The Consumer Financial Protection Bureau released a notice of proposed rule with request for public comment to prohibit creditors from using arbitration clauses to block class action litigation.
The CFPB's proposed ban is not surprising. However, it will only impact arbitration agreements concerning covered consumer financial products or services entered into after its effective date.
A copy of the NPRM is available at: Proposed rule with request for public comment
Arbitration Clauses and Class Action Waivers
Arbitration is an effective means for consumers to vindicate their claims in an informal setting. Through the informal setting of arbitration, consumers are not restricted by court rules of evidence and procedure that could otherwise limit or even prevent the assertion of particular claims or the use of certain evidence in a court proceeding. This provides consumer litigants with a significant advantage over their creditors.
But creditors ask a concession for giving up the protections they receive in civil courts. Arbitration agreements prohibit a consumer from asserting class action claims.
Favoring Class Actions Over Innovation
The Bureau's rationale for the proposed ban is largely based on its finding that class actions "better enable consumers to enforce their rights under Federal and State consumer protection laws and the common law and obtain redress when their rights are violated." The Bureau also notes it believes the threat of class action litigation increases a company's costs for compliance and causes companies to forgo potentially profitable initiatives because they may increase the risk of class action liability. At the same time, this may also reduce innovation in financial products and services, but the loss of these new and useful products and services, the Bureau concludes, is outweighed by the benefits to consumers from class action litigation.
Who and What Would Be Covered
The proposed rule would cover a multitude of entities that provide consumer financial products or services. Among the covered parties are entities that provide extensions of consumer credit, act as consumer creditors or participate in a consumer credit decision. It would encompass debt collectors under the federal Fair Debt Collection Practices Act (FDCPA) as well as others collecting consumer debt who are not debt collectors under the FDCPA. And it covers persons who purchase or acquire consumer debt. This list is not exhaustive and the proposed rule does cover other persons not listed here. In addition, it also provides limited exemptions for certain persons, products and services. Most notable, the rule exempts the federal government and "any affiliate of the Federal government" when providing a consumer financial product or service directly to consumers.
What It Would Prohibit
The proposed rule would not ban arbitration of disputes over consumer financial products and services. It would prohibit the use of arbitration agreements to dismiss or stay a class action concerning a covered product or service. However, it does permit disputes to head to arbitration once a court has ruled that a claim may not proceed as a class action and any right to appeal the court's ruling has expired.
Proposed Required Disclosures and Arbitration Agreement Terms
If a covered person uses an arbitration agreement in a covered transaction, the agreement must contain one of two mandatory disclosures.
When the arbitration agreement covers only particular consumer credit products or services that are covered by the proposed rule, it must state: "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."
As noted above, a few products and services are not covered, like business loans. When the arbitration agreement concerns both covered and not covered products or services, the following disclosure may be used: "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."
If a consumer credit product or service was subject to an arbitration agreement "between other parties" and did not contain one of the previously outlined proposed mandatory disclosures, the proposed rule would require either an amendment of the arbitration agreement using language mandated by the proposed rule or that a mandatory notice be given to the consumer.
Record Keeping and Provision of Information to the Bureau
Covered providers who submit claims to arbitration or have claims against them submitted to arbitration will be required to provide the Bureau with particular documents and information concerning those claims. If the claim was filed by the covered person, then the information and documents must be provided to the Bureau within 60 days of the filing of the arbitration or of any "record" filed by the covered person. Otherwise, for claims filed against the covered person, the documents and information must be provided within 60 days of the covered person's receipt of the record.
The information and documents proposed by the rule are: (1) the initial claim and any counterclaim; (2) the arbitration agreement filed with the arbitrator or arbitration administrator; (3) the judgment or award, if any, issued by the arbitrator or arbitration administrator; and (4) if an arbitrator or arbitration administrator declines to administer the arbitration or dismisses it because of the covered person's failure to pay arbitration filing or administration fees, then covered persons will be required to provide the Bureau with "any communication the provider receives from the arbitrator or an arbitration administrator related to such a refusal."
Finally, it would require covered persons to provide the Bureau with "any communication the provider receives from an arbitrator or an arbitration administrator related to a determination that a pre-dispute arbitration agreement for a consumer financial product or service . . . does not comply with the administrator's fairness principles, rules, or similar requirements, if such a determination occurs."
Ralph T. Wutscher
Maurice Wutscher LLP
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