Bad News and Good News – The CFPB’s Arbitration Rule

Just when you thought that the practical operational restraints imposed by the new Administration had limited (i.e., handcuffed) the CFPB’s ability to engage in new mischief-making (i.e., new rule-making), today the CFPB issued its arbitration rule (the “Rule”).  The Rule can be found at https://s3.amazonaws.com/files.consumerfinance.gov/f/documents/201707_cfpb_Arbitration-Agreements-Rule.pdf.

As in life in general, the Rule provides both good news and bad news for the consumer financial services industry.  While a deep dive into the twists and turns created by the Rule will emerge in the next few days, we offer a few initial thoughts that focus on the good and bad contained in the Rule as published.

First, the bad news—this is litigation hell for just about everyone providing or supporting consumer financial services.  Essentially (and subject to very limited exceptions), the Rule applies to practically any person or entity that provides loans, deposit accounts, services, collection assistance, or credit reporting consumer products and services.  As of the effective date of the Rule (60 days after publication in the Federal Register plus an additional 180 days), so-called “providers” must modify arbitration agreements to ban pre-dispute limitations on class actions—and update old agreements as new products and services are obtained.  Among other things, the Rule contains draft provisions whereby bans on class actions contained in older agreements are to be supplied to consumers to notify consumers that class actions within the arbitration context are no longer applicable.

In addition to this limit on class claims within the arbitration, the Rule also imposes a reporting/disclosure requirement on providers.  Specifically, arbitrations covered by the Rule must be reported to the CFPB.  Although personal information regarding the identity of consumers must be redacted, the CFPB has indicated that the data will be publically available so as to facilitate the filing of follow-up claims by the plaintiffs’ bar.

To summarize the bad news—the Rule creates a new procedural and compliance nightmare.  Commencing in the latter part of the first quarter of 2018, providers will be required to amend consumer disclosures on a go-forward basis.  In regard to existing (i.e., pre-Rule consumer agreements), providers will be required to monitor contracts to update arbitration provisions that become subject to the requirements of the Rule.  And finally, complex policies and procedures must be developed to identify and report arbitrations subject to the Rule to the CFPB.

Now, the good news—repeat after me—the Congressional Review Act or “CRA.”  It provides Congress with the ability to rescind a regulatory action, which the GOP-controlled Congress has already employed following the last election.

Importantly, the CRA is not subject to a requirement that 60 votes be obtained in the Senate—a mere majority in both Houses is all that is required.  Moreover, once passed and signed by the President, the affected agency is prohibited from revisiting the subject regulation for an extended period of time.

Already, the questions are being asked why the CFPB issued the Rule with knowledge that the employment of the CRA is not only possible, but probable.

My guess is hubris.

We will see what happens.

 

Joe Lynyak

Joe Lynyak

Joe is a partner in the Firm’s Finance & Restructuring Group and a member of the Banking Industry Group. He practices in both the Firm’s Washington, D.C. and Southern California offices.Joe possesses a broad knowledge base regarding foreign banks and domestic banks, savings associations, bank holding companies, finance companies, mortgage banking companies and their subsidiaries and affiliates. His practice includes providing financial intermediaries advice in the areas of regulatory and strategic planning, application and licensing, legislative strategy, commercial and consumer lending, examination, supervision and enforcement, and general corporate matters.Joe’s FDIC-insured financial institution clients benefit from his experience in the special state and federal statutory and regulatory requirements—including safety and soundness issues—that apply to regulated financial intermediaries. He regularly counsels clients on matters such as retail operations, privacy, identity theft, consumer compliance, application and underwriting, payments systems, Internet, electronic commerce, examination, supervision and enforcement, operational and strategic planning matters.Joe is a frequent lecturer on legal topics involving the operation and regulation of financial service companies. Specific regulatory topics upon which Joe has advised clients and spoken at conferences include the Dodd-Frank Act, prudential regulation, the Volcker Rule, the Bank Secrecy Act (and other anti-money laundering provisions), mortgage lending and the CFPB.

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