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CFPB Issues Final Rule Barring Waivers of Class Action Claims in Arbitration Agreements for Consumer Financial Transactions

On Monday July 10, 2017, the CFPB issued a final rule that will bar companies from using pre-dispute arbitration agreements which require consumers to waive their ability to bring or participate in class actions in connection with many consumer financial transactions.

The Dodd-Frank Act called for the CFPB to conduct a study on the use of mandatory arbitration agreements for consumer financial transactions, and further allowed the CFPB to issue regulations which prohibit or impose conditions or limits on such agreements if doing so was in the public interest, protected consumers, and was consistent with the findings of the CFPB’s study.  The CFPB concluded its study in March 2015 and issued a proposed rule in May 2016.

The rule precludes the use of pre-dispute arbitration provisions which bar a consumer from bringing or participating in a class action in connection with a covered consumer financial product or service, and requires inclusion of express language that the arbitration agreement does not bar the consumer from initiating or participating in a class action.  This provision will apply to agreements entered into beginning 241 days after the final rule is published in the Federal Register and does not affect or limit arbitration agreements with class action waivers entered into before that date.  The rule does not preclude pre-dispute agreements requiring individual actions to be arbitrated, as opposed to class actions, and does not prevent parties from entering into post-dispute agreements to arbitrate.

The final rule applies to creditors who extend consumer credit, who participate in consumer credit decisions, who refer applicants and prospective applicants to consumer credit providers, and who select or offer to select consumer credit providers, as well as entities which buy or sell, or service, extensions of consumer credit.  The rule also applies to automobile leases, debt management or debt settlement services, credit repair providers, credit reporting companies, depository accounts, electronic fund transfers and remittances, payment and credit card processors, check cashing, check collection, and check guarantee services, and debt collection.  The rule expressly excludes entities regulated by the Securities and Exchange Commission or a state securities commission, entities regulated by the Commodity Futures Trading Commission, governmental entities, entities which have less than 25 customers per year, entities which offer consumer credit in connection with non-financial goods and services who are otherwise not subject to the CFPB’s rulemaking power, employers who offer the consumer financial product or service as an employee benefit, and entities which are exempt from the CFPB’s rulemaking power.

To the extent a covered entity uses pre-dispute arbitration agreements after the rule goes into effect (such as for individual actions), it must submit to the CFPB certain records and documents regarding the arbitration, including the claims and any counterclaims, answers to the claims and counterclaims, a copy of the arbitration agreement, and any judgment or award.  Covered entities must also provide any communications from the arbitrator or arbitration administrator regarding the entity’s failure to pay any required filing or administrative fees, and any communications from the arbitrator or arbitration administrator that the arbitration agreement does not comply with the administrator’s fairness principles, rules, or similar requirements.  Finally, the entity must submit any court filings in which it seeks to dismiss, defer, or stay a case due to a pre-dispute arbitration agreement, along with a copy of the arbitration agreement.  The CFPB intends to post these submissions, with certain private or identifying information redacted, on a public website starting around July 2019.

Note that this rule will have little new effect on mortgage loans, as the Dodd-Frank Act already expressly barred the use of pre-dispute arbitration agreements in connection with mortgage loans, and such arbitration agreements were in limited use before that due to decisions in 2004 by Fannie Mae and Freddie Mac to no longer purchase mortgages which were subject to mandatory arbitration provisions.

The text of the final rule and the CFPB’s analysis and interpretations can be found at: https://s3.amazonaws.com/files.consumerfinance.gov/f/documents/201707_cfpb_Arbitration-Agreements-Rule.pdf.