On October 7, the Consumer Financial Protection Bureau (CFPB)
released an outline of its proposal for a possible rule regarding
arbitration clauses in consumer financial product and service
agreements.
There are two elements to the CFPB's proposal: (1) Elimination
of agreements blocking consumer participation in class actions and
(2) submission to the CFPB (and potentially public posting) of
arbitral claims and awards.
Enable Consumer Access to Civil Class Actions
The proposal would prohibit the application of arbitration
agreements to class action cases. Specifically, the proposal would
require that any contract or agreement for a covered consumer
financial product or service explicitly state that the arbitration
agreement is inapplicable to cases filed in court on behalf of a
class unless and until class certification is denied or the class
claims are dismissed.
The CFPB's proposal indicates that the Bureau would likely
provide form or model language, which would act as a safe harbor
for companies that choose to employ the model language in their
agreement.
Require Submission of Arbitral Claims and Awards
The second proposal would require covered entities that use
arbitration agreements in their contracts with consumers to submit
to the CFPB initial claim filings and written awards in consumer
finance arbitration proceedings. The Bureau is also considering
whether to publish the claims or awards to its website. This
requirement would apply whether or not the arbitration administer
publishes claims or rewards.
The proposal to submit arbitral claims and awards would apply to
all arbitration proceedings involving a covered business, including
individual and class arbitrations.
Scope of the Proposal
Companies affected by the proposal include those defined as
covered entities in Sections 1002, 1027, and 1029 of the DFA. The
CFPB is also considering whether to cover additional consumer
financial products and services, such as payment processing.
Consumer financial products or services that may be excluded from
the arbitration rule include those that are:
- Already subject to arbitration rules issued by the Securities and Exchange Commission or the Commodity Futures Trading Commission;
- Provided by persons when not regularly engaged in business activity (e.g., an individual who may loan money to a friend);
- Provided by the federal government;
- Provided by state, local, or tribal governments or other government entities to persons in their jurisdiction, or to persons outside their jurisdiction, if it is not credit that is subject to the Truth in Lending Act or Regulation Z; and
- Credit that a business extends for the consumer's purchase of its own nonfinancial goods or services when covered by Section 1027(a)(2)(B)(ii).
Next Steps
A Small Business Review Panel will review and provide feedback on the potential economic impacts of the proposals. The CFPB has posted a list of questions for small businesses participating in the Panel to determine the impact that the proposals would have on small businesses. Comments on the proposal and alternatives will inform the rule ultimately proposed by the CFPB.
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