CPFB arbitration rule: What you need to know

Businesses in the consumer financial products and services markets should prepare for it to become effective next year

The Consumer Financial Protection Bureau enacted a rule this summer that will limit the use of arbitration in consumer financial products and services agreements. But the rule’s future remains uncertain as congressional Republicans seek to kill the rule before it can take effect.

Following the financial crisis of 2008–09, Congress passed the Dodd-Frank Act, which, among other things, created the CFPB and directed it to study and potentially regulate the use of arbitration agreements in consumer financial markets. After years of study and public debate, the CFPB issued its final rule in July. The rule is designed to prevent businesses from using arbitration as a means to avoid liability and accountability.

The new rule has two primary objectives.

First, it gives consumers collective power in court by forbidding the use of mandatory pre-dispute arbitration agreements in consumer financial contracts that bar consumers from joining their claims against a business together in large-scale class actions or mass actions. The theory is that consumers will be more likely to hold businesses accountable for illegal activity if they can bring claims collectively and spread the costs of litigation.

Second, the rule attempts to increase transparency and public accountability by requiring businesses that use pre-dispute arbitration to submit records to the CFPB. Because arbitration is ordinarily private, the results of arbitration are hard to know and statistics difficult to compile. The rule seeks to change that and empower the CFPB to monitor the efficacy and fairness of arbitration.

But the rule has limitations. In particular, the CFPB only has authority to regulate businesses that offer or provide “consumer financial products or services.” Examples of “covered transactions” include extensions of credit, lending, loan servicing, auto leasing and brokering of leases, debt management, settlement and repair, credit reporting, debt collection, consumer accounts and remittance transfers, certain fund transfers and payment processing and check cashing.

Businesses are not on the hook for compliance until March 19, 2018, but there is a question whether the rule will ever actually take effect.

The CFPB arbitration rule (and the CFPB itself, including its director) has been under siege from the start. Republicans in Congress have continually denounced the CFPB as a regulatory overreach. In August, Republicans on the House Financial Services Committee threatened to hold CFPB Director Richard Cordray in contempt for failure to comply with congressional subpoenas seeking records related to the arbitration rule.

Criticism of the arbitration rule has reached a fevered pitch. The U.S. Chamber of Commerce derided the rule, stating that it only benefits class action lawyers, not individual consumers. A letter campaign directed at Republican leadership in the House and Senate by several business and trade associations and conservative think tanks urged Congress to use its authority under the Congressional Review Act to nullify the rule. In July, the House voted to scuttle the rule and the Senate seemed poised to follow suit.

But the rule may have been saved at the 11th hour by events on the ground — a miscalculation by Equifax in the aftermath of a massive data breach, which exposed the personal data of 143 million Americans. Equifax initially offered free credit monitoring to affected consumers, but with a catch: to get the service, consumers were forced to agree that any future disputes would be resolved through binding arbitration. An immediate public outcry caused Equifax to quickly drop the arbitration clause. 

Equifax’s misstep was a major boon to the CFPB and Democrats, including Sen. Elizabeth Warren, D-Mass., who have been championing the CFPB’s cause. Given the public mistrust of the financial services industry, especially in the wake of the Equifax catastrophe, it now seems less likely that Congress will act to interfere with the rule’s implementation.

The bottom line is that businesses in the consumer financial products and services markets should return to the mindset that the CFPB arbitration rule will become effective in March. Businesses should review their consumer agreements. Voluntary arbitration will remain lawful, but agreements that attempt to force mandatory arbitration in lieu of collective action lawsuits will be illegal as of March 19, 2018. Additionally, businesses will need to prepare to make regular submissions to the CFPB of arbitration-related records.

Dan Deane is a partner in Nixon Peabody’s Manchester office and co-leader of the firm’s Telephone Consumer Protection Act team and deputy leader of the Class Actions and Aggregate Litigation group.