On July 10, 2017, the Consumer Financial Protection Bureau (CFPB) issued its final arbitration rule prohibiting covered providers of certain “consumer financial products or services”1 from using a pre-dispute arbitration agreement to prevent consumer class actions. The rule also requires these entities to insert language reflecting this limitation into their arbitration agreements. In addition, the final rule stipulates that providers that use pre-dispute arbitration agreements must submit certain records relating to arbitral and court proceedings to the CFPB. The CFPB intends to use the information to monitor these proceedings to “determine whether there are developments that raise consumer protection concerns that may warrant further Bureau action.” The CFPB will publish collected materials on its website with appropriate redactions to provide greater transparency into consumer arbitration.
Section 1028 of the Dodd-Frank Act authorized the CFPB to regulate (and even prohibit) arbitration of disputes over consumer financial products or services should its study of consumer financial services arbitration (mandated under the Act) support such a conclusion. The Bureau’s final rule is based on its findings ― consistent with its 2015 study ― that pre-dispute arbitration agreements are being widely used to preclude consumers from seeking class-wide relief for legal violations, and that consumers rarely file individual lawsuits or arbitration claims to secure such relief.
The final rule will take effect 60 days after publication in the Federal Register, but under Section 1028(d), it will apply only to covered contracts “entered into” more than 180 days after the rule’s effective date. Companies that do not currently include an arbitration clause with a class action waiver in their agreements should seriously consider inserting one within the 240-day period before the rule becomes effective to take advantage of favorable treatment under current law: the U.S. Supreme Court’s decision in AT&T Mobility v. Concepcion preempts state laws that decline to enforce these waivers. Companies should seek guidance from knowledgeable counsel, as arbitration provisions must be carefully drafted to withstand scrutiny by the courts.
The CFPB’s views on arbitration have generated considerable controversy. Several possible scenarios exist under which the final rule may not take effect. Congress could nullify the rule under the Congressional Review Act, which would prevent a similar rule from being issued in the future without congressional approval. Moreover, there may be lawsuits challenging the rule on the basis that the CFPB’s own study suffers from procedural defects and, in any case, does not support its stated findings. Finally, the Financial CHOICE Act passed by the House removes the CFPB’s authority to regulate arbitration, although it seems unlikely to pass the Senate.
Given these potential obstacles, many observers had doubted that the CFPB would risk issuing a final arbitration rule — unless Director Richard Cordray were planning to resign soon thereafter to run for governor of Ohio in 2018. Many assumed that, if Director Cordray resigned before the final rule was issued, a Republican would be appointed as acting CFPB director and would almost certainly either terminate the rulemaking or at least reevaluate whether such a restrictive rule should be finalized. Under this analysis, Director Cordray had little to lose by issuing the rule and leaving his future options open.
1 The CFPB’s position is that “insurance” (as defined under state law) that is sold and financed in connection with the offering of a “consumer financial product or service” (CFPS) such as a consumer loan is subject to the rule, but “the business of insurance” in general, and “insurance” offered in a completely separate transaction from the offering of a CFPS in particular, are not.