On Monday, July 10, the Consumer Financial Protection Bureau issued a final rule that bans the use of arbitration agreements that waive class actions in consumer financial services contracts. As we noted when the CFPB first proposed the rule in May 2016, the final rule is effectively a blanket ban on the use of arbitration by companies in the consumer financial services arena. The practical impact, if the rule comes into force, will be to overturn the US Supreme Court’s endorsement of arbitration agreements that waive class actions, including the Court’s landmark decision six years ago in AT&T Mobility LLC v. Concepcion.
We will offer a webinar next week to discuss the final rule in detail—including what it means for financial services providers and related companies—but here are key considerations for businesses in the short term.
The rule applies to providers of covered financial products and services (subject to specific exceptions) as well as “affiliates” who act as service providers with respect to covered products and services. These products and services include but are not limited to: extensions of credit, acquiring or selling consumer credit, various other credit-related activities, automobile leases, offering deposit and prepaid accounts, money transmitters and check cashing.
The rule does not take effect immediately. The rule’s effective date is 60 days following publication in the Federal Register (which should be shortly), and it applies to contracts entered into more than 180 days after that. What this means is that existing arbitration agreements and agreements that are entered into during at least the next eight months will be “grandfathered”—providing businesses with a modest window to analyze whether they should adopt new arbitration agreements or modify existing ones.
The rule will almost certainly be challenged in federal court. Under the Dodd-Frank Act, the CFPB was required to find that the regulation “is in the public interest and for the protection of consumers.” That finding, in turn, must be “consistent with” the arbitration study that was required by the statute. Under Dodd-Frank, that analysis required an assessment of “the potential benefits and costs to consumers and [regulated businesses], including the potential reduction of access by consumers to consumer financial products or services resulting from” the proposed rule. Both the process by which the CFPB conducted the study and the findings and conclusions that it drew are subject to challenge. In addition, the constitutionality of the CFPB’s structure—and in particular the lack of checks on a single director whom the President may discharge only for “cause”—is currently the subject of a pending court challenge. If the agency’s structure is found to be unconstitutional, the rule will be invalidated and the question whether to issue an arbitration rule will be remanded for consideration by a constitutionally constituted Bureau.
Members of Congress have already viewed the CFPB’s activities with a great deal of skepticism. Under the Congressional Review Act (CRA), Congress may, by simple majority votes in both houses and the approval of the President, overturn regulations like the rule issued by the CFPB under fast-track procedures. Congress has already overturned a number of regulations by invoking the CRA. Many observers expect that Congress will consider whether to do so here.
Although the possibility of judicial review and congressional action is real, businesses should nonetheless move quickly to plan for life after the CFPB’s final rule, should it survive challenge. The issuance of the CFPB’s arbitration rule makes clear that this is the time for businesses to review their existing arbitration provisions and consider whether to adopt new arbitration programs before the “grandfathering” period ends.