CFPB Proposes Rules to Limit Arbitration Agreements in Consumer Financial ProductsLast week, the CFPB announced two proposals related to the inclusion clauses that require arbitration to resolve all future disputes (“pre-dispute arbitration agreements”) in consumer financial products. The first proposal would effectively ban pre-dispute arbitration agreements that prohibit disputes brought by a class or other group of individuals. The second proposal would require companies to submit all claims filed and written awards produced in arbitration proceedings to the CFPB for further review, provided the company included a pre-dispute arbitration agreement in a consumer financial product.  These proposals are in response to the CFPB’s findings described in its March 2015 report, produced after a three-year study of the use of arbitration agreements in consumer financial products.

What Are in the Proposals?

The CFPB’s first proposal would require all pre-dispute arbitration agreements to “provide explicitly that the arbitration agreement is inapplicable to cases filed in court on behalf of a class unless and until class certification is denied or the class claims are dismissed.” The CFPB indicated that the final rule would provide either model or mandatory language to ensure compliance with this requirement. This proposal is meant to address findings in the report related to arbitration agreements found in contracts for bank accounts, credit cards, or other financial products that both require the resolution of all disputes in arbitration proceedings and prohibit consumers from conducting an arbitration proceeding as a group or class.

In the report, the CFPB concluded that clauses of this sort shielded companies from class litigation and ultimately prevented consumers from obtaining remedies for alleged harms that may be considered too small or insignificant to pursue on an individual basis. The CFPB considered allowing companies to continue to use arbitration clauses that require all disputes to be resolved through arbitration, as long as those clauses allowed for class or group arbitration proceedings. Because class arbitration rules have not been widely applied to consumer finance disputes, however, the CFPB “is not confident that class arbitration is a reliable setting for aggregated resolution of consumer finance claims.” The current proposals will not prohibit arbitration clauses that permit a consumer to choose either arbitration or litigation to resolve a group or class dispute, as long as the clause does not require the consumer to participate in class arbitration rather than a class action lawsuit.

The CFPB’s second proposal would require companies to submit information regarding claims and written awards in arbitration proceedings as a condition to the continued use of any pre-dispute arbitration clause in a contract related to a consumer financial product. The CPFB is also considering whether such information should be published on its website and available to the public. This proposal is intended to address concerns related to the fairness of and potential for conflicts of interest in arbitration proceedings between consumers and companies. The CFPB believes this proposal is “sufficient to protect consumers from the risk of harm that may occur without mandated safeguards,” particularly in light of the fact that the CFPB has not obtained conclusive evidence as to the impact of mandatory pre-dispute arbitration agreements on consumers or the proper resolution of disputes.

Next Steps

As the first step in its rulemaking process, the CFPB is preparing to convene a Small Business Review Panel  to gather feedback from small financial services providers. The panel will produce a report based on the input received no more than 60 days after they convene.

If the proposals are adopted, the CFPB anticipates the rules will become effective 30 days after the rules are published and the rules will not become operative for 180 days after the effective date. As such, these requirements will not be applicable to any arbitration agreements entered into within 210 days of the date the rules are officially published by the CFPB.