CFPB Issues Final Arbitration Rule – Who Is Covered and How Does It Affect Your Business?

Financial Industry Alert | July.24.2017

The CFPB, after entertaining numerous comments, issued its final arbitration rule on Monday, July 10. The rule prohibits specified providers of certain consumer financial products and services (loans, credit cards, and other products and services) from using an agreement with a consumer that provides for mandatory arbitration of disputes in lieu of filing or participating in a class action. (CFPB regulations already prohibit using pre-dispute agreements in most types of consumer mortgages.)

Key takeaways of the rule:

  • Arbitration provisions still may be included in consumer-facing product or service agreements such as those mentioned above, but such agreements must include the following provision: "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." 
  • As for timing, the rule will become effective 60 days after it is published in the Federal Register, and will apply to contracts entered into more than 180 days after it becomes effective. The rule was published in the Federal Register on Wednesday, July 19, 2017. In the absence of effective action to block the rule, discussed below, the rule will become effective on September 17, 2017 and will apply to contracts entered into after March 16, 2018.
  • Providers of consumer financial products covered by the rule will be required to submit certain arbitral and court records to the CFPB.
  • The rule does not apply to activities only incidental to the provision of consumer financial products or services (i.e., buying and selling loans, servicing loans or providing debt management services, for example). Persons regulated by the SEC, the CFTC, a state securities commission, a federal agency and any State or Tribe are not covered by the rule. Further, any person that offers products or services (whether financial in nature or not) to no more than 25 consumers in each of two consecutive years is not covered by the rule.
  • Notably, there is also a limited exception for compliance with the rule for prepackaged general purpose reloadable card agreements if (a) the consumer acquires the card at a retail store, (b) the pre-dispute arbitration provision is inside of the packaging material and (c) it was packaged prior to the compliance date of the rule. However, the exception only applies if a provider has the ability to contact the consumer in writing. As per the rule, within 30 days of obtaining the consumer's contact information, the provider must notify the consumer that the pre-dispute arbitration agreement complies with the requirements of the rule (the class action waiver ban) by providing an amended pre-dispute agreement to the consumer.
  • Congress may use its authority under the Congressional Review Act (CRA) to invalidate the CFPB's new rule. Congress will have 60 legislative days to act from the rule's publication in the Federal Register. If both houses of Congress vote on resolutions disapproving the rule and the president signs those resolutions (which can be brought to the floor without committee votes and do not need a 60-vote majority in the Senate to pass), regulators are barred from formulating a regulation that looks substantially similar to the one that was nullified unless they are authorized by Congress to do so.
  • The ABA and the Chamber of Commerce have asked Congress to invoke the CRA. House Financial Services Committee Chairman Representative Jeb Hensarling, R (TX), who introduced the Financial Modernization Act, is also a proponent of the invocation of the CRA to eliminate the class action waiver ban. Yesterday, members of the House and Senate introduced legislation that would block the rule from taking effect under the CRA.
  • Further, the Office of the Comptroller of the Currency (OCC) publicly asked the CFPB to delay the announced rule, asking for time for the two agencies to work together to resolve potential concerns regarding the soundness and safety of the rule. Despite this request from the OCC, the CFPB moved forward with publication in the Federal Register.

We will be back with further updates as to the implications of the rule for our clients as well any future developments in Congress or otherwise.