United States: CFPB Moves To Ban Class Action Waivers But Will Not Ban Individual Arbitration

In a move that the financial industry long anticipated but nonetheless greeted with loud groans, the Consumer Financial Protection Bureau ("CFPB") on October 7, 2015 proposed to ban class action waivers in contracts for consumer financial products and services. Although the proposed ban would not take effect for a few years, it would have a significant impact on banks and nonbank lenders because it is expected to lead to a major increase in class action litigation. Since class action waivers and arbitration clauses have historically gone hand-in-hand in consumer agreements, these provisions have helped stem the tide of class actions in recent years. According to the CFPB, more than half of credit card contracts and 44 percent of checking account agreements contain arbitration clauses, and these provisions are common in auto finance contracts as well.

The CFPB's announcement came in the form of a 34-page "outline of proposals"1 that must be reviewed by a Small Business Review Panel before the CFPB can begin formal rulemaking. The CFPB discussed its proposals at a field hearing in Denver, where CFPB Director Richard Cordray criticized class action waivers as a "free pass that prevents consumers from holding their financial providers directly accountable for the harm they cause when they violate the law."2 Industry representatives argued that the proposed class action waiver ban would be harmful because it would encourage frivolous lawsuits. They also argued that it was unnecessary because most consumers are able to resolve their disputes through customer service inquiries or complaint mechanisms operated by the CFPB and the state attorneys general.

Ban Will Likely Take Effect in 2018, Will Not Affect Existing Contracts

Pursuant to the Small Business Regulatory Enforcement Fairness Act, the October 7 outline will be reviewed by a Small Business Review Panel. Only after obtaining feedback from the Panel can the CFPB formally propose new regulations for notice and comment. We expect the Panel's process to take four to eight months,3 with a proposed rule potentially released in the first half of 2016. Following a comment period, the CFPB would consider comments and issue a final rule, possibly by mid-2017. The Consumer Financial Protection Act ("CFPA") requires that any limits on arbitration apply to customer agreements entered into at least 180 days from the effective date of the final rule, and the CFPB is contemplating an effective date 30 days after the publication of the final rule.4

Thus, like all new CFPB rules, the proposed ban on class action waivers would take several years to draft and implement. Fortunately for financial institutions, even if adopted, it will only impact contracts that are entered into after the rule takes effect – likely no earlier than 2018 – and of course the rules will not impact non-consumer financial contracts.

Given the magnitude of industry opposition to this potential rule, the CFPB may have an incentive to finalize and implement the rule by then because Director Cordray's five-year term expires in July 2018. Although the CFPA permits the Director to serve beyond the expiration of the term "until a successor has been appointed and qualified,"5 the agency will likely want to complete its changes to the arbitration system well before the White House and Congress begin discussions of a nominee to succeed Director Cordray.

Proposal Follows March 2015 Report to Congress that Foreshadowed a Proposed Ban

The CFPB's proposal follows its release in March 2015 of a 700-page Report to Congress, in which the agency argued that consumers receive far more monetary benefits from class action litigation than from arbitration.6 The March Report fanned the flames of a spirited debate between consumer advocates and industry representatives about the impact of arbitration clauses. Industry has argued that arbitration clauses save financial institutions money, which financial institutions can then pass along to consumers in the form of cheaper and more available credit. The CFPB's March Report contended that the removal of arbitration clauses did not result in an increase in the cost of credit to consumers. At the October field hearing, Director Cordray said the Report "did not find evidence that credit card companies either increased prices or reduced access to credit when they eliminated their arbitration clauses."

CFPB Preserves Mandatory Pre-Dispute Arbitration Clauses for Individuals

To the extent there is a silver lining for financial institutions in the CFPB's announcement, it is the fact that the CFPB decided not to propose an outright ban on mandatory arbitration clauses. Indeed, such a ban would likely encounter strong opposition in Congress and the courts, which have repeatedly confirmed federal policy favoring arbitration clauses (as embodied in the Federal Arbitration Act). Instead, the Bureau's targeted approach proposes to allow pre-dispute arbitration clauses in consumer financial contracts, under two conditions:

  • The contract must state that the arbitration clause does not apply to class action litigation, unless and until the class certification is denied by the court or the class claims are dismissed in court. The CFPB expects to provide model contract language.
  • Companies must submit to the CFPB all filings made by or against them in consumer financial arbitration disputes, and any decisions resulting from those filings.

The CFPB said that it would use the proposed information collection to monitor the effects of arbitration clauses on the resolution of individual disputes. In his remarks, Director Cordray said that the decision not to ban arbitration clauses for individual disputes "is consistent with the conclusions reached in our study. It is also consistent with rules that the Financial Industry Regulatory Authority has applied to broker-dealers for years, with the approval of the Securities and Exchange Commission."

But the CFPB's decision to permit institutions to continue requiring arbitration for individual disputes will not provide much comfort to industry, given that, as the CFPB found in its Report, "companies rarely use their arbitration clauses to block consumers from suing them in individual cases."7

Financial Institutions Should Prepare for an Increase in Class Action Litigation

Even though the proposed ban on class action waivers would not take effect until 2018 or later, financial institutions should redouble their efforts now to ensure they are complying with all consumer financial laws, to avoid any gaps or potential vulnerabilities in 2018. The proposed class action waiver has the potential to increase the level of scrutiny on banks' practices as much as – if not more than – the creation of the CFPB back in 2010, for the simple reason that, as zealous as the CFPB has been about policing the practices of banks and other lenders, it only has 1,400 employees. By comparison, the size and resources of the class action bar is limited merely by the size of the attorney fees, which will only grow as a result of the increasing number of class actions.

In recent years, Reed Smith has defended hundreds of putative class actions filed across the country, often by the leading national plaintiffs' class action firms. We are currently representing dozens of financial institutions in class action suits, including cases involving RESPA, TILA, TISA, TCPA, MERS, FDCPA, HAMP, HBOR, mortgage insurance, call recording, and fair lending. We have a successful track record handling all phases of such litigation, including dispositive motions, class certification, discovery, and trial. In several significant instances – our experience includes the national coordination and organization of the defense of multiple actions in different jurisdictions where overlapping issues are raised, including proceedings before the Judicial Panel on Multidistrict Litigation.

Footnotes

1 CFPB, "Small Business Advisory Review Panel for Potential Rulemaking on Arbitration Agreements" ("Outline"), October 7, 2015, available at http://files.consumerfinance.gov/f/201510_cfpb_small-business-review-panel-packet-explaining-the-proposal-under-consideration.pdf.

2 CFPB, "Prepared Remarks of CFPB Director Richard Cordray at the Arbitration Field Hearing" ("Cordray Remarks"), October 7, 2015, available at www.consumerfinance.gov/newsroom/prepared-remarks-of-cfpb-director-richard-cordray-at-the-arbitration-field-hearing-20151007/.

3 The last major outline of proposals that the CFPB took to a small business panel was on payday, car title, and installment lending. That outline was released in March 2015; seven months later, the CFPB is still drafting a proposed rule.

4 Outline at 22 (citing 12 U.S.C. 5518(d)).

5 12 U.S.C. 5491(c)(2).

6 To view our Client Alert discussing the March 2015 Report, click here. The Report is available at www.consumerfinance.gov/reports/arbitration-study-report-to-congress-2015/.

7 Cordray Remarks.

Client Alert 2015-280

This article is presented for informational purposes only and is not intended to constitute legal advice.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
In association with
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

Disclaimer

Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

Registration

Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

Cookies

A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

Links

This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

Mail-A-Friend

If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

Security

This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.