Congress Pumps the Brakes on New Rule Banning Class Action Waivers In Certain Consumer Contracts

Jul 31, 2017 | Topics: Class Actions, Business Litigation

On July 11, 2017, the Consumer Financial Protection Bureau (“CFPB”) issued its final rule on arbitration clauses in contracts governing consumer financial products and services.  In short, new rule would ban class action waivers in agreements for new bank accounts or other financial products or services.  However, the U.S. House of Representatives recently voted 231–190 to nullify the rule.  So what is this controversial rule all about?

In 2010 the Dodd-Frank Wall Street Reform and Consumer Protection Act (“The Dodd-Frank Act”) was signed into law.  The Dodd Frank Act, among other things, required the CFPB to collect and review information relating to the use of pre-dispute arbitration provisions in consumer contracts.  In March 2015, the CFPB reported their findings, which included, among other things, a finding that pre-dispute arbitration agreements were being used to preclude consumers from seeking class-wide relief.  This finding, combined with the fact that consumers rarely file individual lawsuits or arbitration claims to obtain such relief from consumer contracts left the CFPB worried that consumers were without legal redress.

In May 2016, the CFPB announced its proposed rule that would prevent the use of arbitration provisions to block class action lawsuits in consumer contracts in two ways.  First, the new rule would prohibit companies from using pre-dispute arbitration agreements to block consumer class actions in court and require these companies to include language in their agreements that would reflect this limitation.  In other words, companies can no longer require customer to waive their right to bring class action lawsuits.

Second, the new rule would require companies that use pre-dispute agreements to submit certain records relating to arbitral and court proceedings to the CFPB, including claims and counterclaims, answers to these claims and counterclaims, and awards issued in arbitration.  The CFPB would also collect correspondences from arbitration administrators regarding companies' non-payment of arbitration fees and their failure to follow the arbitrator’s fairness standards.  This information would then be published.

It should be noted that this rule would only apply to companies that lend money, store money, and move or exchange money to and for consumers (i.e. banks, credit card companies, auto lenders, student lenders, payday lenders, check cashing companies, debt collectors, and credit reporting agencies.)  It should also be noted that the rule does not ban arbitration clauses and thus, companies can still require consumers to bring individual claims through arbitration.  

So what is the effect of the rule?  Without the ability for consumers to waive their right to bring class action lawsuits, an obvious outcome would be an influx of class action litigation in the consumer realm.  Further, the information collecting aspect of the rule would increase regulatory scrutiny of arbitration proceedings and awards, and the publication of that information brings on additional litigation and regulatory risks.  While proponents of the rule argue that it will allow consumers to hold financial instructions accountable, critics (including the American Bankers Association and the Consumer Bankers Association) argue that it would and force consumers into court while forcing companies to defend attorney-driven class action lawsuits from which consumers hardly benefit.

The rule is set to go into effect in 8 months but now that the house has voted to repeal the rule under the Congressional Review Act, its fate lies with the Senate.