Gibson Dunn analyzes the CFPB’s Rulemaking to Curtail Arbitration Agreements Barring Class Actions in Consumer Financial Contracts

On October 7, 2015, the United States Consumer Financial Protection Bureau announced that it is “launch[ing] a rulemaking process” that is intended to impede the use of “pre-dispute arbitration agreements for consumer financial products and services.”[1] The proposal currently under consideration by the Bureau would (1) “prohibit companies from blocking group lawsuits through the use of arbitration clauses in their contracts;” and (2) “require companies to send to the Bureau all filings made by or against them in consumer financial arbitration disputes” and any resulting decisions, “which might be made public.”[2]

If the CFPB ultimately adopts the current proposal, it will affect products and services in nearly every industry, including, according to the CFPB, “credit cards, checking and deposit accounts, certain auto loans, small-dollar or payday loans, private student loans,” and even mobile wireless providers. Not only would the proposal interfere with a company’s ability to control costs associated with consumer contracting, but also it will encourage a new wave of class action litigation.

Given the widespread impact this proposal could have on businesses’ ability to use arbitration clauses in consumer contracts to manage risk, and the CFPB’s expansive view of its jurisdiction, companies in all industries should consider participating in the CFPB’s rulemaking.

I. The Dodd-Frank Act Authorized The CFPB To Study Use Of Arbitration Agreements

The Dodd-Frank Wall Street Reform and Consumer Protection Act authorized the CFPB to study and issue a report on the use of arbitration clauses in consumer contracts for financial services and products, and to consider issuing any regulations necessary to protect customers, consistent with the results of its study.

The CFPB published the results of its study in a 700-page report in March 2015. The study found that roughly 90% of arbitration clauses bar consumers from filing group arbitrations or class action litigations.[3] The report also concluded, unsurprisingly, that class actions are dramatically more lucrative for plaintiffs and their attorneys than individual lawsuits or arbitrations. Indeed, even with arbitration agreements included in the overwhelming majority of consumer contracts, the CFPB found that in the five-year period it studied, “group lawsuits delivered, on average, about $220 million in payments to 6.8 million consumers per year in consumer financial services cases.”[4]

Notably, the Act expressly banned pre-dispute arbitration clauses in most residential mortgage contracts as part of the Truth in Lending Act. As expected, the mortgage industry has seen a corresponding increase in class action litigation since the ban took effect in June 2013.

II. CFPB’s Current Proposal Would Prohibit Use Of Arbitration Agreements To Bar Class Actions And Would Require Reporting Of Arbitral Decisions

In the wake of its study, the Bureau resolved to increase consumers’ ability to pursue group lawsuits in order to “create the leverage to bring about . . . changes in business practices.”[5] Accordingly, in a speech on October 7, 2015, CFPB Director Richard Cordray announced that “the Bureau has decided to launch a rulemaking process” to limit the use of mandatory arbitration provisions that preclude consumers from filing class actions.[6]

The proposed rule described by Cordray has two primary components:

First, “the proposal under consideration would prohibit companies from blocking group lawsuits through the use of arbitration clauses in their contracts.”[7] Although not an outright ban on all arbitration agreements, the current proposal would require any arbitration provision “to say explicitly that it does not apply to cases brought on behalf of a class unless and until the class certification is denied by the court or the class claims are dismissed in court.”[8] The CFPB’s position is that this carve out in any arbitration provision will increase the frequency and amount of consumer recoveries, and subject companies to “court orders” that “force companies to change the way they do business.”[9]

In effect, this proposal could allow consumers to file (and force businesses to defend against) even frivolous class actions. Indeed, the CFPB’s own report indicates that at least 70% of individual arbitration claims are inappropriate for class treatment (and could not satisfy Rule 23(b)’s predominance requirement) because they concern primarily “the amount of debt the consumer owed the company,” with only a fraction of those challenging any “particular conduct by the company.”[10]

Second, the current proposal “would require companies to send to the Bureau all filings made by or against them in consumer financial arbitration disputes and any decisions that stem from those filings.”[11] Not only is the CFPB proposing to undertake this massive data collection about consumers, their consumption practices, and financial services they receive, but the Bureau also is “considering publishing this information for all to see, so the public can analyze it as they see fit.”[12] The CFPB’s proposed reporting requirement is burdensome, but it is particularly troubling insofar as publication of the reported information could invade consumers’ privacy rights and materially compromise trade secrets and other legitimately confidential commercial information.

The Bureau’s proposal could jeopardize the viability of arbitration as a means to resolve disputes. At least at this early stage, the CFPB has not acknowledged the benefits of arbitration to consumers and businesses, or explained how the proposal would comport with Congress’s express support for arbitration as set forth in the Federal Arbitration Act.

III. Considerations for Companies Employing Arbitration Agreements in Consumer Contracts

The CFPB intends to submit its current proposal to a “small-business review panel,” but it has not given any indication that it intends to solicit other industry views.[13] If it decides to proceed with its current proposal, the Bureau will issue a formal notice of proposed rulemaking, after which it will receive public comments and potentially issue a final rule.

In the interim, companies should seek legal counsel to determine whether any proposed rulemaking will affect their use of arbitration agreements. This could turn on factors such as whether consumers can elect to opt out of arbitration or whether group arbitrations are permitted. If counsel determines that a company’s arbitration agreement could be subject to the Bureau’s ultimate rule, the company should consider participating in the rulemaking.

In addition, companies should undertake reviews to evaluate their litigation risks and insurance coverage. The CFPB’s report found that between 2010 and 2012, across six different consumer finance markets, 3,462 individual lawsuits were filed about consumer finance disputes (two went to trial resulting in $1 million in damages), but “[n]o class cases went to trial.”[14] If arbitration provisions are required to carve out consumer class actions, and even a small subset of cases that would have otherwise been filed as individual actions are filed as class actions, companies could face exposure and litigation costs that impose significant settlement pressure. Companies should, therefore, consult with counsel well in advance of the CFPB’s formal rulemaking to understand the financial impact such a rule could have on their business.

ENDNOTES

[1] Prepared Remarks of CFPB Director Richard Cordray at the Arbitration Field Hearing, Oct. 7, 2015 (Cordray Remarks), available at http://www.consumerfinance.gov/newsroom/prepared-remarks-of-cfpb-director-richard-cordray-at-the-arbitration-field-hearing-20151007/.

[2] Cordray Remarks.

[3] CFPB Says 90% of Banks’ Arbitration Clauses Bar Class Suits, Juan Carlos Rodriguez, Law360 (Dec. 13, 2013).

[4] Cordray Remarks (emphasis added).

[5] Id.

[6] Id.

[7] Id.

[8] Id.

[9] Id.

[10] Consumer Financial Protection Bureau Study Finds That Arbitration Agreements Limit Relief for Consumers, available at www.consumerfinance.gov.

[11] Cordray Remarks.

[12] Id.

[13] CFPB Weighs Axing Class Action Bans In Arbitration Clauses, Evan Weinberger, Law360 (Oct. 7, 2015).

[14] Consumer Financial Protection Bureau Study Finds That Arbitration Agreements Limit Relief for Consumers, available at www.consumerfinance.gov.

The full memorandum was originally published by Gibson Dunn on October 13, 2015, and is available here.