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What to do now about the new CFPB rule on arbitration?

What to do now about the new CFPB rule on arbitration?  (1) begin planning now and (2) begin actual preparation after the 60 days runs.

Congress has 60 days after publication of the new CFPB rule to take action to stop the application of this rule.  Publication occurred on Wednesday (July 19th).  It is impossible to predict what Congress will do.  However, we can be virtually certain that absent such Congressional action, this new rule will apply 180 days after those 60 days expire.  While there are other possible hurdles for this rule (for instance, an expected lawsuit challenging the rule; a possible new CFPB Director in the future; a challenge to the CFPB’s structure, etc.), these other impacts are unlikely to prevent the rule from beginning to have application.

We suggest you use the next 60 days to plan but wait to make any substantial expenditures until it is certain what Congress will do.  Here are some key questions which financial institutions should consider during those 60 days:

Should you keep arbitration in new consumer contracts even though it will not have the class action waiver?

  • The positive to having an arbitration clause is that you will have the ability to invoke arbitration to resolve individual cases in a generally predictable, prompt and economic fashion.  Such clauses can be especially helpful if the plaintiff has chosen an unfavorable forum.  In other words, as a defendant, you will have a choice to invoke arbitration.
  • The negative is that an opposing party can also invoke arbitration (either in the initial complaint or in response to a case which you may file (for instance, to collect on a debt)). In arbitration, you will lose the ability to appeal (especially important in legally technical cases, such as those based upon the UCC).  Further, because of the AAA Consumer Rules, you will have to pay all or most of the arbitration costs.  Further, the new CFPB rule will include a reporting requirement for arbitrations for covered persons, thus imposing administrative costs on you.

This decision is a close call.  Some commentators have predicted that all financial institutions will drop arbitration because of the loss of the class action waiver.  Based upon our experience as litigators, we would prefer to keep the arbitration clause because it provides a choice of venue for a defendant, which can be especially important in particularly unfavorable forums.  However, you may make a different choice based upon the costs or administrative burden that will occur.

 If you eliminate arbitration in new contracts, should you eliminate it in all consumer contracts for uniformity and to avoid the uncertainty surrounding the interpretation of “new product or service”? 

Even if you eliminate arbitration in new contracts, we think you should consider keeping it in existing contracts.  This saves you some money in not having to reissue.  It also means that you hopefully reduce the size of any class.  We don’t see much of a downside since the lack of uniformity will only apply when you are moving to invoke arbitration.

What about business accounts?

For business accounts, we do not believe that the rule applies because the rule is premised upon whether a particular product is a covered product or service.  Each of the criteria appears to relate to consumer activities (for instance, TISA, EFTA, consumer credit, etc.).  Therefore, if you include arbitration today in your agreements with businesses, you should continue to include it.