Adding Arbitration Agreements Recommended

This article was originally published by Ballard Spahr and is reprinted with permission.

The Consumer Financial Protection Bureau announced earlier this month a final rule that prohibits covered providers of certain consumer financial products and services from using an agreement with a consumer that provides for arbitration of any future dispute between the parties to bar the consumer from filing or participating in a class action lawsuit with respect to the covered consumer financial product or service. The final rule also requires a covered provider that is involved in an individual arbitration pursuant to a pre-dispute arbitration agreement to submit specified arbitral records to CFPB, which will post them on its website beginning in July 2019.

CFPB’s action comes more than a year after it issued a proposed arbitration rule in May 2016. More than 110,000 comments were submitted in response to the proposed rule. The final rule appears to be nearly identical to the proposed rule. The final rule also follows CFPB’s March 2015 study of consumer arbitration mandated by Section 1028 of the Dodd-Frank Act. Section 1028 provides that the CFPB, “by regulation, may prohibit or impose conditions or limitations on the use of” pre-dispute arbitration agreements concerning consumer financial products or services if it finds doing so “is in the public interest and for the protection of consumers.”

The CFPB claims that class action waivers in arbitration agreements deny consumers their day in court while enabling companies to avoid paying big refunds and continue to engage in allegedly harmful practices. Our analysis of CFPB’s proposed rule and arbitration study found that CFPB’s own data confirmed that arbitration is a faster, less expensive and far more effective way for consumers to resolve disputes with companies than class action litigation. The CFPB study showed that consumers who prevailed in an individual arbitration recovered an average of $5,389. By contrast, the study showed, the average class action settlement for consumers who received cash payments was only $32.35. And those consumers often had to wait as long as two years to receive the payment. Class counsel, however, recovered a staggering $424,495,451.

Consumers who prevailed in individual arbitration received 166 times as much as the average putative class member. Moreover, in the proposed arbitration rule that now has been finalized, CFPB estimated that the 53,000 financial services companies that currently use arbitration agreements will now have to spend between $2.62 billion and $5.23 billion over the next five years to defend an additional 6,042 class actions. CFPB expects those numbers to be repeated every five years.

The final rule will take effect 60 days after publication in the Federal Register and will apply to agreements entered into more than 180 days after that. In addition, the final rule raises questions about whether arbitration agreements entered into before the effective date will survive when circumstances surrounding the agreements change after the effective date.

It is possible that one or more events could occur during the 240-day grandfather period that would stop the final arbitration rule from taking effect. For example, the Financial Choice Act, which already has been passed by the House of Representatives, could become law; Congress could disapprove the rule under the Congressional Review Act; and legal challenges based on the failure of the final rule and arbitration study to comply with the Dodd-Frank Act and the Administrative Procedure Act could be asserted.

During the next 240 days, companies that do not presently use arbitration agreements in their financial services contracts should strongly consider adding them, since agreements entered into before the rule becomes applicable are grandfathered under existing law, which is favorable to class action waivers. In AT&T Mobility v. Concepcion, the U.S. Supreme Court held that the Federal Arbitration Act preempts state laws that refuse to enforce class action waivers in consumer arbitration agreements. Moreover, companies currently using arbitration agreements should promptly consult with counsel to consider what steps they can take to reduce litigation risks in light of CFPB’s final rule.

Alan S. Kaplinsky, Mark J. Levin and Scott M. Pearson are partners with Ballard Spahr law firm, headquartered in Philadelphia. Ballard Spahr’s Consumer Financial Services Group pioneered the use of pre-dispute arbitration provisions in consumer financial services agreements. The group is nationally recognized for its guidance in structuring and documenting new consumer financial services products, its experience with the full range of federal and state consumer credit laws, and its skill in litigation defense and avoidance.