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The Consumer Financial Protection Bureau ("CFPB") issued a new rule that restricts mandatory arbitration clauses in certain consumer financial contracts. The final rule was adopted without the addition of any substantial changes since the first version was proposed by the CFPB in 2016 (see previous coverage).
The rule applies to providers of certain consumer financial products and services that relate to lending, storing, and moving or exchanging money. The final rule works by (i) restricting providers from using pre-dispute arbitration agreements that prohibit class action lawsuits, (ii) mandating that providers include language in their arbitration agreements that reflects this limitation, and (iii) imposing requirements that providers submit records related to pre-arbitration agreements to the CFPB for monitoring purposes.
Under the rule, companies still would be able to include arbitration clauses in their contracts for the resolution of individual disputes. However, in contracts that are subject to the rule, the clauses would have to contain language stating explicitly that they could not be used to stop consumers from being part of class actions in court.
According to the CFPB, the new rule will "restor[e] consumers' rights to join together to pursue justice and relief through group lawsuits." CFPB Director Richard Cordray commented on the potential effects of the new rule:
"[Arbitration] clauses allow companies to avoid accountability by blocking group lawsuits and forcing people to go it alone or give up. Our new rule will stop companies from sidestepping the courts and ensure that people who are harmed together can take action together."
House Financial Services Committee Chair Jeb Hensarling (R-TX) voiced his opposition to the rule and called on Congress to reject it:
"This bureaucratic rule will harm American consumers but thrill class action trial attorneys. In releasing this rule today, Director Cordray ignored a prior request by the acting Comptroller of the Currency that he work with the OCC to resolve its potential safety and soundness concerns. As a matter of principle, policy, and process, this anti-consumer rule should be thoroughly rejected by Congress under the Congressional Review Act."
The rule will become effective 60 days after its publication in the Federal Register.
Commentary / Jacob Dachs
While the rule (if it survives) is likely to have far-reaching effects for banks, auto lenders, credit card issuers and payday lenders (among others), it will not apply to SEC- and CFTC-regulated entities. The CFPB considered applying the rule to CFTC-regulated entities; this would have subjected those entities to compliance with the rule – on top of an existing CFTC rule that requires customers to sign a separate disclosure before agreeing to pre-dispute arbitration in certain contracts. However, based on a CFTC-submitted comment letter asserting its "exclusive jurisdiction . . . over CFTC-regulated products and services," the CFPB ultimately deferred to the CFTC. As a result, the final rule includes exemptions for persons regulated by the SEC, state securities regulators or the CFTC, as well as for all transactions subject to CFTC jurisdiction. See CFPB Rule 1040.3(b)(1).
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