On July 10, 2017, the Consumer Financial Protection Bureau (the “CFPB”) finalized its proposed arbitration rule that will prohibit providers of certain consumer financial products and services from requiring a consumer to utilize mandatory pre-dispute arbitration in lieu of a consumer filing or participating in a class action (“Arbitration Rule”). In other words, no longer may covered entities require a consumer to use arbitration in lieu of class action participation. This Arbitration Rule will likely have far ranging consequences for covered providers, including mandatory updates to consumer agreements, likely increases to legal and compliance costs and increased operational risks in new consumer products.

Background

Congress directed the CFPB to study pre-dispute arbitration agreements in the Dodd-Frank Wall Street Reform and Consumer Protection Act (“the Dodd-Frank Act”).  The Dodd-Frank Act also authorized the CFPB, after completing the study, to issue regulations restricting or prohibiting the use of arbitration agreements if the CFPB found that such rules would be in the public interest and for the protection of consumers.  In 2015, the CFPB published and delivered to Congress a study of arbitration.  On May 24, 2016, the CFPB proposed the Arbitration Rule with a request for comment.  Since May 2016 the CFPB has been silent, leading many in the financial services industry to believe that, with the change in administration, the CFPB had abandoned the Arbitration Rule.  In finalizing the Arbitration Rule, the CFPB has answered the industry’s long outstanding question.  Would the CFPB be more moderate in its approach in issuing regulation that drastically impacts financial services providers?  The industry has its answer.  The CFPB has answered in the negative.

What institutions are covered by the Arbitration Rule?

The Arbitration Rule will apply to most banks and nonbank lenders (e.g., mortgage and FinTech), payment processing companies, consumer reporting agencies, debt collection agencies and certain automotive finance companies. Specifically, the CFPB states that Arbitration Rule will only apply to providers of certain consumer financial products and services in the core consumer financial markets of lending money, storing money and moving or exchanging money, including most providers that are engaged in the following activities:

  • most types of consumer lending (such as making secured loans or unsecured loans or issuing credit cards);
  • activities related to that consumer lending (e.g., providing referrals, servicing, credit monitoring, debt relief, and debt collection services, among others, as well as the purchasing or acquiring of such consumer loans);
  • extending and brokering automobile leases that operate as the “functional equivalent” of automobile purchase finance arrangements (traditional automotive finance transactions are excluded);
  • storing funds or other monetary value for consumers (e.g., providing deposit accounts); and
  • providing consumer services related to the movement or conversion of money (e.g., certain types of payment processing activities, transmitting and exchanging funds, and cashing checks).

The Arbitration Rule

  • Class action prohibitions are unenforceable. The Arbitration Rule prohibits providers of certain consumer financial products and services from using an agreement with a consumer that provides for arbitration of any future dispute between the parties in lieu of a consumer filing or participating in a class action.

The CFPB notes that this prohibition will permit an arbitration agreement that allows for class arbitration, provided that a consumer is not required to participate in class arbitration instead of class litigation.  In other words, a pre-dispute arbitration agreement that allows a consumer to choose whether to file a class claim in court or in arbitration will be permissible under the Arbitration Rule, although an arbitration agreement that permits the claim to only be filed in class arbitration will not be permissible.

  • All covered consumer financial services agreements utilizing pre-dispute arbitration agreement must be updated with a specified plain-language statement. The CFPB is requiring that covered providers update their consumer financial services agreements to include a specified plain-language provision in their pre-dispute arbitration agreements disclaiming the agreement’s applicability to class actions. Specifically, the CFPB has provided this language for three specific scenarios.

First, for all covered consumer financial services agreements that are entered into after the compliance date (as discussed below) and which have a pre-dispute arbitration provision, the provision must contain the following language:

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.

Second, when the pre-dispute arbitration agreement is for multiple products or services, only some of which are covered by the Arbitration Rule, the provider must include the following provision:

We are providing you with more than one product or service, only some of which are covered by the Arbitration Agreements Rule issued by the Consumer Financial Protection Bureau. 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.  This provision applies only to class action claims concerning the products or services covered by that Rule.

Third, when the pre–dispute arbitration agreement existed previously between other parties and does not contain either the provision identified above, the provider shall ensure the agreement is amended to contain the following provisions within 60 days of entering into the pre-dispute arbitration agreement.

We agree that neither we nor anyone else who later becomes a party to this pre-dispute arbitration agreement will use it 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.

We agree not to use any pre-dispute arbitration 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.

  • If the covered provider uses pre-dispute arbitration agreements in its consumer contract, the CFPB requires that the covered provider submit specific arbitral records to the CFPB. The Arbitration Rule will require a covered provider that is involved in an arbitration pursuant to a pre-dispute arbitration agreement to submit specified arbitral records to the CFPB within 60 days after the documents are filed with the arbitrator. The CFPB intends to use the information it collects to continue monitoring arbitral proceedings to determine whether there are developments that raise consumer protection concerns that may warrant further CFPB action.  These materials will be published by the CFPB on its website in some form, with appropriate redactions or aggregation as warranted.

What is the effective date?

The CFPB has designated August 10, 2017 as the Arbitration Rule’s effective date.  Pursuant to the Dodd-Frank Act, the Arbitration Rule will only apply to agreements entered into 180-days after the effective date.  Consequently, the Arbitration Rule will become fully effective on February 10, 2018.

What does this mean for your institution?

In sum, the consequences for covered providers are likely to be far ranging.  In the short term, to facilitate implementation and ensure compliance, covered providers will need to update their consumer form agreements with the specific plain-language provisions identified in the Arbitration Rule.  In addition, covered providers seeking to maintain pre-dispute arbitration provisions will need to plan and implement a process for submitting the specified arbitration documents to the CFPB.

In the long term, with consumers no longer subject to mandatory arbitration, covered providers should expect legal and compliance costs to rise.  While only speculative at this point, it is fair to say that the number of consumer class action suits filed will likely increase.  Consequently, covered entities will likely need to dedicate additional resources to defend prospective class actions.  In addition, with a likely increase in the number of class actions filed, the Arbitration Rule will increase the risks associated with any rollout of new consumer products or services.

There continues to be stiff resistance to the Arbitration Rule

While the Arbitration Rule has been finalized, there continues to be stiff resistance to its implementation.  In its July 10, 2017 letter to the CFPB, the Acting Comptroller of the Office of the Comptroller of the Currency stated that the Arbitration Rule may saddle banks with “potentially ruinous liability” and risk the safety and soundness of the banking system as a whole.  In Congress, Senate Banking Committee member Tom Cotton and House Financial Services Committee member Roger Williams declared that they will seek to block the Arbitration Rule pursuant to the Congressional Review Act. In the end, the Arbitration Rule’s continued viability is far from certain.

To view the full text of the CFPB’s Arbitration Rule, click here.

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Photo of Juan M. Arciniegas Juan M. Arciniegas

Mr. Arciniegas works primarily as a derivatives lawyer and covers markets for over-the-counter (OTC) derivatives, structured finance products and listed futures. He advises on every stage throughout the life cycle of a derivatives transaction, providing assistance to a wide range of market participants engaged in the markets in various capacities. Regulatory matters range from assisting clients on financial reform legislation, registration and membership with the CFTC, NFA, and other financial market utilities, to providing guidance to commercial end-users and sell-side participants on exemptions, cross-border access issues, and matters involving the overlapping jurisdiction of securities and commodities regulation. Transactional matters include the negotiation and implementation of comprehensive documentation for agency-MBS, cleared and OTC derivatives, FX, futures, loan-level hedging arrangements, prime brokerage, repurchase transactions, securities lending, structured finance transactions, and related industry protocols implementing changes in those markets. Mr. Arciniegas has appeared before the CFTC, the Federal Reserve, the SEC, and is a frequent speaker and published author on futures and derivatives topics.

Photo of James M. Kane James M. Kane

Mr. Kane serves as the Co-Chair of the Financial Institutions group for Vedder Price. His practice is focused on financial institutions and their officers and directors. He serves his clients in a number of different capacities. He serves as the regulatory and corporate counsel for many institutions. Calling upon his experience as a regulator, as a past director of two different community banks, and as a private practitioner for nearly 20 years, Mr. Kane is able to offer practical and experienced legal advice that few attorneys can match. In this capacity, he has counseled clients on general corporate, regulatory and securities matters, on new products and on mergers and acquisitions.

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Mr. Morrissey concentrates his practice in the representation of financial institutions and corporations and their officers, directors and shareholders in connection with mergers and acquisitions, securities offerings, corporate finance, corporate governance and regulatory and compliance matters. He has represented clients in numerous bank and thrift mergers and acquisitions and securities transactions. In addition, he has represented clients with respect to various bank regulatory matters, including advising clients with respect to preparing for regulatory exams and responding to enforcement actions.

Photo of Jennifer Durham King Jennifer Durham King

Ms. King concentrates her practice in capital markets and corporate securities transactions, with a specific focus on financial institutions. Ms. King regularly represents issuers and underwriters as lead counsel in a broad range of capital markets transactions, including public and private debt and equity offerings, mergers and acquisitions, and capital planning and formation. In 2017, Ms. King was selected as an Illinois Leading Lawyer in the categories of Corporate Finance Law and Securities & Venture Finance Law.

Ms. King also counsels public companies on their reporting and disclosure obligations under the federal securities laws, as well as on a variety of corporate governance matters, including compliance with the Sarbanes-Oxley Act, Dodd-Frank Act, and stock exchange requirements, creation and implementation of corporate compliance programs, and shareholder and board of directors matters.

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Photo of Mark Svalina Mark Svalina

Mr. Svalina advises corporate clients, financial institutions and FinTech companies on significant corporate transactions. He focuses his practice on representation of financial institutions and their officers, directors and shareholders in connection with mergers and acquisitions, corporate finance, corporate governance, and regulatory and compliance matters. In addition, he has represented clients with respect to various bank regulatory matters, including advising clients with respect to preparing for regulatory exams, responding to enforcement actions, new products/services and federal and state compliance issues.