The Consumer Financial Protection Board (CFPB) recently published its much-anticipated final mandatory arbitration rule. It prohibits certain consumer financial products and services companies from using consumer arbitration agreements to bar the consumer from filing or participating in a class action. If Congress fails to intervene, the rules would increase the risk of litigation, particularly class-action lawsuits, for a variety of financial services companies.

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History of Mandatory Arbitration Rule

As previously discussed on this blog, the Dodd-Frank Act ordered the CFPB to study the use of arbitration clauses in consumer financial markets. It also authorized the agency to issue regulations that “prohibit or impose conditions or limitations on the use of an agreement between a covered person and a consumer for a consumer financial product or service providing for arbitration of any future dispute between the parties” if the regulation is “in the public interest and for the protection of consumers.”

After concluding that pre-dispute arbitration agreements are being widely used to prevent consumers from seeking relief from legal violations on a class basis, the CFPB published its proposed rulemaking in May, 2016. Not surprisingly, the proposal received harsh criticism from a number of key players in the financial industry, including the U.S. Chamber of Commerce, American Bankers Association, and Consumer Bankers Association. The same groups are now speaking out against the final rule, arguing that arbitration is essential to preventing frivolous and costly lawsuits.

CFPB’s Final Rule Proposal

The CFPB’s final class-action rule prohibits covered providers, including companies that provide credit cards, checking and deposit accounts, prepaid cards, money transfer services, certain auto loans, auto title loans, small dollar or payday loans, private student loans, and installment loans, from using a pre-dispute arbitration agreement to block consumer class actions in court. It requires most providers to insert language into their arbitration agreements reflecting this limitation.

Under the rule, a covered provider must ensure that any pre-dispute arbitration agreement contains 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.”

Businesses that elect to use arbitration clauses for individual disputes must submit certain information to the CFPB, including the arbitration claims filed and awards issued. According to the CFPB, it will use the information it collects to “continue monitoring arbitral and court proceedings to determine whether there are developments that raise consumer protection concerns that may warrant further Bureau action.”

Arbitration Rule Could Be Short-Lived

The new rule is scheduled to take effect 60 days following publication in the Federal Register and applies to contracts entered into more than 180 days after that. However, Congress may act to overturn the rule before it ever takes effect.

The Financial Choice Act, which aims to undo many provisions of Dodd-Frank, provides: “Section 1028 of the Consumer Financial Protection Act of 2010 (12 U.S.C. 5518) is hereby repealed.” The CFPB’s authority to restrict mandatory arbitration is set forth in Section 1028.

Even more likely, lawmakers could rely on the Congressional Review Act, which allows Congress to overturn any federal regulation enacted within the past 60 days. Republicans previously relied on the statute to undo many regulations passed in the waning days of the Obama Administration.

The question remains whether enough Republicans are willing to suffer at least some fallout with voters who support the consumer protections provided under the new rule. We will continue to track the status of the CFPB arbitration rule, so please check back for updates.

Do you have any questions regarding the final CFPB arbitration rule? Would you like to discuss the matter further? If so, please contact me, Joel Kreizman, at 201-806-3364.