On October 7, 2015, the US Consumer Financial Protection Bureau (“CFPB”) announced a proposal to prohibit financial services companies from using certain types of arbitration clauses in consumer contracts. The CFPB has proposed prohibiting financial services companies from using arbitration clauses to prevent consumer class action proceedings in court, but would continue to permit arbitration in individual consumer disputes.
Under the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”), the CFPB, which was established by Dodd-Frank, was required to undertake a study on the use of arbitration clauses in consumer financial markets. The CFPB released its 728-page report in March of 2015. The report found that arbitration clauses were commonly used, but that the vast majority of consumers were unaware of such clauses. The CFPB concluded that permitting consumers to bring class action lawsuits (or group actions) could be an effective way to provide consumers relief in certain circumstances, such as where the dollar amount of the claim is small. The CFPB also stated that class actions can have a much larger deterrent effect on errant company or industry practices than can individual proceedings.
As part of its proposal, the CFPB would require financial services companies to provide all arbitration filings and written awards to the CFPB, which the CFPB could make public (subject to appropriate privacy protections). The CFPB stated that making this information public would “bring the arbitration of individual disputes into the sunlight of public scrutiny” and “would provide a safeguard against arbitration proceedings that are unfair or otherwise harmful to consumers.”
The CFPB emphasized that, at this time, its proposal would permit financial services companies to continue to use arbitration clauses for individual consumer disputes. Those clauses would have to make it clear that consumers still had the right to pursue class actions in court (and, as an additional but not standalone option, pursue group actions in arbitration).
The CFPB stated that it intends for its proposal to cover a broad range of consumer financial services providers:
- banks
- credit unions
- credit card issuers
- “certain auto lenders”
- small-dollar or payday lenders
- auto title lenders
- installment and open-end lenders
- private student lenders
- “providers of other credit in certain other contexts”
- loan originators that are not creditors
- providers of credit in the form of deferred third-party billing services
- providers of certain auto leases for at least 90 days
- servicers of covered credit and auto leases
- remittance transfer providers
- providers of domestic money transfer services or currency exchange
- general-purpose reloadable prepaid card issuers
- certain providers of virtual currency* products and services (*Norton Rose Fulbright offers a series of publications on virtual currency and you can register here)
- check cashing providers
- credit service/repair organizations
- debt settlement firms
- providers of credit monitoring services and
- debt buyers
The CFPB also is considering adding payment processors to this long list.
The CFPB is considering five areas of exceptions from the proposal, for consumer financial products or services 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, and tribal governments and government entities to persons in their jurisdiction, or to persons outside their jurisdiction if not credit that is subject to the Truth in Lending Act or Regulation Z, or
- credit a business extends for the consumer’s purchase of its own nonfinancial goods or services under certain circumstances.
The CFPB has requested public comment on the proposal. If the rule is adopted, the CFPB anticipates that it would have an effective date 30 days after publication, but the new rule would not affect arbitration agreements entered into any date prior to 210 days after the rule is published because Dodd-Frank requires 180 days for an arbitration rule to become effective.
In contrast, courts in Europe seem to be looking more favorably upon arbitration agreements between commercial entities.
You can find more information on the European Union’s reaction to “anti-suit injunctions” at page 25 of Norton Rose Fulbright’s International Arbitration Report (Issue 5).
