CFPB's Final Arbitration Rule Published
On July 10, 2017, the Consumer Financial Protection Bureau (the CFPB) released its Final Rule (the Final Rule) to prohibit the use of pre-dispute arbitration agreements in contracts for covered consumer financial products and services to bar class actions. The Final Rule would also require certain providers involved in arbitrations under such agreements to submit specified arbitral and court records to the CFPB. If Congress fails to block the adoption of the Final Rule, which was published in the Federal Register on July 19, 2017, then the Final Rule will become effective September 18, 2017. Compliance with the Final Rule will then be required for pre-dispute arbitration agreements "entered into" on or after March 19, 2018 (the Compliance Date), which is the first weekday at least 241 days after the Final Rule's publication rather than 211 days thereafter as would have been provided by the rule (the Proposed Rule) proposed in the CFPB's May 2016 Notice of Proposed Rulemaking.
The Final Rule adopts the Proposed Rule, which was summarized in our prior client Advisory "5 Things Every Company Needs to Know About the CFPB's Proposed Rule on Arbitration,"1 with some modifications. The Proposed Rule built on the CFPB's March 2015 Arbitration Study and largely mirrored the October 2015 Outline of Proposals of its Small Business Advisory Review Panel for Potential Rulemaking on Arbitration Agreements. If it becomes fully effective, the Final Rule will generally prevent persons that offer or provide covered consumer financial products and services and are subject to the CFPB's jurisdiction, and their affiliated service providers (collectively, providers), from relying on a pre-dispute arbitration agreement to stop consumers from filing or participating in a class action filed in court and will require the inclusion of certain specified provisions in covered pre-dispute arbitration agreements. The Final Rule is intended to cover a broad but specific set of products and services within the core consumer financial markets of storing, lending, and moving money. The Final Rule will also require providers to submit information to the CFPB concerning arbitrations and court proceedings conducted under agreements covered by the Final Rule. Notable revisions to the Proposed Rule that were made in the Final Rule are summarized below.
The Proposed Rule was controversial from its release, and particularly since the November 2016 federal elections, the prospects for the Final Rule's implementation in the near-term have not appeared to be strong. The Acting Comptroller of the Currency has publicly expressed skepticism regarding the analytical premises underlying the Final Rule and requested access to the CFPB's arbitration-related data and "a few additional weeks" to analyze that data, and address prudential concerns before the Final Rule's publication in the Federal Register. CFPB Director Richard Cordray dismissed the Acting Comptroller's concerns and arguments for delay, however, and the Final Rule was published only nine days after its release. The Office of the Comptroller of the Currency, or another agency represented on the Financial Stability Oversight Council (the FSOC), may be able to petition the FSOC to stay the effectiveness of, or set aside, the Final Rule.
In addition, the Congressional Review Act (the CRA) grants Congress the authority to use a joint resolution of disapproval to overturn a rule, within 60 legislative days from when the rule is published, that may not meet the congressional intent. After doing so only once before 2017, Congress has already exercised its CRA authority 14 times this year.2 On July 20, 2017, Representative Keith Rothfus (R-PA) introduced a resolution with the support of all Republican members of the House Financial Services Committee, including Committee Chairman Jeb Hensarling (R-TX), that would do so for the Final Rule. Separately, the version of H.R. 10, the "Financial CHOICE Act of 2017" (the FCA), passed by the House of Representatives last month would, if also passed by the Senate and signed by the President, revoke the CFPB's authority to restrict pre-dispute arbitration agreements.3 The FCA, along with reforms proposed last month by the Department of the Treasury, also would restructure the CFPB and would impose controls on the exercise of its rulemaking and other authorities. Although the FCA has been referred to the Senate Banking Committee for consideration, Committee Chairman Mike Crapo (R-ID) has indicated that the Senate is more likely to develop its own financial reform legislation than to approve the House's version of the FCA. Whether, when, and how congressional Republicans will counteract the Final Rule, therefore, is unclear.
Notable Revisions to the Proposed Rule
The Final Rule was revised from last year's Proposed Rule to, among other things:
- Broaden the definition of the term "pre-dispute arbitration agreement" to include not only agreements with providers (as defined above) but, instead, all agreements between a covered person, as defined by Title X of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the CFPA), and a consumer. This change clarifies that even if a consumer's original counterparty for an arbitration agreement is exempt from the Final Rule, the contract still may be a "pre-dispute arbitration agreement" for which a different person that meets the definition of "provider" would be subject to the Final Rule. For example, an automobile dealer extending an automobile loan would likely be exempt from the Final Rule, but a servicer of that automobile loan could still be prohibited from relying on an otherwise valid pre-dispute arbitration agreement contained in the loan documentation.
- Clarify that so-called delegation provisions, which the CFPB describes as agreements to arbitrate threshold issues (such as enforceability) concerning a pre-dispute arbitration agreement, are considered pre-dispute arbitration agreements under the Final Rule.
- Clarify that an affiliate service provider may be a provider under the Final Rule even if its affiliate (such as a merchant) is not itself a provider.
- Clarify the scope of the Final Rule's coverage to "the offering or provision" of a listed product or service when it is a consumer financial product or service as defined by the CFPA.
- Broaden the Final Rule's coverage to include certain aspects of mobile phone applications and websites offered or provided by providers of covered consumer financial products or services for accessing information about those products or services.
- Clarify that the activities of extending consumer credit, participating in credit decisions, referring applicants, and selecting or offering to select creditors to whom requests for consumer credit may be made are covered by the Final Rule only when they are performed by a "creditor" as defined in Regulation B.
- Exclude creditor referral or selection activity that is incidental to a non-covered business activity.
- Add coverage of certain credit repair products or services.
- Narrow the Proposed Rule's exclusion from coverage for transmission or exchanging of funds that is "integral" to a non-covered product or service to exclude only such activity that is "necessary" to such a product or service.
Exclusions from Coverage
- Clarify that certain persons are entirely excluded from the Final Rule's coverage regardless of what product service they offer or provide.
- Generally exclude from the Final Rule each of the following:
- a person regulated by the Securities and Exchange Commission (SEC), as defined by the CFPA, including a securities broker-dealer or SEC-registered investment adviser;
- a person regulated by the Commodity Futures Trading Commission, as defined by the CFPA;
- a person to the extent regulated by a State securities commission, as described in the CFPA, as either a broker dealer or an investment adviser;
- a Federal agency; and
- a State, Tribe, or "arm" thereof.
- Clarify that the numerical-threshold exemption from the Final Rule applies based on the frequency with which a product or service is provided, regardless of the number of times it is offered, and the effect of exceeding the exemption's numerical threshold.
- Clarify that the Final Rule will not undo the statutory limits of the CFPA's so-called merchant exclusion on the CFPB's authority over a merchant, retailer, or other seller of nonfinancial goods or services or of any of the other exclusions under 12 U.S.C. §5517 or §5519.
- Broaden the exemption for merchants who purchase or acquire consumer credit from other exempt merchants to apply to both the purchase or acquisition itself and to any servicing or collection activities by the merchant purchaser or acquirer.
- Add an exemption from the Final Rule for employers to the extent they are offering or providing a product or service to an employee as an employee benefit.
Limitations on the Use of Pre-Dispute Arbitration Agreements
- Clarify that, for a pre-existing agreement to arbitrate future disputes between the parties that predates the Compliance Date, the Final Rule applies only with respect to any new product or service provided under that agreement.
- Provide an example of conduct that does not constitute prohibited reliance on a pre-dispute arbitration agreement under the Final Rule.
- Permit class action defendants to rely on a pre-dispute arbitration agreement where they have a genuine belief that they are not subject to the Final Rule.
- Improve the readability of the provisions required to be included in covered pre-dispute arbitration agreements.
- Align the specified language for a required amendment to a previously existing arbitration agreement with the language required to be included in covered pre-dispute arbitration agreements.
- Permit a provider sending a written notice to effect an amendment to a pre-dispute arbitration agreement that applies to multiple products or services, only some of which are covered by the Final Rule, to include an additional sentence clarifying the applicability of the notice.
- Specify new sentences that providers are allowed to add at the end of the provisions required to be included in covered pre-dispute arbitration agreements.
- Permit a provider that uses a standard term in the rest of a pre-dispute arbitration agreement to describe the provider or the consumer (such as "Bank" or "Customer") to use that term instead of the term "we" or "you" in the provisions required to be included in any provision or notice required by the Final Rule.
- Permit Tribal governments to reserve their right to claim they cannot be sued due to their sovereign immunity.
- Permit the use of a language other than English for a pre-dispute arbitration agreement that is also written in that other language.
- Require the insertion of amendment language into covered delegation provisions.
- Clarify that despite the temporary Compliance Date exception for providers of general-purpose reloadable prepaid card agreements with respect to the Final Rule's notice and amendment requirements, such providers still may not rely on pre-dispute arbitration agreements in class actions.
Submission of Arbitral and Court Records
- Expand the requirements for providers to submit records of proceedings involving pre-dispute arbitration agreements to include court records (excluding incidental uses of a pre-dispute arbitration agreement that do not rise to the level of reliance).
- Require the CFPB to post provider-submitted arbitral and court records to its website.
Considerations for Companies Offering Consumer Financial Products and Services
Now that the clock for providers to be subject to the Final Rule's requirements is close to starting, companies offering consumer financial products and services will need to resume (or begin) their compliance work in earnest and think hard about how they will resolve consumer disputes and mitigate potential liability arising therefrom under the Final Rule. Although the CFPB's changes to the Final Rule will require a fresh look at existing plans and strategies, the major considerations are similar to those for the Proposed Rule. Companies would be well served by reviewing their consumer contracts, including the extent of their exposure to the Final Rule and the effect of the Final Rule; by considering ways to mitigate risk, such as by qualifying for an exclusion or exemption or otherwise remaining outside the Final Rule's coverage or by reviewing practices, policies, and procedures to assess and mitigate class action exposure; and by keeping tabs on pending legislation and financial regulatory reform.
© 2017 Arnold & Porter Kaye Scholer LLP. This Advisory is intended to be a general summary of the law and does not constitute legal advice. You should consult with counsel to determine applicable legal requirements in a specific fact situation.
The Arbitration Study and the Outline of Proposals were summarized in our prior client Advisories "CFPB Releases Much Anticipated Arbitration Clause Study" and "CFPB Takes Latest Step Toward Limiting Use of Pre-Dispute Arbitration Agreements for Consumer Financial Products and Services," respectively.
Jessica Silver-Greenberg & Michael Corkery, U.S. Agency Moves to Allow Class-Action Lawsuits Against Financial Firms, N.Y. Times (July 10, 2017). For further reading on use of the CRA to repeal regulations initiated during the Obama Administration, please refer to our prior client Advisory ";Restraining the Current Regulatory State Through the Congressional Review Act."
For further reading on the FCA, please refer to our prior client Advisories "House Financial Services Committee Approves Revised 'Financial CHOICE Act'"and "House of Representatives Passes 'Financial CHOICE Act.'"