clauses in consumer finance contracts. The CFPB rule, which will restore consumers’ ability to band together in court to pursue claims, is a significant step forward in the ongoing fight to curb predatory practices in consumer financial products and services and to make these markets fairer and safer.”
AARP Government Affairs: The August 22nd letter supports the proposed rule but suggests “additional action is needed to ensure the intended protection is sufficiently comprehensive..." Among the recommended changes is expanding the rule’s coverage to “additional credit related providers, including credit reporting agencies, debt settlement providers, and credit repair providers.”
Public Citizen: In an August 22nd letter and Press Release, the group “urge[s] the Bureau to move forward with the proposed rule and prohibit providers of consumer financial services and products from using forced arbitration clauses to block consumers from participating in class actions in public courts and in arbitration. We further urge the Bureau to adopt a bright-line rule banning forced arbitration by consumer financial service providers outright, an action that is consistent with the CFPB’s mission and is entirely supported by the Bureau’s Study.”
PIABA: In its August 22nd letter, PIABA notes that many aspects of the proposed regulation track FINRA’s existing rules: “As the CFPB has pointed out, class action waivers have been prohibited in securities arbitrations by FINRA for several decades. Additionally, several of the records the CFPB proposes to have industry participants disclose have been disclosed in the securities arbitration forum for many years.” It also focuses on RIAs, noting that as of now many are not governed by FINRA’s rules. “Presently, no such rules exist which governs the conduct of SEC-registered investment advisers. Accordingly, investment advisers should be covered by the CFPB’s proposed rule to the extent they are offering products and services subject to CFPB oversight.” The Association also urges the CFPB to address mandatory arbitration.
Law Profs: One of the first comment letters was sent May 23rd by 210 law professors “who teach and write in such disciplines as civil procedure, contracts, consumer law, financial services law, and dispute resolution.” The academics support the proposed rule for three reasons: “(1) class actions can serve as a powerful tool to help consumers of financial services and products vindicate their rights under federal and state law; (2) individual arbitrations are not and realistically will never be a sufficient substitute for consumer class actions; and (3) our legal system relies heavily on private enforcement of consumer rights through class actions, as public enforcement may face significant resource restraints.” The letter cites with favor the FINRA rules, which permit PDAAs but ban CAWs.
Others: Other supportive letters were filed by: Americans for Financial Reform, the Center for Justice and Democracy, the Leadership Council on Civil and Human Rights, the Pew Charitable Trusts, and Ex-FINRA Director of Arbitration George Friedman, whose May 26th letter expresses a view stated by several commenters: the proposed rules takes a sound approach mirroring that of FINRA: He also focused on an aspect of the proposed rule that has not garnered much attention: “CFPB is correct in intending to regulate the content of arbitration clauses in consumer financial contracts. FINRA Rule 2268 offers an excellent model.”
U.S. Chamber of Commerce: A 100+ page August 22nd letter, submitted by the Chamber’s Center for Capital Markets Competitiveness and Institute for Legal Reform, dissects the proposed rule and argues why it should not be adopted. “Instead of proceeding with its misguided proposal, the Bureau should re-open its arbitration study process, consider ways to improve its data collection and analysis, and then, in the sunlight, hold a public discussion on whether a rulemaking is needed. If a transparent study process identifies ways in which arbitration could be improved for the benefit of consumers, the Bureau should proceed cooperatively with stakeholders to improve arbitration. But the Bureau should abandon its present proposal to double down on our broken class action system. Even if arbitration were in need of improvement, no improvement is achieved by putting consumer welfare in the hands of the class action trial bar.”
American Bankers Association, Consumer Bankers Association, and the Financial Services Roundtable: The joint August 22nd letter urges that “the proposed rule should not be made final, as proposed, because it is not in the public interest or for the protection of consumers, and it is not consistent with the Bureau’s March 2015 empirical Study of consumer arbitration. It should be withdrawn and not re-proposed unless it is consistent with the statutory parameters.”
SIFMA: In its July 1st letter, SIFMA challenges any attempt to apply the proposed rule to SEC-regulated entities, suggesting that CFPB await SEC action. “In short, we believe that the CFPB should defer regulation of arbitration generally, and arbitration clauses specifically, for SEC-regulated entities to the SEC. Thus, the proposed exemption for broker-dealers in the Proposal, and any prospective exemption for investment advisers, are unnecessary.”
Credit Union National Association: CUNA submitted an August 18th letter opposing the proposed rule as it would apply to credit unions. An August 19th Press Release summarizes the group’s opposition: “The letter primarily stresses that the proposed changes to arbitration process are inappropriate for member-owned, not-for-profit financial cooperatives.” CUNA also opposes the data gathering aspect of the rule, stating: “While such requirements would undoubtedly be helpful for attorneys seeking to put frivolous class action lawsuits together, we do not believe there is a significant value for credit union members.”
National Association of Insurance Commissioners: NAIC asserts in its August 5th comment letter that the rule goes too far in trying to regulate life insurance policy loans. Say the Commissioners: “Specifically, as the regulators of life insurance providers and products, we are concerned with the proposed rule’s application to extensions of credit by providers of whole life insurance policies…. Policy loans are not products for which authorities were transferred to the bureau. Federal restrictions imposed by the bureau on arbitration agreements related to policy loans would affect the authority of the State insurance regulator, and are thus beyond the appropriate jurisdiction of the bureau.”
Concern Expressed by CFTC
Commodity Futures Trading Commission: Staff’s August 22nd letter raises concerns about the Commission’s exclusive jurisdiction under the Commodity Exchange Act, as provided in Dodd-Frank, Title X, and “respectfully requests that any final CFPB rule on arbitration agreements does not apply to any CFTC registrant with regard to such registrant’s CFTC-regulated activities.”
(ed: *We don’t envy the CFPB staff in analyzing and responding to this massive number of comments! **While RIAs are not often the subject of a class action (hedge fund and mutual fund advisers are potential targets), they could be. CFPB rules don’t cover RIAs and SEC is probably glad that FINRA has a rule against CAWs. Query: If CFPB acts against CAWs for financial institutions and FINRA has already acted on BDs, should not SEC consider rulemaking against CAWs in RIA agreements under Dodd-Frank section 921? ***The final comments tallies may be a bit higher; CFPB was still posting comments as we went to press. ****We will track this rulemaking and keep our readers and followers informed.) (SAC Ref. No. 2016-32-01)
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