CFPB Kills Class Action Waivers for Consumers Contracts and Makes Arbitration Public

The Consumer Financial Protection Bureau (CFPB) issued a rule on Monday prohibiting class action waivers in arbitration provisions of certain consumer contracts. The rule—to be codified at 12 C.F.R. § 1040—also requires covered businesses to submit records to the CFPB regarding any arbitration filed by or against their customers regarding covered products and services. The provided records will be made public and hosted by the CFPB on a searchable database. The likely impact of this rule (should it be allowed to go into effect) will be significant for financial institutions and dramatically alter their relationships with their customers.

The rule applies to defined “covered products and services,” including essentially any transaction relating to consumer financial products and services.   Covered providers will need to comply with the rule 180 days after it becomes effective (which is 60 days after publication in the Federal Register).

The rule will apply to any contracts “entered into after” this date.  The CFPB takes an aggressive position on what is an existing contract.  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 the existing contract.  The CFPB commentary provides only small guidance on what constitutes a new product or service (a charge on an existing credit card is not a new product or service; a new account or a new closed-end credit transaction (including a refinance) would be a new product or service).  Even if a new product or service is added, the existing product or service would still be covered by the existing arbitration clause.

The question then becomes, what use does consumer arbitration retain? Moving forward, businesses can no longer rely on arbitration provisions as a means to avoid class actions, rulings and filings will be publicly available (just like court filings), and grounds for appeal or review of an arbitration award remain notably scarce.

Unwinding this rule will also be difficult. Given the United States Court of Appeals for the District of Columbia Circuit’s recent opinion in Clean Air Council v. Pruitt, a simple regime change of the CFPB (which seems imminent) may not be sufficient to stop enforcement of the rule. The best hope likely falls to Congress. Under the Congressional Review Act, Congress has 60 days to vote on a resolution to disapprove the rule. Such resolution once signed by the President not only nixes the regulation but also bars promulgation of look-alike regulations. Whether Congress is too preoccupied with other issues or cares to unwind the rule is something all businesses subject to the rule should watch.