This morning the Federal Register published the CFPB's final arbitration agreements rule. This rule prohibits covered providers of certain consumer financial products and services from using an agreement with a consumer that provides for arbitration of any future dispute between the parties to bar the consumer from filing or participating in a class action concerning the covered consumer financial product or service. It also requires covered providers that are involved in an arbitration pursuant to a pre-dispute arbitration agreement to submit specified arbitral and court records to the CFPB. The final rule is effective 60 days after it is published in the Federal Register with a mandatory compliance date of 181 days after the effective date. Therefore, the effective date of the final rule will be Monday September 18, 2017 (the 60th day is on Sunday the 17th) and the compliance date will be Monday, March 19, 2018.
The final rule applies to nearly every consumer financial product or service offered or provided by or on behalf of virtually any provider subject to the CFPB's rulemaking authority. It also applies to pre-dispute arbitration agreements entered into by affiliates that are not normally covered by the CFPB's rulemaking authority when the affiliate provides a covered consumer financial product or service. There are a few differences in the coverage of providers and products and services between the final rule and the CFPB's general coverage but essentially anyone who is reading this is going to be covered. If you are a Temenos Compliance Services client and you have questions as to whether you are a covered provider or your products or services are covered, please feel free to send us a question. If you are not a client, (we would certainly like to invite you to become one), you should consult legal counsel to determine whether the rule applies.
That said, there is a limited exception from the disclosure requirements for certain pre-packaged general-purpose reloadable prepaid card agreements. The general prohibition on relying on a pre-dispute arbitration agreement requirement for certain pre-packaged general-purpose reloadable prepaid card agreements still applies. However, covered service providers are excused from the disclosure requirements where the covered provider does not have the ability to contact the consumer in writing, the consumer acquires a general-purpose reloadable prepaid card in person at a retail store, the pre-dispute arbitration agreement was inside of packaging material when the general-purpose reloadable prepaid card was acquired, and the pre-dispute arbitration agreement was packaged prior to the compliance date. For a provider that has the ability to contact the consumer in writing, the exception applies if the consumer acquires a general-purpose reloadable prepaid card in person at a retail store, the pre-dispute arbitration agreement was inside of packaging material when the general-purpose reloadable prepaid card was acquired, and within 30 days of obtaining the consumer's contact information, the provider notifies the consumer in writing that the pre-dispute arbitration agreement complies with the final rule's requirements by providing an amended pre-dispute arbitration agreement to the consumer.
The final rule does not prohibit the use of arbitration. First, a consumer and provider may decide, after a dispute has arisen, to resolve the dispute through arbitration. Second, a provider may rely on a pre-dispute arbitration agreement entered into on or after the compliance date if the presiding court has ruled that the case may not proceed as a class action, including any applicable interlocutory appeals. The final rule essentially requires that before you enforce a pre-dispute arbitration agreement, you give the consumer an opportunity to bring a class-action law suit. Once the presiding judge denies the class certification, the covered provider may then enforce the pre-dispute arbitration agreement and require that the dispute be settled in arbitration instead of in a court of law.
A covered provider may still enter into pre-dispute arbitration agreements but it must, upon entering into a pre-dispute arbitration agreement, include specified language in the agreement. The final rule requires specific language and a covered provider may not deviate from the language in the final rule. When the pre-dispute arbitration agreement applies to multiple products and services, only some of which are covered consumer financial products and services, the final rule provides alternative language that a covered provider may use. The final rule requires a provider that enters into a pre-dispute arbitration agreement that had existed previously as between other parties and does not contain the required language to ensure the agreement is amended to contain the required language or to provide a written notice to any consumer to whom the agreement applies. This could occur, when, for example Big Bank is acquiring Small Town Bank after the compliance date, and Small Town Bank had entered into pre-dispute arbitration agreements before the compliance date. If, as part of the acquisition, Big Bank enters into the pre-dispute arbitration agreements of Small Town Bank, Big Bank would be required either to ensure the account agreements were amended to contain the required language or to provide a written notice with the required language.
For any pre-dispute arbitration agreement for a covered consumer financial product or service entered into after the compliance date, a covered provider must submit a copy of the certain arbitral and court records to the CFPB. The covered provider must send the records within 60 days of filing by the provider of the record with the arbitrator, arbitration administrator, or court, or receipt by the provider of any such record filed or sent by someone other than the provider, such as the arbitration administrator, the court, or the consumer. Before submitting the records to the CFPB, the covered provider must redact certain information from the record. The CFPB will establish a publicly available database to post the records on its website no later than July 1, 2019.
Now, it is still possible that Congress or the courts can stop the final rule from taking effect before the 240-day period expires. For example, the Financial Choice Act, which already has been passed by the House of Representatives, could become law. Congress could also disapprove the rule under the Congressional Review Act. Several parties have indicated that they may assert legal challenges based on the failure of the final rule and arbitration study to comply with the Dodd-Frank Act and the Administrative Procedure Act. But because the implementation period is so short, I would not wait for any of these events to occur prior to beginning to implement the changes.
So, what are you to do next? The first thing you need to do is to review all your agreements for covered consumer financial products and services-this includes deposit agreements, loan agreements, EFT and remittance transfer agreements, etc.-for pre-dispute arbitration agreements. Do not forget to review the agreements provided by third parties such as an auto dealer engaged in indirect lending. If you use pre-dispute arbitration agreements, you will need to revise those pre-dispute arbitration agreements to include the required language. Additionally, you should consult with legal counsel to consider what steps they can take to reduce litigation risks considering the final rule. If you do not currently use pre-dispute arbitration agreements this final rule does not really apply, but you cannot just ignore the rule going forward. Any time you acquire a consumer loan or other agreement for a consumer financial product or service after the compliance date, including those acquired in the acquisition of another provider, you will need to review that agreement to see if it includes a pre-dispute arbitration agreement. If the agreement includes a pre-dispute arbitration agreement, you will need to send the amended agreement or the separate notice within 60 days of becoming a party to the agreement.