The Bureau of Consumer Financial Protection (the "CFPB") has issued a Notice of Proposed Rulemaking (the "NPRM"), proposing the promulgation of a new regulation, 12 CFR part 1040 (the ""Proposed Rule"), which would have two primary effects on the providers of certain consumer financial products and services ("providers").
First, the Proposed Rule would prevent providers from relying on pre-dispute arbitration agreements to obstruct a class action suit that is brought in relation to the provision of consumer financial services or products, and would require providers to include specific language in their customer contracts recognizing the customer's right to bring or participate in such lawsuits.
Second, the Proposed Rule would require providers to submit documentation to the CFPB pertaining to their arbitration claims and communications with arbitration administrators.
Beginning in the 1990s, providers began to use arbitration provisions with more frequency in their consumer financial products contracts. These now-ubiquitous provisions have acted essentially as class action waivers in many cases. Various legislative and regulatory entities have taken action within the last few decades to limit the power of arbitration agreements to prevent claims. These entities include FINRA (formerly NASD), the Commodity Futures Trading Commission, Fannie Mae and Freddie Mac, the Federal Trade Commission, and the Department of Health and Human Services Centers for Medicare and Medicaid Services. In fact, the FINRA Code of Arbitration contains language that is strikingly similar to the Proposed Rule—FINRA members cannot enforce arbitration agreements against members of a class until class treatment is denied or the class member has opted out of the class or class relief.
The CFPB's authority to promulgate the Proposed Rule is derived from the 2010 financial services regulatory reform law, the Dodd-Frank Wall Street Reform and Consumer Protection Act (the "Dodd-Frank Act"). As described in our previous blog post on this topic, the Dodd-Frank Act directed the CFPB to study pre-dispute arbitration agreements and authorized the CFPB, if in the public interest and for the protection of consumers, to issue regulations prohibiting or restricting the use of arbitration agreements.
The CFPB published its arbitration study in March 2015. The study focused on various topics, including (i) the prevalence of arbitration agreements in financial products and services contracts; (ii) consumers' understanding of the dispute system; (iii) the procedural differences between arbitration and court proceedings; (iv) the volume of individual consumer financial arbitrations; (v) the volume of individual and class consumer financial litigation; (vi) the frequency in which consumers sue in small claims court regarding consumer financial services; (vii) the details of class action settlements; and (viii) the extent to which arbitration agreements lead to lower prices for consumers.
The CFPB cited several of the study's findings in the NPRM, concluding that: (i) consumers are rarely aware of the effect of arbitration clauses; (ii) providers' exposure to class action lawsuits acts as a deterrent to conducting illegal practices; (iii) individual dispute resolution is often insufficient for consumers to enforce contracts and laws related to consumer financial products and services; and (iv) class action suits are more effective in providing relief to consumers.
Which industries/activities are in scope?
The CFPB's proposal is very broad and covers providers of any financial product or service that is "offered or provided for use by consumers primarily for personal, family, or household purposes" as well as "a financial product or service that is delivered, offered, or provided in connection with the first type of consumer financial product or service." It is applicable to more than just credit-related products and services. The CFPB has indicated that the following financial products and services potentially are within the scope of the proposed regulation:
- Automobile/ transportation vehicle sales financing (except motor homes, golf carts and motor scooters)
- Commercial banking
- Consumer lending (including purchasers of consumer debt)
- Credit reporting
- Credit card issuing
- Credit counseling
- Credit intermediaries (including marketplace and payday loans, traveler's checks and virtual currency)1
- Direct property and casualty insurance
- Debt collecting activities
- Financial transactions processing and clearinghouses (including mobile payments, prepaid cards and transmittals of money)
- Pawnshop loans
- Truck, utility trailer and RV lending and leasing
- Used car sales and leasing
- Wired telecommunications carrier products and services (including cable television and landline telephones)
- Wireless telecommunications carrier products and services (including cell phones but excluding satellites)
In addition, the Proposed Rule could reach a State or municipal government-affiliated utility that provides credit or payment processing services to a consumer resident in that State or municipality in order to allow a consumer to purchase energy from an unaffiliated energy supplier.
Excluded from the proposed rule's scope would be broker dealers in limited circumstances; the federal government and state and local governments; and merchants or sellers of nonfinancial goods, in limited circumstances, who extend consumer credit.
Under the Proposed Rule, a "consumer" is defined as an individual or representative acting on behalf of an individual.
An "arbitration agreement" covered by the Proposed Rule includes both stand-alone arbitration agreements and arbitration clauses within an agreement for a consumer financial product or service.
Arbitration clauses – required contract provision
The heart of the Proposed Rule prohibits providers from relying on a pre-dispute arbitration clause when confronted with a class action claim relating to certain financial products or services. The provider may not seek a stay or dismissal of the claim, despite the presence of an unambiguous arbitration clause, unless and until the class action attempt has failed and an appeal is no longer available.
The Proposed Rule also requires the following specific language to be included in arbitration clauses for products or services falling within the scope of the Proposed Rule:
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.
The required language varies slightly in situations where the agreement is for multiple products or services, only some of which may fall under the regulation. Further, if a provider becomes party to a contract that previously existed between the consumer and another party, the provider must, within 60 days, amend the contract to include language required by the Proposed Rule or provide a notice as required by the Proposed Rule.
A limited exception to the language requirement in the Proposed Rule exists with respect to general pre-paid non-reloadable cards (not store-specific cards). Because many pre-paid cards are often sold by third-party retailers, the CFPB determined that it would be an unreasonable burden on providers to require them to retrieve all their prepaid cards from various retailers and reprint them. In this unique situation, a provider's obligations under the Proposed Rule depend on whether the provider is able to contact the consumer in writing. The CFPB noted, in its analysis, that the Proposed Rule does not impose on providers an obligation to obtain a consumer's contact information.
Arbitration record submission requirements
In addition to including specific language in arbitration agreements, the CFPB has proposed new record submission requirements. The provider must ensure that the CFPB receives, in connection with any claim filed in arbitration—either by the provider or another—concerning consumer financial products or services covered by the Proposed Rule, the following information: (i) the initial claim and counterclaim; the pre-dispute arbitration agreement filed with the arbitrator or arbitration administrator; (iii) the judgement or award, if any; and (iv) any communications a provider receives from the arbitrator or arbitration administrator as a result of the provider failing to pay required filing or administrative fees. Further, the provider must ensure the CFPB receives any communications received by the provider from the arbitrator or arbitration administrator relating to a determination that a pre-dispute arbitration agreement does not comply with the administrator's fairness principles, Proposed Rules, or similar requirements. The Proposed Rule also contains requirements for timing and redaction of a consumer's personal information.
Impact on providers
The Proposed Rule, if adopted, will undoubtedly have an effect on providers of consumer financial products and services, both directly and indirectly. According to the CFPB, these effects could be (i) an increased incentive to comply with the law; (ii) potential additional class litigation expenses; and (iii) a one-time cost of changing language in consumer contracts or an ongoing cost associated with providing contract amendments or notices in the case of providers acquiring pre-existing contracts that do not contain the required language.
The direct impact of the Proposed Rule on providers is the requirement to include specific language in arbitration agreements with consumers. Providers who choose to use arbitration agreements with consumers will be required to amend the language in the contracts used in the future to include the language required by the Proposed Rule. Also, as mentioned above, providers may incur an ongoing cost and burden associated with amending contracts or providing notices to consumers when the provider acquires a pre-existing contract that lacks required language. For example, if Bank A acquires Bank B and Bank B had entered into non-compliant arbitration agreements in the past with consumers, Bank A would be required to amend the agreements or provide the requisite notice under the Proposed Rule.
Another direct impact of the Proposed Rule on providers is the requirement to submit records relating to arbitration. While providers are not responsible for submitting the records themselves if they arrange for another person to submit the records on the providers' behalf, the provider is still ultimately responsible for ensuring compliance with the record submission requirement.
The indirect impact of the Proposed Rule on providers could be costs resulting from efforts to ensure more compliance with the law and from exposure to additional class action litigation. Examples of costs associated with ensuring compliance include (i) investments in general compliance management, such as review of policies, procedures, and staff training materials; and (ii) changes in the consumer financial products or services they offer, such as changing a particular feature of a product or service that makes it more susceptible to class action claims. The CFPB estimates, based on its study, that the Proposed Rule would create class action exposure for about 53,000 providers, which would result in a total of an additional $342 million paid to consumers, an additional $66 million paid to plaintiff's attorneys, and an additional $39 million spent by providers on their own attorneys fees and internal staff and management time.
The CFPB noted that the application of the Proposed Rule could even have an effect on due diligence in mergers and acquisitions, including the particularly complex area of healthcare and medical debt:
Buyers of medical debt would, in some cases, need to perform due diligence to determine how this proposed rule would apply to the debts they buy. For example, proposed § 1040.4(a)(2) would require buyers of consumer credit, including medical credit, when they enter into a pre-dispute arbitration agreement to amend the agreement to contain a provision – or send the consumer a notice – stating that the debt buyer would not invoke that pre-dispute arbitration agreement in a class action.
Finally, if the Proposed Rule is adopted in final form, with any changes made in response to the comments, providers will need to know how much time they will have before compliance is mandatory. Comments are due on or before August 22, 2016. Given the wide use of these arbitration clauses, it can be anticipated that a large number of comments will be submitted, both for and against the Proposed Rule.
If and when finalized, the effective date of any final rule will be 30 days after the date of its publication in the Federal Register. However, compliance with a final rule will not be required until 180 days after the effective date, and could possibly be extended, in order to give providers a sufficient amount of time to amend contracts, policies, and procedures in order to comply with the provisions of any final rule.
Norton Rose Fulbright offers a series of publications on virtual currency and you can register here