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New CFPB Rule Prohibits Class Action Waivers

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:

  1. 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
  2. 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).)

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Speculation Abounds on CFPB’s Next Step on Arbitration Clauses

You might have seen it this March in the New York Times: an article about American troops having their vehicles repossessed by auto lenders while on active duty, and the troops being unable to fight repossession in court because of mandatory arbitration clauses  in their lending contracts.

The poignant story on vets and car repossession is just one piece in the ongoing discussion about what actions the CFPB will take regarding provisions in consumer contracts limiting the consumer to arbitration in the event of a future dispute, referred to as “pre-dispute arbitration clauses.” Under Section 1028 of Dodd-Frank, the CFPB was required to conduct a study on use of arbitration clauses in connection with offering consumer financial products and services. If, through study, the CFPB finds that prohibiting or limiting the clauses in agreements between market participants it regulates and consumers “is in the public interest and for the protection of consumers,” it can impose regulations to that effect. Further, Section 1414 of Dodd-Frank already prohibits pre-dispute arbitration clauses in mortgage contracts.

With the CFPB recently releasing its final, 728-page arbitration study finding that arbitration agreements “limit relief for consumers,” indications are that the CFPB will conduct some rulemaking to curtail, or at least significantly limit, them in the consumer financial product market, and likely over industry objections. The study, which began in April 2012 and was followed by a preliminary report released in December 2013 before the final report was published, involved analysis of data from consumer contracts and the courts regarding the resolution of consumer disputes.

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11th Circuit Upholds Deposit Agreement Arbitration Provision

The United States Court of Appeals for the 11th Circuit rendered an important decision on March 5, 2012, addressing the enforceability of binding arbitration provisions in consumer deposit agreements. The case began when Lawrence and Pamela Hough brought suit against Regions Bank for allegedly violating federal and state law by collecting overdraft charges under its deposit agreement. The deposit agreement contained an arbitration provision and Regions moved to compel arbitration. The federal district court hearing the case denied the motion to compel on the ground that the arbitration clause was substantively unconscionable because it contained a class action waiver. Regions appealed the decision to the 11th Circuit Court of Appeals and the appellate court vacated the ruling and sent it back to the trial court in light of a recent United States Supreme Court which held that the Federal Arbitration Act preempted a California’s judicial rule regarding the unconscionability of class arbitration waivers in consumer contracts. This time around the district court found other reasons to deny Regions’ motion to compel arbitration, holding that the arbitration clause was substantively unconscionable under Georgia law because it believed that a provision granting Regions the unilateral right to recover its expenses for arbitration allocated disproportionately to the Houghs the risks of error and loss inherent in dispute resolution.

The lower court decision was again appealed to the 11th Circuit. On appeal the Houghs argued that while the arbitration provision in the deposit agreement capped the Houghs’ costs for the arbitration proceeding at $125, another paragraph required the Houghs to reimburse Regions as a prevailing party for its costs of arbitration. The arbitration agreement permitted Regions, if it was “the prevailing party,” to obtain “reimburse[ment] for [its] costs and expenses (including reasonable attorney’s fees) … [in] arbitration” and to collect that amount by “charg[ing] [the Houghs’] account.” The district court concluded that the reimbursement provision was unconscionable because Regions had an exclusive right of setoff. The 11th Circuit disagreed, and noted that under Georgia law an arbitration provision is not unconscionable because it lacks mutuality of remedy. The district court also ruled that the arbitration clause had a degree of procedural unconscionability, but the 11th Circuit found that to be unconscionable under Georgia law, a contract must be so one-sided that “no sane man not acting under a delusion would make and that no honest man would participate in the transaction.” The court found that the arbitration clause in the Houghs’ agreement fell well short of that standard. Although the district court found it troubling that the clause was presented to the Houghs “on a take-it-or-leave-it basis with no opt-out provision,” the 11th Circuit noted that under Georgia law, an adhesion contract (i.e., one that is not truly negotiated between the parties such as a deposit agreement or a credit card agreement) is not per se unconscionable.

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