July 17, 2017
Authored by: Jed White, Alfred Shaumyan and Douglas Thompson
On July 10, 2017, the Consumer Financial Protection Bureau (CFPB) released a rule prohibiting class action waivers in certain pre-dispute arbitration agreements. The rule drastically impacts arbitration clauses currently used by many financial products and services providers in their consumer agreements.
The rule has three main components. First, the rule prohibits providers from using a pre-dispute arbitration agreement to prevent consumers from bringing or participating in class actions in federal and state court. Second, the rule requires that arbitration agreements inform consumers that their right to bring a class action is unrestricted. Third, the rule requires providers to supply certain records and data relating to arbitral proceedings to the CFPB.
The rule is effective 60 days after publication in the Federal Register and generally applies to agreements entered into more than 180 days after the effective date. Congress, however, can use the Congressional Review Act to prevent the rule from taking effect.
What is the effect of the rule?
The new rule prohibits pre-dispute arbitration agreements for certain consumer financial products or services that block consumer class actions in federal and state courts. The rule accomplishes this in two ways:
- providers cannot rely on any pre-dispute arbitration agreement entered after the compliance date that restricts or eliminates a consumer’s right to a class action in state or federal court (§ 1040.4(a)(1)); and
- providers must include certain specified plain language in arbitration agreements that explicitly disclaims the arbitration agreements applicability to class actions (§ 1040.4(a)(2)).
The rule also requires providers to submit certain records relating to arbitral proceedings to the bureau, including copies of pleadings, the pre-dispute arbitration agreement, and the judgment. (§ 1040(b).)
Who does the rule apply to?
Because the CFPB only has jurisdiction over consumer financial products and services, the rule is limited to consumer financial products and services. Section 1040.3(a) details the products and services covered by the proposed rule. Generally the activities covered involve consumer lending, servicing consumer debts, storing money, and moving or exchanging money.1 Consumer lending and consumer credit generally means credit extended to a natural person primarily for personal, family, or household purposes. 12 C.F.R. 1002.2(h).
Under § 1040.3(b), the rule does not apply to certain providers and transactions where the CFPB has indicated it believes consumers are already protected or do not otherwise need protection from the rule. For example, § 1040.3(b)(1) covers broker-dealers to the extent they are otherwise covered by rules prohibiting the use of pre-dispute arbitration agreements in class litigation. Similarly, 1040.3(b)(3) exempts providers who provide consumer financial services to no more than 25 consumers in the current calendar year and no more than 25 consumers in the previous year. The CFPB has indicated it believes that 25 or fewer consumers is unlikely to meet the “numerosity” requirement for class actions in the first place, and further the infrequent use of such services lowers the chance of even an individual claim.
Governments and their affiliates are also excluded by § 1040.3(b)(2). The CFPB has indicated it believes that the democratic process generally will operate to protect consumers from unfair government conduct with respect to consumer financial products and services.
When does the rule go into effect?
The rule is effective 60 days after publication in the Federal Register. And the rule generally applies to agreements entered into more than 180 days after the effective date. (§ 1040.5(a).) There is an exception to the compliance date for general-purpose reloadable prepaid cards packaged with a pre-dispute arbitration agreement before the compliance date if certain additional requirements are also met. (§ 1040.5(b).)
Should I start revising my pre-dispute arbitration agreements?
Congress can prevent the rule from taking effect under the Congressional Review Act. This requires the House and Senate to pass a resolution – with a simple majority in each chamber – and the President’s signature. Congress generally has 60 days to pass the resolution after the rule is published in the Federal Register. 5 U.S.C. § 801(3). There has already been some indication that Congress intends to use the Congressional Review Act to prevent the new rule from taking effect. If a provider can revise covered agreements within 180 days of the effective date, it might make sense to wait until the rule becomes effective before revising the agreements.
1. Examples of activities covered by the rule include: most types of consumer lending (both secured and unsecured and issuing credit cards); activities related to that consumer lending (debt servicing, credit monitoring, debt relief, debt collection services, and purchasing or acquiring of consumer loans); extending and brokering automobile leases that are consumer financial products or services. The proposed rule also covers providing deposit accounts and providing consumer services related to the movement or conversion of money (certain payment processing activities, transmitting and exchanging funds, cashing checks, etc.).