On July 10, 2017, the Consumer Financial Protection Bureau (CFPB) dropped the other shoe and issued final rules prohibiting “providers of consumer financial products and services in the core consumer financial markets of lending money, storing money, and moving or exchanging money” from “using a pre-dispute arbitration agreement to block consumer class actions in court.” The final rules also require covered providers to insert language “reflecting this limitation” in contracts with pre-suit arbitration clauses. Completing the trifecta, the new rules require “providers that use pre-dispute arbitration agreements to submit certain records relating to arbitral and court proceedings to the Bureau,” which will use the information to monitor use of arbitration clauses regarding “whether there are developments that raise consumer protection concerns that may warrant further Bureau action.” The CFPB also intends to create a website providing “greater transparency into the arbitration of consumer disputes.”
Translated: “No class action waivers in new consumer contracts or any existing contracts that are materially (or perhaps even non-materially) altered. You will self-report on your use of arbitration so we can build evidence for further restricting its use. If you use arbitration in a way we perceive to be unfair, your result will be posted on our website—a/k/a ‘the Wall of Shame.’”
Harsh restatement? Maybe—but maybe not. The CFPB first announced its intention to do away with class action waivers in pre-suit arbitration clauses in March 2015, when it published the results of its arbitration study, mandated by the Dodd-Frank Act, on use and effectiveness of pre-suit arbitration clauses. The CFPB’s results were roundly criticized by business and industry groups, which brought to the agency’s attention multiple examples of class actions used as devices to force settlements, such as the ATM “two sign” and Americans with Disabilities Act (ADA) website accessibility cases levied with particular regularity against financial institutions. The agency brushed aside those critiques as well as significant jurisprudence, see, e.g., Thoroughgood v. Sears, Roebuck & Co., 6 24 F.3d 842 (7th Cir. 2010)(Posner, J.), and issued a preliminary rule in May 2016. The final rules become effective 60 days after publication in the Federal Register. They apply to agreements entered into 180 days the effective date, or 240 days after publication, unless halted by litigation or Congressional action under the Congressional Review Act, or CRA (not to be confused with the other CRA, the Community Reinvestment Act). In addition, Acting Comptroller of the Currency Keith Noreika recently raised concerns regarding the effect of the CFPB’s final arbitration rule on the safety and soundness of banks that the OCC regulates, by increasing litigation exposure.
The final rule cuts a very broad swath. It applies to virtually all entities the CFPB considers to be within its jurisdiction, including “providers” of consumer credit, auto leases, debt management or settlement services, credit clean-up services, credit reports, check cashing services, deposit accounts, and general-purpose reloadable prepaid cards. “Providers” that “participat[e]” in credit decisions, refer applicants, select creditors to which applicants may be referred, acquire extensions of credit covered by the rules, or service extensions of credit also are covered. Debt collectors also are covered. There are limited exclusions for persons regulated by the Securities and Exchange Commission (SEC), Commodity Futures Trading Commission (CFTC), or state securities commissions; states; tribes and their “arms”; any “provider” otherwise covered if they and any affiliates collectively provide covered products to no more than 25 consumers in both the current and the preceding calendar year; and merchants of “nonfinancial goods or services.”
For those covered by the new rules, the requirements appear simple enough. Beginning 240 days after publication, assuming no litigation is filed or Congress does not act under the CRA, all “new” contracts must contain mandatory terms prohibiting the “provider” from using a pre-suit arbitration clause to block the filing of a class action by the consumer. The rules require insertion of mandatory language in all such agreements and prohibits “providers” from relying on class action waivers in agreements subject to the rules as a defense to class action lawsuits.
The rules require “providers” to submit records of each individual arbitration claim filed by or against the provider, including the pleadings, a copy of the agreement filed with the arbitrator, the judgment or award, and communications from the arbitrator if the provider fails to pay a required filing fee or the arbitrator determines that the agreement does not meet the arbitrator’s requirements for fairness. The rules also require a provider to submit its court filings in which it relies on pre-suit arbitration clauses to defeat, dismiss or stay a lawsuit. All must be provided within 60 days of filing. Individual identifying information must be redacted, but the provider’s name and the arbitrator’s name must be included.
Some issues that raised questions in the proposed regulation remain unresolved in the final version. First, the scope of coverage of the final rules appears to extend beyond the individual consumers that would intuitively be covered by the rules, and invites questions about who else is covered. The rules define “consumers” to include not only individuals but “an agent, trustee, or representative acting on behalf of an individual.” This raises questions regarding entities like trusts and sole proprietorships.
Perhaps the most difficult textual issue to sort out will be the distinction between “new” products and contracts versus “preexisting arrangements.” The rules contain qualifying language stating that they do not apply to contracts in existence prior to the effective date of the rules. By itself, this effort to segregate “old” and “new” is likely to create difficulties, particularly where a “consumer” files a class action based on “old” and “new” terms. The final rules provide some limited examples, but no definitive framework for triggering events that would bring an agreement under coverage by these rules, such as the “MIRE event” framework under the flood insurance rules (under which the Making or Modification, Increase, Renewal or Extension of a loan triggers flood insurance obligations). While the proposed rules made a stab at trying to walk this tightrope, the final rules do not.
So what should “providers” do while the 240-day window is open?
If a provider does not include arbitration clauses and class action waivers in its contract documents, right now is the time to decide whether to do so. This means determining which products should be modified to include arbitration and class action waiver provisions, determining the substance of each provision, and rolling out the modified documents so that they will be effective before the 240-day period closes. A provider may decide not to use these provisions, but the decision should be made after appropriate consideration of risks and benefits with the assistance of counsel and action by the board if necessary.
Those providers that do already include arbitration and class action waiver provisions in some products or agreements should examine other products that do not include these provisions. Should they be modified? If so, how? If new language is being added to some products and documents, should other documents be checked as well? Once again, the provider must be aware that the document must be fully effective before the 240-day window closes. A provider may decide not to use these provisions, but the decision should be made after appropriate consideration of risks and benefits with the assistance of counsel and action by the board if necessary.
Because the “new vs. old” section of the final rules is not entirely clear in terms of definitions, scope and potential interpretation by the CFPB, care should be taken in drafting new or modified provisions to ensure—to the extent possible—that a subsequent modification of a document or product will not turn a protected waiver clause into a “new” clause subject to the rules. A look backward to the preliminary CFPB draft rules may be instructive as to the CFPB’s thinking on this issue.
And any new or existing arbitration clauses or waiver provisions should be drafted carefully. The self-reporting provisions of the rule suggest that there may be a sharp regulatory focus on those provisions and on how arbitrations are conducted. The CFPB did not idly ask for self-reporting of situations in which an arbitrator or arbitration administrator finds a clause to be unfair or unconscionable. Prophylactic drafting (along the lines suggested in the U.S. Supreme Court’s AT&T Mobility vs. Concepcion decision) will be particularly important and again advice of counsel is called for.
The time lag before Federal Register publication may add a few days or even a few weeks to the 240-day window in the final rules, but the period will pass very quickly. The time to confer with counsel is now.