CFPB Issues Rule Banning Mandatory Arbitration Clauses

Despite the Supreme Court’s recognition that mandatory arbitration clauses are appropriate and enforceable, the Consumer Financial Protection Bureau announced in July 2017 a new rule banning financial service companies from including mandatory arbitration clauses in their agreements with consumers that include a class action waiver. This Rule, unless overruled by legislation, will impact a number of businesses who will need to revisit their consumer agreements.  

Given the plethora of consumer class action, many businesses have looked to incorporate mandatory arbitration clauses in their consumer contracts. These clauses provide consumers with a remedy, but typically bar the ability to seek relief on a class-wide basis. The Supreme Court in AT&T Mobility, LLC v. Concepcion and its progeny has expressly approved such clauses, even where state courts have struck them down.

The CFPB’s Arbitration Agreements Rule looks to restore a consumer’s right to bring or join class actions lawsuits. Under the rule, financial service companies will still be able to include arbitration clauses in agreements for specified consumer financial products and services, but they cannot use them to block consumers from being part of group actions. The rule applies to “providers” of covered consumer financial products and services and excludes from coverage certain groups of providers, including employers offering consumer financial products or services for employees as employee benefits, entities regulated by the Securities and Exchange Commission or the Commodity Futures Trading Commission, and broker dealers and investment advisers overseen by state regulators.

The Rule also requires that financial service companies submit certain arbitration-related records to the CFPB, including records filed in an arbitration or court proceeding in which a party relies on an arbitration clause or agreement and communications form an arbitration related to an arbitration agreement that does not comply with the new rule. The CFPB will publish redacted copies of those records on a publicly available website by July 1, 2019. The rule is effective September 18, 2017 and applies to pre-dispute arbitration agreements entered into on or after March 19, 2018.

Although the CFPB has issued its rule, it may be blocked from enforcement. On July 25, 2017, the House of Representatives voted in favor of striking the rule. The Senate version of the resolution of disapproval has already been introduced, however a date for the Senate vote has not yet been set. If the House, Senate and President disapprove of a regulation under the CRA, the regulation is invalidated and cannot be reissued by an agency. Financial service companies should stay tuned.

TAKEAWAY: While the CFPB’s Arbitration Agreements Rule will bar financial service companies from including class action waivers as part of a mandatory arbitration claims, the fate of this new regulation is in the hands of the U.S. Senate, which is in recess until September 5, 2017.  Unless the Senate and President act, financial service companies will once again be subject to a wide-array of class action litigation.

Post script:  On October 24, 2017, the United States Senate (after Vice President Mike Pence's tiebreaking vote) voted to repeal the CFPB's anti-arbitration rule. 

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