The Consumer Financial Protection Bureau (CFPB) is considering proposing rules that would prohibit consumer financial services companies from using class action waivers in consumer arbitration clauses, the CFPB announced today at a field hearing in Denver, Colorado.

The CFPB has published an outline of its proposals in preparation for convening a Small Business Review Panel to gather feedback from small industry stakeholders. This is the first step in the process of a potential rulemaking on this issue. The proposals would ban companies from including arbitration clauses that block class action lawsuits in their consumer contracts. This would apply to most consumer financial products and services that the CFPB oversees, including credit cards, checking and deposit accounts, prepaid cards, money transfer services, certain auto loans, auto title loans, small dollar or payday loans, private student loans, and installment loans. 

The proposals would not ban arbitration clauses in their entirety.  However, for companies still willing to offer arbitration for individual cases, the clauses would have to say explicitly that they do not apply to cases filed as class actions unless and until class certification is denied by the court or the class claims are dismissed in court. Companies would be permitted to give the consumer a choice of bringing a class proceeding in arbitration or in court. However, the CFPB acknowledged that that many if not most companies would not include this option since an industry trade group has characterized class arbitration as “a worst-of-all-worlds Frankenstein’s monster.”

The proposals would also require that companies that choose to use arbitration clauses for individual disputes submit to the CFPB the arbitration claims filed and awards issued so that the CFPB can monitor the fairness of the process. The CFPB is also considering publishing the claims and awards on its website so that the public can monitor them.

Alan S. Kaplinsky, practice leader of Ballard Spahr’s Consumer Financial Services Group, was invited by the CFPB to attend the field hearing to present the financial services industry’s position on the proposed rules. Also attending were Jean Sternlight, Professor of Law at the University of Nevada, Las Vegas; Jose Vasquez of Colorado Legal Services;  Ira Rheingold of the National Association of Consumer Advocates;  John Ruby of Bellco Credit Union; and Stephen J. Ware, Professor of Law at the University of Kansas. Kaplinsky testified at the hearing:

“Although the CFPB’s proposal reflects an inclination not to outright prohibit the use of arbitration, let's make it perfectly clear. By requiring companies to insert in their arbitration provisions language excepting class actions from arbitration, the Bureau is in reality proposing an outright ban. If this proposal becomes a final regulation, most companies will simply abandon arbitration altogether. That’s because the cost-benefit analysis of using arbitration will shift dramatically.

While companies’ dispute resolution costs will soar, consumers will be the real losers here since they will no longer have available to them arbitration, which is a faster, cheaper and more effective forum than courts for resolving disputes. You don’t need to take my word for it. The data in the CFPB’s own study vividly demonstrates that the only people who benefit from class actions are the plaintiffs’ class action lawyers and, to a lesser extent, the lawyers who defend those lawsuits.

And there is no doubt that the increased costs resolving disputes will be passed along to customers in the form of higher prices or reduced services. That is simple economics.

By electing not to ban arbitration of individual disputes when there is no class action involved, even the CFPB has implicitly conceded that there is nothing wrong with arbitration. What they have done here is exalt the class action process, which has been discredited by courts and commentators for decades. Despite the results of the CFPB’s own study showing that consumers don't really benefit from class actions, the CFPB concludes, in my view illogically, that class actions need to be preserved regardless of the adverse consequences to consumers, the very group it is charged with protecting.”

The CFPB confirmed that “no providers of consumer financial services or products will be required to comply with new regulatory requirements before a proposed rule is published, public comment is received and reviewed by the Bureau, a final rule is issued, and 180 days passes from the effective date of the regulation, as required by Dodd-Frank section 1028(d).” It added that the CFPB contemplates setting an effective date of 30 days after the rule is published. It therefore anticipates that the rule would not apply to arbitration agreements entered into before 210 days after a rule is published by the CFPB. 

Thus, it is likely that any final rule would not take effect until late 2016 or early 2017, at the earliest. In the meantime, companies who do not presently use arbitration agreements in their financial services contracts should strongly consider adding them, since agreements entered into before a rule becomes effective are grandfathered under existing law which is favorable to class action waivers. In AT&T Mobility v. Concepcion, the U.S. Supreme Court held that the Federal Arbitration Act preempts state laws that refuse to enforce class action waivers in consumer arbitration agreements.

Ballard Spahr’s Consumer Financial Services Group pioneered the use of pre-dispute arbitration provisions in consumer financial services agreements. It is nationally recognized for its guidance in structuring and documenting new consumer financial services products, its experience with the full range of federal and state consumer credit laws, and its skill in litigation defense and avoidance.

For more information, please contact Consumer Financial Services Group Practice Leader Alan S. Kaplinsky or Mark J. Levin.

Copyright © 2015 by Ballard Spahr LLP.
(No claim to original U.S. government material.)

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This alert is a periodic publication of Ballard Spahr LLP and is intended to notify recipients of new developments in the law. It should not be construed as legal advice or legal opinion on any specific facts or circumstances. The contents are intended for general informational purposes only, and you are urged to consult your own attorney concerning your situation and specific legal questions you have.





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