Are existing agreements governed by the new CFPB Arbitration Rule?
The Dodd Frank Act expressly provided that any CFPB rule on arbitration would not apply to existing contracts. 12 U.S.C. § 5518(d). Therefore, the CFPB rule released last week will only bar class action waivers for contracts “entered into after” the applicable date for the regulation (60 days after publication of the rule in the Federal Register and then 180 days after that date).
However, the CFPB has taken an aggressive position on what is an existing contract. Therefore, for existing customers, lenders and other “covered persons” will need to examine every change in any product or services they offer that is subject to the arbitration rule. If any “new product or service” is given to an existing customer, the new regulation applies to that product or service even if it is covered by the terms of an existing contract (assuming that the new product or service is within the scope of the rule). In such a case, the lender would need to amend the previous agreement or provide a new agreement for the new product and could not rely on the arbitration clause to avoid a class action.
The CFPB’s commentary provides little guidance on what constitutes a “new product or service” but does offer the following examples:
- A new charge on an existing credit card is not a new product or service.
- A new deposit account or credit card account would be a new product or service.
- Refinancing an existing debt would be a new product or service.
- A “new closed-end credit transaction” would be a new product or service.
Even if a new product or service is added, any existing product or service could still be covered by the existing arbitration clause and, therefore, care should be taken with any amendment to preserve those existing rights (or the lender could use an entirely new agreement for the new product or service).
If the covered person “acquires or purchases” a pre-existing contract after the applicable date, the covered person would be governed by the new arbitration rule and would have to provide notice and obey the rule.
These are aggressive positions by the CFPB and we have some doubts about whether these interpretations are sustainable – but it is the CFPB’s position and we have no doubt that they will enforce it.