October 12, 2018Nelson Mullins’ Toni Peck Selected as Chair for Lucy Daniels Center
July 11, 2017
Somewhat earlier than expected, the Consumer Financial Protection Bureau (“CFPB”) issued a new set of rules to curb the use of arbitration clauses in consumer finance contracts. The CFPB previously telegraphed that it was planning to regulate arbitration agreements when it launched a public inquiry and issued the results of a Arbitration Study between 2012 and 2015. The proposed Rule was issued May 5, 2016. The CFPB received over 110,000 comments on the proposal during the comment period. The effective date of the rule will be 60 days after it is published in the Federal Register. The Rule will likely be published on July 13, 2017 (3 business days after release by the CFPB). The Rule will apply to any agreement between a consumer and a financial institution entered into after the end of a 180-day grace period. The expected “Compliance Date” is March 10, 2018.
Who is covered?
Any person or entity that offers a consumer financial product is subject to the Rule, including Affiliates and service providers. The Rule does not apply to: SEC-regulated entities, broker-dealers, registered investment advisors, auto dealers and merchants where their activity is not subject to the CFPB’s rule making, attorneys, commercial (non-consumer) transactions, and entities that do not enter into more than 25 consumer finance transactions per year. The CFPB makes clear that the Rule also applies to debt servicers, debt collectors, brokers, consumer reporting agencies, providers of deposit accounts and prepaid accounts, remittance transfers, check cashers, payment processors, and check guarantors.
What about indirect finance?
The CFPB makes clear that even though the merchant or retailer may be exempt from the Rule, the indirect finance company or debt collector (a “provider” under the Rule) is prohibited from relying on an arbitration clause in an installment sales contract.
What is prohibited?
A creditor cannot rely upon a “pre-dispute” arbitration agreement in any class action if the agreement was entered into after the Compliance Date.
Are there new disclosures?
Yes, after the Compliance Date, an arbitration agreement must contain one of the disclosures set forth in 12 CFR 1040.4(b)(2). The notices must be provided at the time of signing or within 60 days of entering into the agreement:
We agree that neither we nor anyone else will rely on 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 filed by someone else.
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. The following provision applies only to class action claims concerning the products or services covered by that Rule: We agree that neither we nor anyone else will rely on 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 filed by someone else.
Amendments to Existing Agreements
We agree not to rely on 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 filed by someone else.
Multiple Transactions but Only Some are Subject to Rule (additional disclosure to above)
This notice applies only to class action claims concerning the products or services covered by the Arbitration Agreements Rule issued by the Consumer Financial Protection Bureau.
The disclosures can be provided in any language if the pre-dispute arbitration provision is also in a language other than English.
Will financial institutions have to change forms?
No. A provision can be added that states the “effective date” of the disclosure. The CFPB has issued language to be used: “This provision does not apply to parties that entered into this agreement before [Compliance Date]” or “This provision does not apply to products or services first provided to you before [Compliance Date] that are subject to an arbitration agreement entered into before that date.
In addition, if certain conditions are met, the requirement to add disclosures does not apply to a pre-dispute arbitration agreement for a general-purpose reloadable prepaid card if the agreement was packaged with the card prior to the Compliance Date.
What about purchasers of financial products?
If a covered person acquires or purchases a “covered financial product or service” that is subject to a pre-dispute arbitration agreement and becomes a party to that agreement after the Compliance date, that person must send the notices.
What is the role of the CFPB?
In addition to the prohibitions and the new disclosure, the Rules requires financial institutions to submit arbitration-related records to the CFPB. Within 60 days or receipt or submission, a financial institution must submit:
Records filed in an arbitration in which a pre-dispute arbitration provision is referenced.
Communications from an arbitrator or tribunal relating to a post-Compliance Date arbitration agreement’s failure to comply with “due process” or “fairness” standards.
Communications from an arbitrator or tribunal regarding a dismissal or refusal to administer a claim due to the entity’s failure to pay a required filing or administrative fee.
What happens with these records?
The records collected will be posted (in redacted form) on a publicly available website.
Are there pending legal challenges?
A number of legal challenges are expected in the next six months. Senator Tom Cotton (R-Ark.) announced on July 11, 2017 that he would seek the repeal of the Rule using the Congressional Review Act (“CRA”), which allows Congress to eliminate agency rules. House Financial Services Committee Chairman Jeb Hensarling (R-Tex.), Senate Banking Chairman Mike Crapo (R-Idaho), Majority Leader Mitch McConnell (R-Ky.), senior U.S. Chamber of Commerce officials, and major bank lobbying groups (including the American Bankers Association) have already called for the Rule to be repealed. (Sylvan Lane, The Hill (July 11, 2017); ABA Banking Journal (July 11, 2017)).
These materials have been prepared for informational purposes only and are not legal advice. This information is not intended to create, and receipt of it does not constitute, an attorney-client relationship. Internet subscribers and online readers should not act upon this information without seeking professional counsel.