CFPB Proposes Rule Regulating the Use of Pre-Dispute Arbitration Agreements

The Consumer Financial Protection Bureau proposed a rule that would regulate the use of pre-dispute arbitration provisions in agreements for many types of consumer financial products or services.  Below is a summary of key provisions of the Bureau’s proposal (click here to read PLA’s previous coverage of the subject.)

First, the proposed rule would bar a “provider” from seeking to enforce a pre-dispute arbitration provision in a class action unless and until the court has ruled that the case may not proceed as a class action.  As a practical matter, this aspect of the Bureau’s proposal would prohibit arbitration agreements from containing “class action waivers”, which generally prohibit consumers from participating in class actions.

Second, the proposed rule would require a provider involved in a claim in arbitration to timely file with the Bureau information about the claim and how it was resolved.

Comments on the proposed rule are due 90 days after the rule is published in the Federal Register.

Pre-Dispute Arbitration Agreements

• Compliance date. The rule would only apply prospectively, that is, to any pre-dispute arbitration agreement entered into 211 days after the final rule is published in the Federal Register.
• Coverage.
  • Wide Range of Providers: The Bureau’s proposal would apply to a “provider,” a specialized term that amalgamates distinct elements of the Consumer Financial Protection Act of 2010, to reach a financial institution, and even a retail merchant under certain circumstances, as well as a service provider to that entity.  Many (but not all) consumer financial products and services would be affected by the proposed prohibition on a class action waiver in a pre-dispute arbitration agreement.
  • Covered Products and Services: Covered financial products would include extensions of credit (e.g. credit cards and personal loans), auto leases, consumer reports, deposit accounts, and remittances.
• Arbitration without a class action waiver. A provider still would be allowed to use a pre-dispute arbitration agreement so long as the provider does not seek to limit a consumer from participating in class action.
• Arbitration Notice. If a provider does seek to use a pre-dispute arbitration agreement, the provider would be required to include in the agreement specific language informing a consumer that the consumer may participate in a class action.  For example, a pre-dispute arbitration agreement would be required to state that it will not be used “to stop you from being part of a class action case in court.”

Reporting to the Bureau

If a provider uses a pre-dispute arbitration agreement and is involved in a claim subject to arbitration, then the provider would be required to file certain information to the Bureau.  Under the proposed rule, the provider would be required to submit records regarding:

• the initial claim or any counterclaim;
• any judgment or award;
• any communication relating to the provider’s refusal to pay filing or administrative fees for the arbitration proceeding, if that refusal results in dismissal of or no action in the proceeding; and
• any communication from an arbitrator or arbitration administrator that a pre-dispute arbitration agreement “does not comply with the administrator’s principles, rules, or similar requirements, if such a determination occurs.”

DWT intends to provide a more detailed analysis in the near future.  Stay tuned.