CFPB Releases Long-Awaited Proposal On Pre-Dispute Arbitration Agreements

On May 5, 2016, the Consumer Financial Protection Bureau (CFPB or the Bureau) released a proposed rule1 to prohibit the use of pre-dispute arbitration agreements to block consumer class actions. The Bureau's proposal reflects concerns about the effects of mandatory consumer arbitration provisions, and a final rule is likely to substantially reduce the efficacy of arbitration clauses for consumer lenders, significantly increase compliance costs and class action exposure, and reduce or eliminate the substantial benefits arbitration provides to consumers. While consumer groups and the class action bar are likely to welcome the proposal—as evidenced by remarks from representatives at a field hearing coinciding with the issuance of the proposed rule—legal challenges are expected to any final rule.

The proposed rule would prohibit covered providers of consumer financial products and services from including pre-dispute arbitration clauses in new contracts that bar a consumer from filing or participating in a class action with respect to the covered consumer financial product or service, and would require any covered pre-dispute arbitration agreement to include specific language to that effect. The proposal also would require a covered provider that uses pre-dispute arbitration agreements to submit certain arbitral records to the Bureau.

The proposed rule would apply to most consumer financial products and services within the CFPB's jurisdiction, including the core consumer financial markets that involve lending money, storing money, and moving or exchanging money.2

Background

For the last few years the CFPB has been examining the role of arbitration agreements in consumer disputes over financial products and services. The Bureau's analysis of arbitration agreements came on the heels of the U.S. Supreme Court's 2011 decision in AT&T Mobility LLC v. Concepcion,3 which held that the Federal Arbitration Act preempts state law purporting to prohibit class action waivers in arbitration agreements. In March 2015, the CFPB completed a study4 of arbitration agreements and other methods for dispute resolution in markets for consumer financial products and services, as directed by the Dodd-Frank Act.5 In October 2015, the Bureau released an outline of its proposals, convened a Small Business Review Panel, and sought input from the public, consumer groups, industry, and other stakeholders. That process concluded in December 2015 with a written report to Director Richard Cordray.

At the May 5 field hearing, Cordray stated that the "study found that class actions provide a more effective means for consumers to challenge problematic practices by these companies. According to the study, class actions succeed in bringing hundreds of millions of dollars in relief to millions of consumers each year...."6

Highlights

The proposal is based on the Bureau's preliminary findings—which follow the March 2015 study—that pre-dispute arbitration agreements are used to prevent consumers from seeking relief from legal violations on a class basis, and that consumers rarely file individual lawsuits or arbitration cases to obtain such relief.

Under the proposed rule, providers would be prohibited from relying on a pre-dispute arbitration agreement entered into after the compliance date with respect to any aspect of a class action that is related to any of the covered consumer financial products or services, unless the court has ruled that the class action may not proceed and any interlocutory appellate review of that ruling has been resolved. Providers would be required to ensure that any pre-dispute arbitration agreements entered into after the compliance date contain a specified provision disclaiming the applicability of those agreements to class action cases concerning a consumer financial product or service covered by the proposed rule.7 The proposed rule would permit an arbitration agreement that allows for class arbitration, provided that a consumer could not be...