Consumer finance companies have until August 22, 2016, to express their concerns regarding the latest rule proposed by the Consumer Financial Protection Bureau (“CFPB”), which bans class action arbitration waiver provisions in consumer financial products and services agreements. The proposed rule (81 FR 32830) was published in the May 24, 2016 issue of the Federal Register for public comment and, if made final, will be codified in 12 CFR part 1040.
Pursuant to Section 1028(b) of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, the CFPB was required to study the use of mandatory arbitration clauses in consumer financial markets. The Act further provided that the agency had the authority to issue regulations “prohibiting or limiting” the use of pre-dispute arbitration provisions to the extent consistent with its research to address and prevent harm to consumers.
In March of 2015, the CFPB released its study on mandatory arbitration clauses in consumer agreements. The study indicated that class actions often provide consumers more effective relief than individual arbitrations. In addition, the agency claimed that consumers who are injured typically do not seek redress due to lack of knowledge and financial burdens of arbitration on an individual basis. As a result, the CFPB drafted the proposed rule, which includes 370 pages of supporting material.
The proposed rule contains two main parts. First, 1040.4(a) prohibits the use of arbitration agreements to block class actions, providing that consumer financial products and services companies “shall not seek to rely in any way on a pre-dispute arbitration agreement” in order to stay or dismiss a class-action suit “unless or until” a court determines that class action treatment is not appropriate. Companies subject to the rule would be required to include the following language in all agreements for arbitration: “We agree that neither we nor anyone else will use this agreement to stop you from being part of a class-action case in court. You may file a class action in court or you may be a member of a class action even if you do not file it.” Thus, consumer financial products and services providers may still require individual arbitration, so long as they do not prohibit an individual from taking part in a class action suit.
Second, 1040.4(b) of the proposed rule requires companies to submit certain records to the CFPB within 60 days of any claim being filed in arbitration. The records to be submitted include, but are not limited to, the initial claim, arbitration agreement and any judgment or award. The agency is currently determining whether these records will be made available to the public individually or in the aggregate.
Commentators have opined that the proposed rule is one of the largest actions taken by the agency in its young history. However, the agency’s actions have not come without criticism and strong opposition. Despite the CFPB’s findings, financial institutions argue that more consumers benefit from individual arbitration and end up with higher awards than they would through class-action lawsuits. The companies also argue that the effect this rule may have would cost them billions—taking the quicker and less expensive process of individual arbitration and drawing out claims to lengthy and expensive class-action litigation. Lastly, opponents fear companies could be exposed to many frivolous lawsuits from consumers who are no longer restricted from bringing class actions.
Should the rule be promulgated it is expected to be fought by consumer financial products and services companies, perhaps up to the Supreme Court.
Currently, there are over 380 comments concerning the proposed rule on the federal register. Upon the publication of a final rule, the CFPB anticipates that its requirements would become applicable beginning on the 211th day after publication, but would not affect existing arbitration agreements.
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