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The Consumer Financial Protection Bureau (the "CFPB") recently proposed a ban on class action waivers in arbitration clauses. The proposed rules, announced on October 7, 2015, would make it illegal for contracts for many types of consumer financial products to contain arbitration clauses that require consumers to agree to waive their right to participate in a class action lawsuit. The proposed rules impact banks, credit unions, money transfer services, auto lenders, private student lenders, and a variety of other financial services companies. While the proposed rules are limited to consumer financial contracts, arbitration agreements have become increasingly common in many types of consumer contracts and the implications of the proposed rules may reach further. The proposed rules as they currently stand suggest that existing arbitration clauses will not be impacted, so companies should revisit their form contracts before any proposed rules go into effect.

The CFPB's authority regarding arbitration clauses in consumer contracts derives from the Dodd-Frank Wall Street Reform and Consumer Protection Act (the "Dodd-Frank Act"). The Dodd-Frank Act tasked the CFPB with studying the use of arbitration clauses in consumer financial markets and gave the CFPB the authority to issue rules consistent with the study's findings. The CFPB's study followed the Supreme Court's landmark decision in AT&T Mobility LLC v. Concepcion, 563 U.S. 333 (2011), which held that the Federal Arbitration Act preempts state laws that prohibit the inclusion of class action waivers in arbitration agreements. The CFPB's three-year study was released in March 2015. 

The report found that more than 75 percent of consumers surveyed in the consumer financial markets were unaware whether their contracts with financial service providers contained an arbitration clause, and that less than seven percent of those who were subject to arbitration clauses were aware that the clauses limited their ability to file a lawsuit in court. The report concluded that consumers benefit more from class action lawsuits and resulting settlements than from arbitration results. Legal scholars and professionals, as well as industry experts, have criticized the study based on its reliance on incomplete and, in some instances, potentially skewed data.

The CFPB's outline of the proposals under consideration has two primary components. 

  • The proposals make it illegal for contracts for certain consumer financial products to contain arbitration clauses that contain class action waivers. 
  • The proposals require companies to submit to the CFPB all claims filed and awards issued in consumer financial arbitration disputes, and further contemplate that this information may be made public. 

What's Next?

As the next step toward the anticipated rulemaking on the issue, the CFPB has convened a Small Business Review Panel that will gather feedback from interested parties. After the CFPB reviews recommendations from this Panel, it will reach out to other stakeholders, including the public, industry and consumer groups, and it will then commence rulemaking.

The proposed rules make clear that the CFPB views mandatory arbitration clauses as anti-consumer. In addressing the Consumer Advisory Board of the CFPB on October 22, 2015, CFPB director Richard Cordray remarked: "Companies have been able to use these obscure clauses to rig the game against their customers to avoid group lawsuits. . . .  [B]y inserting the free pass into their consumer financial contracts, companies can sidestep the legal system, avoid big refunds, and continue to pursue profitable practices that may violate the law and harm consumers on a large scale." According to the CFPB, the current proposals provide three benefits: (1) they afford consumers the opportunity for their day in court; (2) they deter consumer financial violations on a broad scale; and (3) they bring public scrutiny to the arbitration of individual disputes.

The consequences of the CFPB's proposals are significant and far-reaching. If the CFPB finalizes the proposed rules, which as currently proposed would not impact existing contracts, banks and perhaps other companies dealing regularly with numerous consumers will need to update their form client agreements, loan documents and other contracts. In addition to posing significant compliance costs stemming from updating contracts to revise arbitration agreement language, the proposed rules may also increase potential liability due to class action litigation exposure. Some industry experts have also suggested that the proposed rules may result in the elimination of products and services offered to consumers by the affected companies.

If adopted, the CFPB proposals will become operative no earlier than 180 days after the effective date of the final rules, which is contemplated to be 30 days after the rules are published. Thus, the CFPB anticipates that the rules would not apply to arbitration agreements entered into before 210 days after the rules are published. The effective date of the anticipated final rules is likely more than a year away. Given the significance of the proposed rules, companies should consider the inclusion of class action waivers in their contracts before the proposed rules go into effect.

Goldberg Kohn will continue to monitor all developments in the CFPB rulemaking process and issue further client alerts as new information becomes available.