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CFPB Issues Proposed Rule to Restrict the Use of Mandatory Arbitration Clauses and Class Action Waivers

If implemented, the Proposed Rule will result in an increase in class action lawsuits against consumer finance companies that currently include class action waivers in their contracts.

On May 5, in one of its most impactful moves since its inception, the Consumer Financial Protection Bureau (CFPB) unveiled a proposed rule to restrict the use of arbitration clauses in consumer financial contracts (Proposed Rule). This Proposed Rule will prohibit most providers of consumer financial products or services from using a pre-dispute arbitration provision that prevents consumers from filing or participating in a related class action lawsuit.

Arbitration agreements were a target of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (Dodd-Frank Act). Section 1028 of the Act required the CFPB to both (1) study pre-dispute arbitration agreements, which resulted in a March 2015 CFPB report to Congress; and (2) regulate the use of pre-dispute arbitration agreements. The Proposed Rule is derived from these requirements.

In its March 2015 study, the CFPB found such clauses were used in hundreds of millions of consumer contracts, including: 53 percent of outstanding credit-card loans; 86 percent of the loans from the largest private student lenders; 44 percent of insured deposits from financial institutions; 92 percent of prepaid card agreements; and in some states, 99 percent of storefront payday loan contracts.

Important aspects of the Proposed Rule include the following:

  • The scope of the rule touches a range of products including: credit cards, checking and deposit accounts, prepaid cards, money-transfer services, specific auto and auto title loans, payday and installment loans, and student loans.

  • The Proposed Rule will create two sets of limitations on pre-dispute arbitration agreements used by covered providers:

    • First, providers will be prohibited from using a pre-dispute arbitration clause to block consumer class action suits, and providers will be required to include language in agreements that memorializes this limitation. To guarantee compliance, the CFPB is offering language that providers would be required to include in arbitration agreements to explain the rule.

    • Second, covered providers that use pre-dispute arbitration agreements must submit certain records relating to arbitration to the CFPB. This is intended to allow the CFPB to collect further data regarding arbitral proceedings, which may hint at future rule-making to address patterns of perceived consumer protection issues.

  • The Proposed Rule will apply to agreements entered into after the rule's effective date.

When implemented, this rule will be a game-changer for nearly all consumer financial contracts. Affected companies should use this time, before implementation, to mitigate class action claims that previously might have been subject to arbitration. Companies should consider a review of all consumer-facing documents to confirm language complies with applicable federal and state law. Additionally, internal policies and procedures must be reviewed to ensure that product origination and servicing is consistent with all legal requirements. Likewise, vendor agreements must be reviewed in relation to applicable lawincluding, most importantly, principal-agency theories. It is imperative that companies anticipate ways to limit liability and manage future class action risks nowas class action defense litigation spending is anticipated to surge in every consumer finance sector.

Notably, this rule should be considered in the context of the CFPB's pending rules related to the collection of certain credit-related information linked to the commercial "small businesses" market as required by Section 1071 of the Dodd-Frank Act.

The public comment period will close 90 days after publication of the Proposed Rule in the Federal Register. The CFPB has proposed that the final rule not be effective until 180 days after its publication.

©2020 Katten Muchin Rosenman LLPNational Law Review, Volume VI, Number 137


About this Author

Claudia Callaway, Litigation Lawyer, Katten Muchin

Claudia Callaway is chair of Katten’s Consumer Finance Litigation practice and co-chair of the Class Action and Multidistrict Litigation practice. She focuses her practice on the defense of state and federal class actions regarding consumer protection and consumer finance laws and representation of clients before the Consumer Financial Protection Board (CFPB), the Federal Trade Commission (FTC) and state banking agencies.

Claudia represents consumer lenders, third-party debt collectors and other consumer  financial services clients in class action suits and...

Christina J. Grigorian, Banking legal Specialist, Katten Muchin Law firm
Special Counsel

Christina J. Grigorian counsels clients in all matters related to banks, bank holding companies, and state and foreign-licensed consumer and commercial lenders. Ms. Grigorian provides advice to the firm’s financial institution clients concerning structural and operational issues, including legislative developments impacting such operations, and has worked with companies and individuals in the establishment of de novo entities, including national banks, federal savings banks and state-chartered institutions, as well as state-licensed lenders. She has also counseled clients with respect to state and foreign licensing regulations and applications. In addition, Ms. Grigorian has extensive experience in electronic payment networks, network processing and network participation agreements, and innovative uses of electronic funds transfers in areas such as state-funded childcare provider reimbursements. She also counsels numerous clients in the area of credit card operations, including private label card agreements and consumer documentation. Ms. Grigorian also has extensive experience with issues related to Internet commerce, including Internet lending and Internet sales.