Alert May 06, 2016

Consumer Financial Protection Bureau Proposes Rules Prohibiting Class-Action Waivers in Arbitration Agreements


On May 5, 2016, the Consumer Financial Protection Bureau issued long-expected proposed rules that will drastically limit the use of pre-dispute arbitration clauses in contracts for consumer financial products and services. First, the proposed rules would prohibit pre-dispute arbitration agreements that bar consumers from filing or participating in a class action. Second, for those consumer disputes that are arbitrated, the proposed rules would require the financial services companies that engage in arbitration to submit various arbitration records to the Bureau, including claims and awards, so that the Bureau can monitor these arbitrations “to ensure that the arbitration process is fair for consumers.”

On May 5, 2016, the Consumer Financial Protection Bureau issued proposed rules that would limit the use of pre-dispute arbitration clauses in contracts for consumer financial products and services. The proposed rules come as no surprise to the financial services industry as the Bureau has been actively scrutinizing arbitration clauses in consumer agreements for some time. In March 2015, the Bureau released an arbitration study which concluded that arbitration agreements in contracts associated with consumer financial products constrain consumers’ ability to assert their rights if a dispute arises. The study was mandated by the Dodd-Frank Wall Street Reform and Consumer Protection Act, which also empowered the Bureau to issue regulations barring or limiting the use of arbitration clauses depending on the results of its study. In October 2015, the Bureau made clear its intent to limit the use of mandatory arbitration provisions with class action waivers when it released an outline of proposals it was considering to limit their use in consumer financial services agreements.

The proposed rules are a culmination of the Bureau’s longstanding concerns with mandatory arbitration provisions and clear preference for providing consumers with a judicial forum and class action procedures to resolve their disputes. In announcing the proposals, Director Richard Cordray stated that “[m]any banks and financial companies avoid accountability by putting arbitration clauses in their contracts that block groups of their customers from suing them. Our proposal seeks comment on whether to ban this contract gotcha that effectively denies groups of consumers the right to seek justice and relief for wrongdoing.” Although the Bureau claims that companies “would still be able to include arbitration clauses in their contracts,” the proposal appears designed to render such clauses largely ineffective. The most predictable result of this rulemaking, and a concern expressed by industry participants at the Bureau’s May 5 Field Hearing on the proposed rules, will be a marked increase in the number of class action lawsuits, which will fulfill the Bureau’s stated intent to “open up the legal system to consumers so they could file a class action or join a class action when someone else files it.”

The proposed rules will prohibit the use of pre-dispute arbitration clauses that bar consumers from filing or participating in class actions and would prohibit companies from relying on arbitration clauses “with respect to any aspect” of a consumer class action. To ensure this result, the rules will require specified contract language notifying consumers that they have the right to file a class action lawsuit or become a member of a class action. This prohibition against relying on arbitration agreements to bar class actions will apply only to new products and services and will not apply to agreements entered into before the compliance date, unless a provider chooses to add a pre-dispute arbitration agreement to an existing consumer agreement after the compliance date or modifies a prior agreement to provide new products or services.

For those consumer disputes that are arbitrated, the proposed rules will require the financial services providers to submit information to the Bureau so that it can monitor arbitrations “to ensure that the arbitration process is fair for consumers.” Specifically, such entities must submit (a) the initial claim and any counterclaim, (b) the pre-dispute arbitration agreement, (c) any judgment or award from the arbitrator, and (d) communications from the arbitrator or arbitration administrator regarding either the entity’s failure to pay required arbitration fees or the arbitration agreement’s failure to comply with “fairness principles, rules, or similar requirements.” Certain personally identifiable information must be redacted from the submissions, which would be due within 60 days of filing or receipt of documents from other parties. The Bureau is also considering the publication of some of this information to allow the public to monitor the arbitration process as well.

The proposed rules will apply broadly to most consumer financial products and services, including “those related to the core consumer financial markets that involve lending money, storing money, and moving or exchanging money.” (Congress has already prohibited class action waivers in the residential mortgage market.) Accordingly, the proposed rules will affect virtually all consumer financial services companies, including banks of all sizes, creditors, servicers, sellers and purchasers of consumer debt; providers of credit reports; debt management and debt settlement companies; debt collectors; persons holding deposit accounts, offering remittances and other payments; and check cashers and check guarantee companies. There are a number of limited exceptions from the scope of the rule.

Comments on the proposal are due within 90 days after the Bureau’s proposal is published in the Federal Register. Although the Bureau did not indicate when it plans to finalize the proposal, it stated that it would expect compliance by the 211th day following the final rule’s publication. For more information about the proposed rulemaking and its effect on your business, please contact the authors or the attorney with whom you regularly work at Goodwin Procter.

Goodwin is widely recognized as a leading law firm in the consumer financial services market. The firm represents the full range of clients, including banks, mortgage lenders and servicers, credit card issuers, insurance companies, broker-dealers, consumer lenders, payment system networks, money transmitters, auto lenders, student lenders, debt collectors, FinTech companies, leasing companies and industry trade associations. The Consumer Financial Services Practice, led by Lynne Barr, handles a broad range of sophisticated and cutting-edge regulatory and transactional matters, and is backed by Goodwin’s Consumer Financial Services Litigation Practice, led by Tom Hefferon, one of the most highly regarded in the country.