The Consumer Financial Protection Bureau (CFPB) finally moved forward today to ban class action waivers in mandatory arbitration clauses found in certain consumer financial services contracts.

In October 2015, the CFPB published its multiyear study on arbitration provisions in consumer financial contracts and an outline of the proposal under consideration. It then convened a Small Business Review Panel to gather feedback. The Bureau also sought comments from stakeholders — the public, consumer groups, and industry —before moving forward with rulemaking. In May 2016, the Bureau issued its proposed rule. The public responded with more than 110,000 comments during the comment period that followed. 

The CFPB’s new rule ensures consumers’ right to participate in class action lawsuits. It applies to consumer financial products and services, including those entities that lend money, store money, and move or exchange money. Specifically, it covers extensions of consumer credit; automobile leases; debt management and settlement services;  providing credit information directly to consumers; providing accounts under the Truth in Savings Act and Electronic Fund Transfer Act; transmitting and exchanging funds; certain payment processing services; check cashing services; and related debt collection activities. Congress already prohibits arbitration agreements in residential mortgages.

Individual arbitration clauses are still permitted. But if a company includes an arbitration clause in a new contract, specific contractual language must be used.  

The CFPB also attempts to make the individual arbitration process “more transparent by requiring companies to submit to the CFPB certain records, including initial claims and counterclaims, answers to these claims and counterclaims, and awards issued in arbitration.” It will collect information regarding a company’s non-payment of arbitration fees and failure to follow arbitration fairness standards. As explained in the Bureau’s press release, “[g]athering these materials will enable the CFPB to better understand and monitor arbitration, including whether the process itself is fair. The materials must be submitted with appropriate redactions of personal information. The Bureau intends to publish these redacted materials on its website beginning in July 2019.”

The rule becomes effective 60-days after publication in the Federal Register and applies to contracts entered into more than 180-days thereafter. Several obstacles could delay, or even prevent, it from going into effect, however. The rule could be repealed under the Congressional Review Act. Affected parties could sue to overturn the rule on grounds that it is an abuse of discretion or beyond the authority given to the CFPB by the Dodd-Frank Act. Or, it could be delayed by a new Director of the Bureau (Director Cordray’s term ends in July 2018).  

Reed Smith’s financial services attorneys have for many years helped to draft arbitration clauses for consumer contracts, and enforced such provisions through motions to compel arbitration. We have closely followed the Dodd-Frank rules, including this final rule. Should the final rule remain in place, we can advise you on how current arbitration clause language will need to change, how to preserve rights under present contracts, and, as always, how to protect your rights in court.

Stay tuned for updates as we continue to unpack the 775-page rule.