CFPB Moves Ahead to Block Arbitration Clauses, Discounting SBREFA Comments
On May 5, 2016, the Consumer Financial Protection Bureau (CFPB) released its anticipated proposed rule that would ban the use of mandatory arbitration clauses to avoid consumers' class action lawsuits in contract disputes. Arbitration clauses are found in a variety of standard-form consumer financial services contracts, and direct consumers away from class action court litigation towards the arbitration process. The CFPB's rule would allow binding arbitration agreements to be used for individual disputes, if financial services providers followed proposed new public disclosure and monitoring requirements.
The CFPB takes the position that class action litigation, which allows consumers to band together in filing lawsuits and sharing attorneys fees, increases their ability to challenge unfair practices, while opponents argue that class action litigation raises costs and provides low returns for plaintiffs, with the attorneys reaping most of the resulting damages. The U.S. Supreme Court has in recent years upheld mandatory arbitration clauses in other contexts, and there is little doubt the CFPB's rule, if finalized in its present form, will be challenged in court.
The proposed rule is 377 pages long, with much of the text devoted to the CFPB's justifications for its views in favor of class actions and against arbitration. The comment period is sure to draw heated submissions covering all viewpoints. Some clues to the battleground issues can be drawn from the report the CFPB released with its proposed rule, detailing the results of a required process under the Small Business Regulatory Fairness Enforcement Act (SBREFA). The CFPB is required to conduct a SBREFA panel review when it is considering any rulemaking that may have a significant impact on a substantial number of small entities. Under SBREFA, the CFPB must seek input from small entities and take their comments into account in formulating its rule. The comments are part of the rulemaking record that is reviewed if the final rule is challenged in court.
The Bureau's SBREFA report for this rule runs to 250+ pages, and includes a homogenized description of the eighteen small entity representatives' (SERs) views as expressed at the October 2015 SBREFA panel meeting. Although the narrative from the meeting includes few hard numbers, the written comments attached to the report are far more detailed in identifying costs and data to back up the SERs' points. One written comment submitted by two SERs cites numerous studies and attaches an August 2015 Mercatus analysis in support of the argument that strong evidence and even the Bureau's own arbitration study show that arbitration benefits consumers.
And there are indications that the SERs' arguments caught the attention of the SBREFA panel members (the CFPB, Small Business Administration's Office of Advocacy, and OMB Office of Information and Regulatory Affairs). By my count, the Panel put forward thirteen separate recommendations for further action by the Bureau:
- The Panel recommends that the Bureau continue to evaluate the costs to small entities of defending class actions and how such costs may differ from the costs to larger entities
- The Panel recommends that the Bureau further assess the availability and costs of insurance for small entities (including impacts on insurance premiums and deductibles and any costs of pursuing unpaid claims against an insurer), particularly whether and how insurance covers class action defense costs and whether exposure to class actions will impact the cost and availability of this insurance
- The Panel further recommends that the Bureau seek comment on or conduct additional outreach to better understand when small entities may be indemnified by third parties for their behavior and related expenditures they could incur in class actions
- The Panel recommends that the Bureau seek comment on whether small entities engage in different compliance practices than large entities
- The Panel further recommends that the Bureau analyze the impact of class actions on small entities' conduct
- The Panel recommends that the Bureau seek comment on whether the publication of claims and awards would present a representative picture of arbitration
- The Panel further recommends that the Bureau continue to assess whether and by how much its proposal regarding submission and publication of arbitration materials would increase the costs of arbitration, including administrative fees or covered entities' time
- In addition, the Panel recommends that the Bureau consider the privacy and reputational impacts of publishing claims and awards (for both the businesses and consumers involved in the dispute)
- The Panel recommends that the Bureau consider whether there are alternatives to provide relief to consumers for harms and encourage compliance with relevant consumer financial laws that would not increase small entities' exposure to class action lawsuits that could increase their cost of credit
- The Panel recommends that the Bureau continue to evaluate the impact of its proposals under consideration on small entities and whether the Bureau should consider exempting small entities from some or all of the requirements for any proposed rule it might issue or delaying implementation for small entities
- The Panel recommends that the Bureau consider whether, through improved disclosure requirements and consumer education initiatives, the Bureau could increase consumers' awareness and understanding of their dispute resolution rights and use of these fora to resolve disputes and redress consumer harms
- The Panel recommends that the Bureau continue to evaluate whether it can improve consumer access to and the efficacy of individual arbitrations and whether these improvements would be sufficient to provide the same benefits the Bureau believes would be provided by the class proposal. Specifically, the Panel recommends consideration of: requirements for consumer-friendly provisions (e.g., company payment for a greater share of consumer costs in arbitration/small claims court, opt-out mechanisms, use of a specialized arbitration forum)
- The Panel recommends that the Bureau evaluate and seek comment on whether specific features of particular causes of action affect the availability of consumer relief, the deterrent effect of class actions, and the consequences to small entities arising from the settlement or recovery (e.g., the availability of attorney's fees, limits to class recovery, and amount of damages, and whether these aspects argue for exempting certain causes of action from the requirement that class actions be available in a proposed rule)
It appears the Bureau was unpersuaded by the SERs' comments, saying repeatedly that after carefully considering these views, "the Bureau preliminarily finds that the proposed rule would be in the public interest." Where not outright rejecting the SERs' arguments, the Bureau indicates its willingness to receive further comment. No doubt, further comment will be forthcoming and, at a minimum, the SBREFA report provides both significant questions the Bureau - and potentially the courts - must address, and a good set of themes for other interested parties to build on during the comment period that is now beginning.
Clark Hill's Consumer Financial Services Regulatory & Compliance Group is a national leader in the field of consumer financial services law, providing strategic legal counsel to clients in all areas of consumer finance. We provide counsel, consultation and litigation services to financial institutions, law firms and debt buyers throughout the country. Our group can help you navigate this rapidly evolving regulatory environment. Our exceptional team of lawyers and government and regulatory advisors has extensive experience in - and an in-depth understanding of - the laws and regulations governing consumer financial products and services. We can assist you in developing and implementing compliance programs, as well as defending consumer litigation and regulatory enforcement actions.