The Consumer Finance Protection Bureau drops the other shoe

May 11, 2016

Class Action Alert

Author(s): Christopher M. Mason, Dan Deane

On May 5, 2016, the Consumer Finance Protection Bureau, which had previously submitted to Congress a 700+ page study critical of pre-dispute consumer arbitration clauses, announced its expected rules for restricting such clauses. The rules would, among other things, prohibit the use of such clauses in consumer finance and services contracts to preclude class action claims. This alert discusses what businesses should be aware of as the rulemaking process continues.

On Thursday, May 5, 2016, the federal Consumer Financial Protection Bureau (the “CFPB” or the “Bureau”) announced proposed new rules prohibiting class action waivers through mandatory pre-dispute arbitration clauses for a wide range of consumer financial products and services. Such waivers typically require consumers to submit all disputes to individual arbitration, with the effect of surrendering their right to assert claims on a class or collective basis, whether in arbitration or in court. The proposed rules would prohibit the use of any such pre-dispute arbitration clauses to preclude a class action claim in court. The rules would apply to contracts for consumer financial products or services such as credit cards, bank accounts, certain auto loans, payday loans, private student loans and installment loans.

The proposed rules do not come as a surprise. The CFPB announced its consideration of formal rulemaking on the subject back in October 2015,[1] and its congressionally mandated study on arbitration was highly negative of such pre-dispute waivers. But potentially affected businesses still need to pay close attention to the new proposal and the continuing rulemaking process.

The CFPB declared that its “proposal is designed to protect consumers’ right to pursue justice and relief and deter companies from violating the law.”[2] According to the Bureau, in recent years many industry players have inserted mandatory arbitration clauses into consumer financial products and services contracts. The CFPB believes that the individual arbitration process required by such clauses is not an adequate dispute resolution device, at least in the context of consumer finance, and that it leads to unjust results for consumers. According to CFPB Director Richard Cordray, “[s]igning up for a credit card or opening a bank account can often mean signing away your right to take the company to court if things go wrong. 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.”[3]

While this message may sound unabashedly populist, legally, the CFPB proposal is simply an effort to establish a clear exception to the Federal Arbitration Act (the “FAA”), 9 U.S.C. § 1 et seq. The FAA currently mandates that all agreements to arbitrate, even those that arise within a consumer contract, must be enforced by courts in accordance with their terms. See, e.g., id. § 4. Industry stakeholders have argued to the CFPB that its proposed rules conflict with the FAA’s basic “freedom of contract” principles, which have been repeatedly re-affirmed by the United States Supreme Court, even with respect to consumer contracts, in cases such as AT&T Mobility v. Concepcion, 131 S. Ct. 1740 (2011).[4] Some commentators have also argued that such anti-arbitration rules would allow plaintiffs (or their class action lawyers) to leverage the threat of a costly-to-defend class action in order to obtain windfall recoveries.[5] While the CFPB attempts to blunt such criticisms, it does concede that there will be costs to be borne by businesses affected by its proposed rules. Ultimately, however, the Bureau asserts that any such costs will be outweighed by the benefit realized by consumers, even for arbitration processes that might subsidize consumer participation. Cf., e.g., Myriam Gilles and Gary Friedman, After Class: Aggregate Litigation in the Wake of “AT&T Mobility v Concepcion, 79 U. Chi. L. Rev. 623, 644-45 (2012) (citing Christopher M. Mason and Benjamin R. Dwyer, U.S. Supreme Court upholds class action waivers in consumer contracts: AT&T Mobility v. Concepcion (Nixon Peabody LLP 2011) (recommending provision of subsidized procedures)).

The reason the Bureau has room to make such assertions despite the Supreme Court’s recent decisions is that, in the aftermath of the financial crisis and the enactment of the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”), Congress gave the Bureau certain express authority to scrutinize arbitration of consumer finance issues. In Section 1028(a) of the Dodd-Frank Act, for example, Congress instructed the CFPB “to study ‘the use of agreements providing for arbitration of any future dispute . . . in connection with the offering or providing of consumer financial products or services,’ and to provide a report to Congress on the same topic.”[6] The Bureau responded in March 2015 with a 728-page Arbitration Study. While asserting that the study was intended to be empirical, not evaluative, the CFPB’s conclusions were clearly not favorable to supporters of arbitration.

Having conducted its study, the Bureau is now authorized under Section 1028(b) of the Dodd-Frank Act to promulgate regulations restricting or prohibiting the use of arbitration agreements to the extent that it concludes that such rules are in the public interest. Last Thursday’s rulemaking proposal is the CFPB’s effort to do just that. Having issued its proposed rules, the CFPB is now soliciting public comment.

In general, the proposed rules have two objectives. The first is to give consumers collective power in court by barring the use of mandatory pre-dispute arbitration provisions to preclude consumers from bringing claims in the aggregate in court. See Section 1040.4(a) of the proposed rules. The second is to increase transparency and public accountability (and probably diminish the attractiveness of arbitration by reducing its privacy) by requiring providers that use pre-dispute arbitration agreements to submit certain records to the CFPB relating to their arbitral proceedings. See Section 1040.4(b) of the proposed rule. The CFPB states that it will use these reporting requirements to monitor arbitration proceedings and to ensure that cases that do go to arbitration are conducted appropriately. The Bureau also plans to publish some of these materials, with “appropriate” redactions or aggregation, to provide greater transparency into the arbitration of consumer disputes.

As this indicates, although the CFPB’s proposed rules would ban class action waivers, they would not ban arbitration clauses altogether. The Bureau “is neither proposing to restrict the use of arbitration agreements” with respect to individuals, “nor proposing to prescribe specific methods or standards for adjudicating individual arbitrations.”[7] Thus, while a plaintiff whose contract has an arbitration clause would be able to file or join in a class action notwithstanding that clause, if the court hearing the case were to deny class certification, the plaintiff would be bound to proceed with arbitration.

While the proposed rules will have widespread effects, many consumer-facing businesses will not be affected by them. The CFPB’s authority is limited to “consumer financial product[s] or service[s],” and does not even extend to all such products and services. Thus, insurance providers regulated by state insurance regulators; persons regulated by the SEC or a state securities commission (to the extent of their regulated activities); accountants and tax preparers performing “customary and usual” accounting activities; licensed attorneys; and merchants, retailers and sellers of nonfinancial products fall outside the new rules.

For businesses that are affected by the proposed rules, comments on them may be submitted to the CFPB any time within 90 days after their publication in the Federal Register. (This has not yet occurred, but will very soon.) The effective date for the eventual final version of the rules will be 30 days after that version is published in the Federal Register. The final rules will then apply “only to agreements entered into after the end of [a] 180-day period beginning on the regulations’ effective date.” In other words, the CFPB’s restrictions will only apply to contracts entered into seven months (211 days) after the final version of the rules is published.

While it appears unlikely to us that the further rulemaking process will result in any major changes to the proposed rules, affected businesses may nonetheless have reason to comment (for example, if there are practical conflicts for providers of multiple products or services facing a single claim covering multiple products or services). In addition, while the proposed rules clearly disfavor arbitration, they do not address all alternative dispute resolution that may be advantageous to affected businesses.

  1. See Scott O’Connell, Christopher M. Mason, Joseph Leghorn, & Dan Deane, Consumer Financial Protection Bureau puts arbitration in the cross-hairs, Class Action Alert *1 (Nixon Peabody LLP 2015), available here. [Back to reference]
  2. CFPB Proposes Prohibiting Mandatory Arbitration Clauses that Deny Groups of Consumers their Day in Court, Consumer Financial Protection Bureau, available here (last visited May 10, 2016). [Back to reference]
  3. Id. [Back to reference]
  4. See also, e.g., Charles M. Dyke, Christopher M. Mason & Dan Deane, Supreme Court agrees to decide the third case in five years involving enforcement of class-arbitration waivers in FAA-governed arbitration agreements, Class Action Alert *2 (Nixon Peabody LLP 2015), available here; W. Scott O’Connell, Christopher M. Mason, W. Daniel Deane, Morgan C. Nighan & Paige L. Berges, SCOTUS upholds class action waiver again: Amex III significantly limits the “effective vindication” of statutory rights doctrine, Class Action Alert *4 (Nixon Peabody LLP 2013), available here; Christopher M. Mason, Carolyn G. Nussbaum & Paige L. Berges, U.S. Supreme Court tells Oklahoma state court that state law does not trump the Federal Arbitration Act: Nitro-Lift Technologies, L.L.C. v. Howard, Class Action Alert *3 (Nixon Peabody LLP 2012), available here. [Back to reference]
  5. Supplemental Information to proposed rule (to be codified 40 C.F.R. pt. 1040) *at 134, available here[hereinafter Supplemental Information to Proposed Rules]. [Back to reference]
  6. Arbitration Study: Report to Congress, Pursuant to Dodd-Frank Wall Street Reform and Consumer Protection Act § 1028(a), Consumer Financial Protection Bureau, available here. [Back to reference]
  7. Supplemental Information to Proposed Rules, supra note 4, at 140. [Back to reference]

The foregoing has been prepared for the general information of clients and friends of the firm. It is not meant to provide legal advice with respect to any specific matter and should not be acted upon without professional counsel. If you have any questions or require any further information regarding these or other related matters, please contact your regular Nixon Peabody LLP representative. This material may be considered advertising under certain rules of professional conduct.

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