The Federal Register published today the Consumer Financial Protection Bureau's (CFPB) final rule that was announced last week and would prohibit providers of covered consumer financial products and services from using pre-dispute arbitration agreements to compel consumers to participate in arbitration to resolve disputes concerning the product or service. The final rule substantially mirrors the rule proposed by the Bureau in May 2016, which we discussed here. The final rule is based on the CFPB’s findings that pre-dispute arbitration agreements are being widely used to prevent consumers from seeking relief from legal violations on a class basis, and that consumers rarely file individual lawsuits or arbitration cases to obtain such relief.
The final rule will likely be the subject of congressional repeal efforts, with Sen. Tom Cotton (R-Ark.) already indicating that he plans to push for repeal under the Congressional Review Act. Other potential avenues to halt the rule include legislation amending the Dodd-Frank Act, a petition to set aside the rule filed with the Financial Stability Oversight Council, and a legal challenge filed in federal court.
Assuming the rule does go into effect, providers would be unable to rely on a pre-dispute arbitration agreement with respect to any aspect of a class action that concerns any covered consumer financial product or service, and would need to revise covered contracts to add specified language to inform the consumer that the agreement may not be used to block class actions.
The rule becomes effective on September 18, 2017. Covered providers must comply with the rule for pre-dispute arbitration agreements entered into on or after March 19, 2018.
Covered Providers and Covered Consumer Financials Products and Services
The rule does not apply to all consumer financial products and services as defined under the Dodd-Frank Act. Rather, the rule applies to “providers” of covered consumer financial products and services, which it defines to include any person or entity engaging in an activity that is a “covered” product or service, or any affiliate when acting as a service provider, unless otherwise excluded. In order for a product or service to be “covered,” the service must be:
Offered to consumers primarily for personal, family, or household purposes; and
Included in the rule’s list of covered consumer financial products and services, which generally includes core consumer financial services such as lending money, storing money, and moving or exchanging money.
Certain entities are expressly excluded from coverage under the rule under 12 C.F.R. § 1040.3(b), including:
Employers when offering consumer financial products or services for employees as an employee benefit;
Entities regulated by the Securities and Exchange Commission or the Commodity Futures Trading Commission, which have their own arbitration rules;
Broker dealers and investment advisers overseen by state regulators;
Any person or entity not subject to the CFPB’s rulemaking authority, such as auto dealers;
Merchants, retailers and other sellers of nonfinancial goods or services to the extent they are providing credit directly to consumers and that credit is not subject to a finance charge.
Moreover, covered providers are only required to comply with the rule for covered products and services. So, for example, if a covered provider also offers non-covered services, those services would not be subject to the rule.
Pre-Dispute Arbitration Agreements Subject to Rule
The rule applies to pre-dispute arbitration agreements, which are defined as agreements between a covered person and a consumer that provide for arbitration of any future dispute concerning a covered consumer financial product or service. While the agreement need not be between the provider and the consumer, the prohibition against relying on the agreement applies to any covered provider, even if not party to the initial agreement. For example, as explained by the Bureau, “if an automobile dealer includes a pre-dispute arbitration agreement in a consumer motor vehicle installment sales contract, a provider (such as an indirect automobile lender or debt collector) is prohibited from relying on such a pre-dispute arbitration agreement in a dispute concerning the installment sales contract).”
Agreement Language and Record Requirements
The rule does not bar arbitration clauses outright. For contracts entered into after the compliance date of March 19, 2018, however, these clauses have to say explicitly that they cannot be used to stop consumers from banding together to pursue relief as a group. The rule includes the specific language covered entities must use:
“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.”
If an agreement does not contain this language, the provider must amend the agreement to include language required by the rule or provide a written notice to consumers within 60 days of entering into the agreement.
The rule additionally requires providers to submit to the Bureau certain records, such as records filed in any arbitration or court proceeding in which a party relies on a pre-dispute arbitration agreement and certain communications between providers and arbitrators. The anonymized records of claims, awards, and other information about the arbitration of additional disputes will be posted to the CFPB’s website beginning in July 2019.
Penalties for Noncompliance
While the rule is not enforceable through a private right of action, the CFPB and State attorneys general may seek Title X penalties under the Dodd-Frank Act for violations of the rule, including failure to include the required provision in the pre-dispute arbitration agreement. Tier 1 penalties under Dodd-Frank may not exceed $5,526 for each day during which such violation or failure to pay continues. Tier 2 penalties (involving recklessly engaging in the violation) may not exceed $27,631 per day.
Note that the rule does not contain a provision that non-compliant arbitration agreements be deemed null and void. The CFPB notes that where a provider fails to comply with the rule by omitting the required contract language, the rule still prevents the provider from relying on an arbitration agreement in a class action.
Practical Compliance Considerations
Next 240 days. Entities that rely on these pre-dispute arbitration agreements can continue to utilize the language until the compliance date of March 19, 2018 without violating the rule or exposing themselves to liability. Assuming the rule becomes effective, covered providers will be unable to rely on the rule to compel arbitration in disputes concerning covered financial products and services and thus can expect additional exposure to class action litigation, and increased court, settlement, and insurance costs as a result.
Required language, generally. Companies should ensure that the required language is included in their pre-dispute arbitration agreements well before the compliance date of March 19, 2018. Companies should anticipate not having the ability to rely on the arbitration clauses in class action litigation following that date, and consider relevant policies and procedures that could be impacted by such a change.
General-purpose reloadable prepaid cards only. The final rule permits providers of general-purpose reloadable prepaid cards to continue selling packages that contain non-compliant arbitration agreements, if they give consumers a compliant agreement as soon as consumers register their cards and the providers comply with the final rule’s requirement not to use an arbitration agreement to block a class action.
Record retention. Companies will be required to retain and submit to the CFPB certain records, including initial claims and counterclaims, answers to these claims and counterclaims, and awards issued in arbitration. The Bureau also will collect correspondence companies receive from arbitration administrators regarding a company’s non-payment of arbitration fees and its failure to follow the arbitrator’s fairness standards. The materials must be submitted with appropriate redactions of personal information. Assuming the rule becomes effective, we recommend implementing retention measures consistent with this requirement, if not already in place.
Kelley Drye’s Consumer Financial Protection Regulation practice regularly counsels clients on consumer financial protection matters, including by advising clients on compliance with applicable regulations and representing clients before the CFPB, the Federal Trade Commission (FTC), and state attorneys general on consumer finance matters.
 Merchants, retailers, and other sellers of nonfinancial goods and services may be subject to the rule in certain limited circumstances such as when providing consumers a consumer report or credit score under the Fair Credit Reporting Act other than in connection with an adverse action, or when accepting financial or banking data or providing a product or service to accept such data directly from a consumer for the purpose of initiating a payment except by a person selling or marketing a good or service that is not covered for which the payment is being made. See 12 C.F.R. § 1040.3(a)(8).