CFPB’s Proposed Rule Banning Use of Pre-Dispute Arbitration Agreements to Block Consumer Class Actions Signals New Wave of Class Actions Against Industry

Consumer Finance   |   Consumer Finance   |   June 30, 2016
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On May 5, the Consumer Financial Protection Bureau (CFPB or Bureau) published a proposed rule which would prohibit application of pre-dispute arbitration agreements to class litigation involving a broad range of consumer financial products and services. The proposed rule, the most momentous of the Bureau’s rulemaking to date, will apply to pre-dispute arbitration agreements for all "consumer financial products and services" as defined in Dodd-Frank, and contains two restrictions:

Prohibition on class action waivers. First, the rule prohibits inclusion of arbitration clauses that block class action claims in contracts with consumers for consumer financial products and services including credit cards, checking and deposit accounts, auto loans, consumer mortgage and credit servicing, prepaid cards, consumer debt acquisition, credit reporting, and debt collection services. Providers of covered products and services will be prohibited from relying on any pre-dispute arbitration agreement entered into after the rule’s effective date. In addition, any arbitration agreement in a contract for covered products or services will be required to expressly state that the provider agrees not to use such arbitration agreement "to stop the consumer from being part of a class action case in court."

Submission of information on all arbitration proceedings. Second, for any pre-dispute arbitration agreements entered into after the effective date, covered entities will be required to provide the CFPB with certain records of all arbitration claims relating to consumer financial products or services filed by or against them, including initial claim filings, the arbitration agreement, and the judgment or award issued by the arbitrator, with personal consumer information redacted. The CFPB "intends to use the information it collects to continue monitoring arbitral proceedings to determine whether there are developments that raise consumer protection concerns that may warrant further Bureau action," and to publish redacted informational materials on its website.

The rule will open the floodgates for costly class actions against consumer financial service providers. In addition, opening individual arbitrations to regulatory scrutiny is also cause for concern. This foretells the possibility of additional future regulation, which will lead to increased compliance costs. Excluded from the rule are brokers regulated by the SEC, the insurance industry, certain state, local, and tribal governmental units that provide consumer financial services, and providers of 25 or fewer consumer products or services annually.

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