In a much-anticipated move, the Consumer Financial Protection Bureau finalized its long-pending arbitration rule. Reaction from Capitol Hill, consumer groups, and banking associations followed expected lines, from cheers to jeers, depending on the source.
The rule will not affect the use of mandatory arbitration clauses in existing consumer agreements of the types it covers and won’t have a required impact on consumer agreements signed between now and a future compliance date, discussed later in this article, that is scheduled to hit next year. Agreements made after that compliance date will be covered.
A mandatory arbitration clause typically requires consumers opening such product relationships as credit card or deposit accounts to agree to submit any dispute to arbitration, with an exception for small claims action by an individual consumer. Signing such an agreement obligates a consumer to not attempt to seek satisfaction through a class-action lawsuit.
CFPB’s rule would ban the use of mandatory arbitration clauses by covered companies for covered services after the compliance date. Broadly, the rule will apply to companies subject to bureau jurisdiction that “lend money, store money, and move or exchange money.”
Providers could still include arbitration clauses in contracts, using wording mandated by the bureau in its rule, or an acceptable substitute under the rule, to make it clear that the agreement cannot be used to block participation in a class-action suit. (The Dodd-Frank Act itself barred use of mandatory arbitration clauses in mortgage transactions, effective in June 2013. Many mortgage contracts did not contain these provisions, as they were barred by rules of Fannie Mae and Freddie Mac. The Military Lending Act also bars use of the agreements in many contracts involving military borrowers.)
If a provider uses such agreements after the compliance date, CFPB’s rule requires submission to the bureau of certain records connected to any arbitrations entered into under the agreement. In 2019, officials said, this information will be published on CFPB’s website in redacted form, in an effort to increase transparency about the process.
“How do I get this protection?”
During a press conference Q&A session, a reporter asked a CFPB official how she could avail herself of the protection granted by the new rule. She was told that she would have to open a new account after the compliance date. Any relationship opened prior to that date, she was told, would remain under previous rules. The implication, of course, was that to enjoy the new protection, a consumer would have to close old accounts with providers and apply for new ones.
The rule, mired in controversy since CFPB was authorized to consider the issue of mandatory arbitration clauses under the Dodd-Frank Act, could potentially be targeted for congressional cancellation under the Congressional Review Act. Asked about this, CFPB officials provided no real answer, declining to get into the political issues that could arise under a new administration that has made no secret of its differences with the bureau. (No mention of the rule’s announcement was seen among the presidential tweets or official White House statements of the afternoon following the bureau’s press conference.)
The bureau’s announcement put to rest speculation that embattled CFPB Director Richard Cordray would decline to drop the other shoe and publish the final rule. CFPB officials noted in announcing the rule that approximately 110,000 comments had been received in the course of the rulemaking—a stunning response when some financial services regulatory proposals generate a few hundred comments, or substantially fewer.
Thumbs up and thumbs down
In announcing the final rule, Cordray said that mandatory arbitration agreements make it almost impossible “for people to take companies to court when things go wrong.”
“These clauses allow companies to avoid accountability by blocking group lawsuits and forcing people to go it alone or give up. Our new rule will stop companies from sidestepping the courts and ensure that people who are harmed together can take action together.”
CFPB cited much information from a March 2015 study it conducted in developing the rule. Consumers rarely pursue individual actions because of the high legal costs involved versus the likely low monetary results obtained if they succeed, the bureau said. The bureau also pointed out that successful class actions typically involved agreements to halt the practices that brought about the suit, while successful individual actions generally only involve compensation. Only about 2% of consumers surveyed said they would ever consult an attorney or take legal action over a small-dollar dispute.
“As a result, the real effect of mandatory arbitration clauses is to insulate companies from most legal proceedings altogether,” CFPB stated.
The many-faceted issue drew not only volumes of commentary, but detailed reaction as it developed. For example, The Consumer Bankers Association and the American Bankers Association had filed a joint comment letter of 42 pages last year concerning the bureau proposal. Both groups issued reactions to the final rule.
CBA called on Congress to overturn the rule and accused the bureau of using “fuzzy math.”
“Arbitration has long provided a faster, better, and more-cost-effective means of addressing consumer disputes than litigation or class action lawsuits,” stated Richard Hunt, president and CEO at CBA. “The CFPB’s own study shows the average consumer receives $5,400 in cash relief when using arbitration and just $32 through a class-action suit.” CBA was not alone in criticizing the bureau’s reading of its own data.
ABA’s Rob Nichols, president and CEO, said the association was “disappointed that the CFPB has chosen to put class action lawyers—rather than consumers—first with today’s final rule. Banks resolve the overwhelming majority of disputes quickly and amicably, long before they get to court or arbitration.” ABA said the rule would force consumers into court instead of availing themselves of arbitration.
“Consumers receive nothing at all in nearly nine out of 10 class action lawsuits,” said Nichols. ABA also called on Congress to overturn the rule.
On Capitol Hill, House Financial Services Committee Chairman Jeb Hensarling (R.-Texas) called for overturn.
“This bureaucratic rule will harm American consumers but thrill class action trial attorneys,” he said. Hensarling noted that Acting Comptroller of the Currency Keith Noreika had asked Cordray to consult with him to resolve safety and soundness concerns and been ignored by the bureau. During the press conference Q&A CFPB officials said that both prudential banking regulators and the Treasury Department had been consulted.
On the other side of the aisle, Senator Elizabeth Warren (D.-Kan.) applauded the bureau move in a lengthy social media post that linked to a CFPB video about arbitration. It said, in part, that:
“When your credit card company or auto lender cheats you, it’s really hard to hold them accountable. That’s because your financial contracts almost always include a mandatory arbitration clause that forces you into the pro-industry arbitration process and blocks you from banding together in court with other consumers who got cheated. That changes today—thanks to a new rule from the Consumer Financial Protection Bureau that prohibits these kinds of forced arbitration clauses ...”
At the Consumer Federation of America, Rohit Chopra, senior fellow, said that “the rule will help to combat the culture of companies profiting from charging illegal fees and committing other crimes against their customers. This is an important step of restoring law and order to the financial marketplace”
What the rule says on dates
While the rule was released in final form during CFPB’s July 10 press briefing, when it becomes mandatory proves a bit complicated. First, it will become “effective” 60 days after publication in the Federal Register, expected one to two weeks after publication by the bureau. However the rule on its face only applies to pre-dispute arbitration agreements for covered products or services entered into on or after the 241st day after Federal Register publication. That date is considered the “compliance date.” So, the rule’s compliance date will come sometime in March or April 2018.
In a same-day report and preliminary analysis of the rule by attorneys Alan Kaplinsky, Mark Levin, and Scott Pearson, the Ballard Spahr LLP law firm advised:
“During the next 240 days, companies that do not presently use arbitration agreements in their financial services contracts should strongly consider adding them, since agreements entered into before the rule becomes applicable are grandfathered under existing law which is favorable to class action waivers. In AT&T Mobility v. Concepcion, the U.S. Supreme Court held that the Federal Arbitration Act preempts state laws that refuse to enforce class action waivers in consumer arbitration agreements. Moreover, companies currently using arbitration agreements should promptly consult with counsel to consider what steps they can take to reduce litigation risks in light of the CFPB’s final rule.”
The Ballard Spahr article also indicated that it is an open question what actions taken by a provider could pull existing agreements under the new rule.