Arbitrator and NAA member Lise Gelenter discusses the recently announced rule by the Consumer Financial Protection Bureau regarding waivers of class actions in financial consumer contracts.

On July 10, 2017, the federal Consumer Financial Protection Bureau (CFPB) issued a final rule that bans financial services companies regulated by the CFPB from trying to enforce pre-dispute arbitration agreements against consumers who seek to initiate or join class action lawsuits brought in court.  The agency’s press release, which has a link to the full 775-page explanation and text of the rule, is here.  The finalization of the rule means that customers of financial services companies that are regulated by the CFPB cannot be forced to waive their access to courts to bring class actions in order to vindicate their statutory rights.  The rule applies only to financial services companies under the CFPB’s fairly broad jurisdiction, which includes many credit card issuers and banks.

The agency had originally proposed the rule in May 2016 after completing a congressionally-mandated study on the effects of class action waivers on financial service company consumers. It was concerned that: “by blocking class actions, arbitration agreements reduce deterrent effects and compliance incentives in connection with the underlying laws. The Bureau was also concerned that consumers do not have sufficient opportunity to obtain remedies when they are legally harmed by providers of consumer financial products and services, because arbitration agreements effectively block consumers from participating in class proceedings.”  Rulemaking, p. 717.

The rule, codified at 12 CFR Part 1040, prohibits regulated consumer financial services providers from using pre-dispute arbitration agreements to prevent customers from bringing or being part of court-based class action lawsuits.  Regulated companies will have to include language in all consumer contracts with pre-dispute arbitration clauses after the rule’s effective date (60 days from publication in the Federal Register, or roughly 65-70 days from the issuance of the rule) that states:

We agree that neither we nor anyone else will rely on this agreement to stop you from being part of a class action case in court.  You may file a class action in court or you may be a member of a class action filed by someone else. 12 C.F.R. § 1040.4(a)(2)(i) [p. 753 of the final rule].

The Bureau rejected a proposal to allow regulated companies to be able to block class actions in court if they allowed for class arbitrations.  It found that there was little evidence showing that the use of class procedures in arbitration could actually achieve the public policy goals of class actions in a court – the protection of consumers.  Moreover, the agency was concerned about the lack of procedural safeguards in the class arbitration setting.  Rulemaking, p. 521.

It should be noted that the new rule does not bar pre-dispute agreements to resolve disputes through arbitration on an individual basis.  However, it does bar the use of those pre-dispute agreements to block consumers’ access to class actions in court.  The CFPB’s study did not find problems with arbitration as a dispute resolution tool, but the agency’s comprehensive study concluded that arbitration should not foreclose class actions in court because they serve the important public goal of allowing private enforcement of public rights in cases in which individual actions to enforce the law would have little impact or could not be brought due to the small amount of money at stake in any one complaint.

The CFPB is an independent federal agency that is run by a director who cannot be removed from his or her post except for cause.  This may prove important in the longevity of the rule, as on June 5, 2017, a non-independent agency, the Centers for Medicare and Medicaid Services (CMS), proposed rescinding a rule promulgated by the Obama administration that barred nursing homes from requiring nursing home residents to sign any type of pre-dispute arbitration agreements as a condition of admission to the home.