May 9, 2016
Regulation Would Expose 50,000+ Companies to Class
On May 5, 2016, the Consumer Financial Protection Bureau (CFPB)
released a 377-page notice of proposed rulemaking that would
prohibit, going forward, banks and a variety of other companies
from including in contracts arbitration clauses that would prevent
consumers from filing or participating in class-action
litigation. According to the press release: "With this
contract gotcha, companies can sidestep the legal system, avoid
accountability, and continue to pursue profitable practices that
may violate the law and harm countless consumers." The proposed
regulation would continue to allow companies to insist on
arbitration instead of individual litigation, but would
require companies to submit records related to arbitrations to CFPB
for monitoring and for potential posting in some form on its
website. The public will have 90 days to comment on the
proposal once it is published in the Federal
The impact of this controversial proposal would be significant:
CFPB itself estimates that it would expose approximately 53,000
providers, which currently employ arbitration clauses, to class
action litigation. The proposal covers a large swath of what the
agency calls the "core" consumer financial markets within its
rulemaking authority-lending money, storing money, and moving or
exchanging money. Subject to various exceptions and nuances,
the reach of the proposed regulation includes:
- Banking products, including deposit accounts and credit
- Most types of consumer lending, such as private student loans,
auto loans, auto title loans, and small-dollar or payday loans
(also included are the "acquiring, purchasing, selling, or
servicing" of such consumer credit);
- Debt collection, debt buying, and debt-relief services;
- Consumer reports, including providers of credit scores and
- Remittance transfers, domestic money transfers, currency
exchanges, mobile payment apps, payment processors and
- Mobile wireless carrier third-party billing services.
Below, we summarize the proposed regulation's key features and
rationale, and discuss some observations and implications,
including the possibility that a final regulation will be
challenged in court.
CFPB's March 2015 Arbitration Study
Under section 1028(b) of the Dodd-Frank Wall Street Reform and
Consumer Protection Act ("Dodd-Frank Act"), CFPB is required to
publish a study on mandatory pre-dispute arbitration agreements
(for convenience, "arbitration agreements" or "arbitration
clauses") in consumer financial markets.  That section also
authorizes CFPB to issue regulations that "prohibit" or "impose
conditions or limitations" on such agreements if doing so is in the
"public interest and for the protection of consumers" and the
regulations are consistent with the study.
In March 2015, CFPB released a 728-page study that analyzed a
number of topics, including the prevalence of arbitration
agreements in various consumer financial contracts, consumer
understanding of arbitration, and the volume and nature of
individual consumer arbitrations and individual and class
litigations. Among other things, the study found that
hundreds of millions of consumers use financial products or
services that are subject to arbitration agreements,  including
credit cards (53% of outstanding credit card loans are subject to
arbitration ); checking accounts (58.8% of insured deposits);
general purpose reloadable (GPR) prepaid-card contracts (92.3%
); and storefront payday loan contracts (83.7% ). In
addition, between 85% to 100% of arbitration agreements studied
provided that arbitration may not proceed on a class basis.
Most agreements had a carve-out permitting small claims court
litigation. Most agreements also explicitly disclosed that
consumers would not have a right to a jury trial and could not be a
party to a class action in court.
While CFPB believes that its study was "the most comprehensive
analysis to date of the arbitration content of contracts for
consumer financial products and services,"  it has been subject
to extensive criticism, both by industry groups  and members of
CFPB's Proposed Regulation
The proposed regulation has two main sets of provisions-class
action provisions and provisions relating to the submission of
arbitration documents to CFPB-that would apply to the broad scope
of companies selling the products and services noted above.
The proposal also provides for a compliance date of 180 days after
the effective date of the final regulation.
Class Action Provisions. CFPB proposes
to bar a large variety of companies (termed "providers") that offer
certain consumer financial products and services from relying in
any way on arbitration agreements (entered into following the
compliance date) to prevent a consumer from filing a class action
or participating in a class action as an absent class member. 
If, however, a court denies class action status and this denial is
not reversed on appeal, a provider can insist on
- The proposed regulation would require providers, after the
compliance date, to insert language into their arbitration
agreements stating as follows: "We agree that neither we nor
anyone else will use this agreement to stop you from being part of
a class action case in court. You may file a class action in court
or you may be a member of a class action even if you do not file
- The proposal contains a variation on the above language to
address situations where a contract covers various products or
services, only some of which are covered by the proposed
- In situations when a contract was originally entered into by
other parties, a provider has the option of sending to a consumer a
notice in lieu of inserting language into their contract.
In justifying its proposal, CFPB explained that the primary
purpose of mandatory arbitration provisions is to allow companies
to invoke arbitration as a way of avoiding class-action
litigation. Yet, in CFPB's view, individual disputes are
"insufficient as the sole mechanism available to consumers to
enforce contracts and the laws applicable to consumer financial
products and services."  CFPB found instead that class actions
are an essential tool for enforcing consumer rights, particularly
in low-dollar-value cases. In discussing the efficacy of
class actions, CFPB cited its conservative estimate that, in a
recent five-year period, at least 160 million consumers were
eligible for relief in consumer financial class action settlements,
which totaled $2.7 billion in cash, in-kind relief, and attorney's
fees and expenses.
CFPB acknowledged that for companies that can currently invoke
arbitration clauses to avoid class actions, the regulation would
likely increase their costs, some of which may be passed on to
consumers. This is because exposure to class actions
would prompt companies to invest more in compliance and scale back
practices that are profitable but legally risky; companies would
also bear greater costs defending against and resolving class
actions themselves. For example, CFPB estimated that the
regulation would increase class action exposure for about 53,000
companies and result in about 103 additional class action
settlements in federal court per year, costing around $450 million
in payments to consumers and attorney's fees.  CFPB
nevertheless opined that all of these costs were worth enhanced
private enforcement of contracts and consumer protection law.
The agency also believes that increased costs would not result in a
"noticeable impact on access to consumer financial products or
CFPB also noted that Congress, in the Dodd-Frank Act, banned
arbitration clauses in residential mortgage contracts.
Moreover, since 1992, the Financial Industry Regulatory Authority
(FINRA) has had a rule, approved by the Securities and Exchange
Commission (SEC), requiring arbitration agreements adopted by
broker/dealers to include language disclaiming the application of
the arbitration agreement to class actions filed in court.
Submission of Arbitration Documents to
CFPB. Relying on its general rulemaking authority and
its authority to obtain information to monitor consumer finance
markets, CFPB also proposed requiring providers that use
arbitration agreements to submit, within 60 days of filing or
receipt, records regarding arbitrations concerning covered products
or services. This includes information on claims or
counterclaims, the arbitration agreement filed with the arbitrator,
judgments or awards (if any) issued by the arbitrator, and certain
correspondence regarding a provider's non-payment of arbitral fees
and the arbitration agreement's non-compliance with arbitral
principles or rules.  The records would have to be redacted
pursuant to CFPB's requirements.
CFPB is considering publishing this information on its website
in some form, with appropriate redactions or aggregation as
warranted, to increase transparency.  CFPB intends to use the
information to determine whether there are developments in arbitral
proceedings that raise consumer protection concerns and to monitor
for products or practices that harm consumers. CFPB also
stated that this information would allow it to take enforcement
action or make a referral if particular companies were harming
consumers with respect to arbitration agreements, such as by
"routinely not paying arbitration fees."  The agency will
consider whether specific practices in relation to arbitration
constitute unfair, deceptive, or abusive practices.
Comment Sought on Exemption for Small
Entities. CFPB noted that while small entities tend
to have arbitration clauses less often than larger entities, in
situations where small entities do have such clauses, it believed
it was important to have class actions available.
Nevertheless, while the agency is not proposing an exemption for
small entities, it seeks comment on such an exemption and how it
would be defined.
Compliance Date. As required by the
Dodd-Frank Act, the regulation, if finalized, would apply
prospectively to contracts entered into 180 days after the
effective date of the regulation. CFPB proposed that the
effective date be set at 30 days from publication of a final
regulation in the Federal Register. CFPB calls the
end of the 180-day period the "compliance date."
If, after the compliance date, a provider purchases and becomes
a party to a covered contract that had been entered into prior to
the compliance date, the proposed regulation would appear to
require the purchaser to comply with its requirements.
Observations and Implications
- Sweeping scope of companies and products/services
covered: CFPB has proposed to apply the regulation
to what appears to be the full extent of its rulemaking authority
in many (but not all) areas. This is the first CFPB proposed
regulation to do so. Title X of Dodd-Frank describes CFPB's
authority over what it terms "consumer financial products and
services" in intricate fashion, listing a variety of activities,
various exceptions (such as for certain auto dealers and merchants
of non-financial products) and then exceptions to those exceptions.
 For companies that have been unsure as to whether certain
products or services fall under CFPB's authority, this regulation
may prompt companies to resolve those questions (or to comply with
the regulation out of an abundance of caution). And while
CFPB usually has retained control of when the limits of its
jurisdiction are tested in court-insofar as it can decide which
enforcement actions to bring-a final arbitration regulation would
provide occasion for companies and consumers to litigate these
jurisdictional issues. Determining the scope of the
regulation's coverage is likely to be an important and vexing issue
in the public comment process and in the ultimate implementation of
any final regulation.
- Enforcement of a final arbitration
regulation: Although not discussed in the proposal,
as a regulation issued under Title X of the Dodd-Frank Act, CFPB
would have authority to investigate and bring enforcement actions
(including the imposition of civil monetary penalties) for
violations of the regulation by entities within its enforcement
authority, which is a subset of those covered by its rulemaking
authority. Generally, CFPB has enforcement authority over
banks with more than $10 billion in assets (and their affiliates)
and a large variety of non-bank consumer financial services
companies. The federal banking agencies would have authority
to enforce the regulation with respect to the remaining smaller
banks, and the Federal Trade Commission would have concurrent
authority to enforce the rule with respect to non-banks. In
addition, state attorneys general (and state regulators in some
instances) will likely invoke section 1042 of the Dodd-Frank Act as
authority for enforcing the arbitration regulation, even including
state attorneys general actions against national banks and federal
thrifts. (Section 1042 generally requires consultation with
CFPB in advance of such enforcement actions.) Further,
consumers would likely rely on the final regulation to resist a
company's invocation of arbitration rights in alleged violation of
- Potential challenges to a final arbitration
regulation: News reports have indicated the
possibility of one or more industry challenges to any final
regulation, and it is likely that the groundwork for such
challenges will be laid in the comments on the proposal. Such
challenges could be brought in a variety of courts and could be
based on a number of grounds, including that CFPB's empirical
analysis and reasoning (including CFPB's arbitration study and the
statutorily required analysis of costs and benefits) is arbitrary
or capricious under the Administrative Procedure Act.
Challengers could also argue that CFPB lacks sufficiently clear
authority to target the application of arbitration clauses to class
actions, particularly in light of the Supreme Court's
interpretation of the Federal Arbitration Act in AT&T
Mobility LLC v. Concepcion.  Any lawsuits would
likely also include constitutional objections to CFPB's structure,
which appear to have interested the D.C. Circuit panel in the
pending case, PHH Corp. v. CFPB.
- Practical considerations for potentially affected
companies or investors in such companies: Companies
should determine whether any of their activities are covered by the
proposed regulation and review the arbitration provisions in their
existing contracts. Companies should also consider whether
their business models, including the sales or securitizations of
consumer debt or other contracts, would be impacted by the
regulation. Companies may wish to consider whether to
participate in the public comment process, either individually or
through a trade association, to address the proposal generally or
to make more specific suggestions regarding exceptions or
clarifications with respect to the regulation's coverage of
particular activities. In situations in which companies
believe that a final regulation would meaningfully increase their
class action exposure, companies may wish to review their
compliance policies and procedures and any affected products and
services to assess and mitigate this legal risk. According to CFPB,
in 68% of putative consumer class actions, there was no overlapping
private enforcement action, and in those cases where there was
overlap, class actions preceded public enforcement actions two
thirds of the time.
CFPB's proposed regulation can be found
here and its March 2015 arbitration study can be found
1. CFPB, CFPB Proposes Prohibiting Mandatory Arbitration
Clauses that Deny Groups of Consumers their Day in Court (May
2. CFPB, Notice of Proposed Rulemaking on Arbitration Agreements
(NPRM), May 3, 2016, at 285.
3. "In mobile wireless third-party billing, a mobile wireless
provider authorizes third parties to charge consumers, on their
wireless bill, for services provided by the third parties. Because
mobile wireless third-party billing involves the extension of
credit to, and processing of payments for, consumers in connection
with goods and services that the provider does not directly sell
and that consumers do not purchase from the provider, the provision
of mobile wireless third-party billing is a 'consumer financial
product or service' under the Dodd-Frank Act." NPRM at 41
4. See Dodd-Frank Wall Street Reform and Consumer
Protection Act, Public Law 111-203, 124 Stat. 1376 (2010).
5. NPRM at 107.
6. Id. at 41.
7. Id. at 42.
10. Id. at 44-46. In addition, CFPB analyzed all
arbitrations conducted by the American Arbitration Association from
2010 to 2012 in six consumer financial markets, and found that
consumers filed approximately 616 arbitration disputes each
year. The six markets are credit cards, checking
accounts, general purpose reloadable (GPR) prepaid cards,
storefront payday loans, private student loans, and mobile wireless
third-party billing services. CFPB also analyzed individual
litigations filed in federal court in five of the six markets
during 2010-2012, and found approximately 1,154 lawsuits filed per
year. Id. at 55. CFPB analyzed putative class
actions filed in the six markets in federal court and select state
courts (Utah, Oklahoma, and New York, plus seven counties) and
found 187 filings per year during this
timeframe. Id. at 61, 64.
11. Id. at 38.
12. For example, on July 13, 2015, the American Bankers
Association, the Consumer Bankers Association, and the Financial
Roundtable submitted a comment letter to CFPB in response to the
CFPB Study, available at
13. In June 2015, a group of more than 80 House and Senate
Republicans sent a letter to Director Cordray asking CFPB to
"reopen the study process, seek public comment, and provide the
necessary cost-benefit analysis for understanding how a similarly
situated consumer would fare in arbitration versus a
lawsuit." The lawmakers observed that "[r]ather than focusing
on the critical question - whether regulating or prohibiting
arbitration will benefit consumers - and devising a plan to address
the issues relevant to resolving the question, the Bureau failed to
provide even the most basic of comparisons needed to evaluate the
use of arbitration agreements." See Letter from
Members, U.S. Congress, to Richard Cordray, Dir. of the Consumer
Fin. Prot. Bureau (Jun. 17, 2015), available at
14. In October 2015, CFPB released an outline of its regulatory
proposals in connection with a Small Business Review Panel
with gathering feedback from smaller industry stakeholders.
See CFPB, Small Business Advisory Review Panel for
Potential Rulemaking on Arbitration Agreements (Oct. 2015), at
4, available at
With the release of its proposed regulation last week, CFPB also
released findings from that Panel. CFPB, Final Report of
the Small Business Review Panel on the CFPB's Potential Rulemaking
on Pre-Dispute Arbitration Agreements (Dec. 11, 2015),
15. NPRM at 361 (proposed 1040.4(a)(1)).
16. See id. at 373.
17. Id. at 361 (proposed 1040.4(a)(2)(i)).
18. Id. at 361 (proposed 1040.4(a)(2)(ii)).
19. Id. at 362 (proposed 1040.4(a)(2)(iii)).
20. Id. at 92. In comparing arbitration and
individual litigation, CFPB concluded that it was unable to say
which was superior.
21. Id. at 103.
22. Id. at 285. CFPB also provided figures using
more conservative assumptions. See id. at 285
23. Id. at 132.
24. Id. at 185.
25. Id. at 362-63 (proposed 1040.4(b)).
26. Id. at 142. CFPB stated, for example, that
while AAA and JAMS are specified as administrators in the vast
majority of arbitration agreements and they have procedural and
substantive safeguards, companies may designate other
administrators that may be biased or employ unfair
procedures. Id. at 139-40.
27. Id. at 143.
28. Id. at 229.
29. Id. at 211.
30. Id. at 5, 150. CFPB included a grace period
for certain prepaid cards that were packaged before the compliance
date. Id. at 364 (proposed § 1040.5(b)).
31. Id. at 371 (proposed Official Interpretation
32. See, e.g., Dodd-Frank Act §§
1002(5); 1027; 1029.
33. 563 U.S. 333 (2011). Note that in February 2016
Senator Patrick Leahy introduced a bill, entitled the Restoring
Statutory Rights and Interests of the States Act of 2016, which
would amend the Federal Arbitration Act to make it inapplicable to
claims brought by individual or small businesses "arising from the
alleged violation of a Federal or State statute, or the
Constitution of the United States, or a constitution of a State,
unless the written agreement to arbitrate is entered into by both
parties after the claim has arisen and pertains solely to an
34. See Per Curiam Order of April 4, 2016, PHH
Corp. v. CFPB, No. 15-1177 (D.C. Cir. Apr. 4,
35. NPRM at 114.