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Congress Overturns the CFPB Arbitration Rule

On October 24, the Vice President broke a 50-50 tie in the Senate to join the House in sending to the President a bill repealing the CFPB’s arbitration rule, a rule that would have allowed consumers to bring class actions challenging abuses in the financial services sector. The Senate action was taken pursuant to the Congressional Review Act, which allows a simple majority of both Houses to not only repeal a rule, but to prohibit the agency from reissuing the rule or a new rule in substantially the same form, unless specifically authorized by Congress.

The CFPB arbitration rule would have prohibited forced arbitration clauses containing class action bans in contracts with consumers against financial service providers. It would not have prohibited arbitration of individual claims.

12 Ways to Still Defeat an Arbitration Requirement

The CFPB rule would have had an enormous impact on returning to consumers remedies they had lost through the widespread use of arbitration clauses with class action bans. Nevertheless, consumers have a number of ways to defeat an arbitration requirement, as set out below. For more detail and extensive cases citations related to these twelve ways and for additional approaches, see NCLC’s Consumer Arbitration Agreements. All links below are to the latest digital update to that treatise.

These twelve ways to defeat an arbitration clause apply to individual cases. They also apply where the grounds to challenge the arbitration clause applies to all class members. In addition, as long as the named plaintiff in a class action can avoid an arbitration requirement, there are good arguments that the class action should be certified even if there is a possibility that other class members may be bound by an arbitration requirement. See id. § 2.7.

  1. As of June 1, 2013, federal law prohibits mortgage lenders from using or enforcing arbitration clauses. See id. § 4.2.2. This includes second mortgages, reverse mortgages, and other security interests in a dwelling.
  2. The same federal prohibition applies to manufactured home loans and even loans for trailers, vacation and second homes, and boats used as dwellings. See id. § 4.2.2.
  3. As of October 3, 2016, federal law prohibits arbitration requirements applied to active military personnel or their dependents in contracts involving almost all types of non-purchase-money, closed-end credit. As of October 3, 2017, the prohibition also applies to credit cards and other open-end credit. See id. § 4.2.3.
  4. An arbitration agreement is a matter of contract, and it is not enforceable if the defendant cannot establish the existence of an agreement. See Bazemore v. Jefferson Capital Sys., L.L.C., 2016 WL 3608961 (11th Cir. July 5, 2016); NCLC’s Consumer Arbitration Agreements § 5.1.1a. The language of the arbitration agreement determines its enforceability, and there can be no analysis of that language without production of the agreement. Debt collectors and debt buyers particularly may have difficulty producing the underlying credit agreement containing the arbitration requirement, and thus may have a difficult time compelling arbitration. See id. § 5.2. And of course, a surprising number of consumer contracts do not contain an arbitration requirement.
  5. The party seeking to compel arbitration must establish that the consumer entered into the agreement. See generally id. Ch. 5. The contract cannot have been obtained through duress, minority, incompetency, or fraud in the factum, and the arbitration provision itself cannot be induced by misrepresentation. Id. § 6.9. The agreement is not binding if it is never finalized (such as in a yo-yo vehicle sale; see id. § 5.6), or where the agreement containing the arbitration requirement (such as a buyer’s order) is superseded by another agreement that does not contain it (such as an installment sales agreement). See id. § 5.7. A contract may also fail if it cannot be carried out according to its terms. This may be the case, for example, where the agreement designates NAF as the arbitration service provider even though NAF can no longer administer consumer arbitrations. See id. § 5.8.
  6. Defendants who are not parties to the agreement (such as certain debt collectors) will have difficulty enforcing the agreement, and even defendants who are parties to the agreement will have difficulty enforcing it against consumers not parties to the agreement. Nor does the agreement apply to disputes not covered by the arbitration clause. See id. Ch. 7.
  7. A defendant can waive the arbitration requirement by engaging in a court litigation that the consumer initiates, by refusing to pay arbitration fees or refusing to participate in the arbitration, or (according to some courts) by initiating collection litigation in a public forum against the consumer prior to the consumer’s subsequent litigation. See id. Ch 8.
  8. An unconscionable arbitration agreement may be unenforceable or the court may excise the unconscionable provisions, such as requirements for inconvenient forums, one-sided rules, unaffordable costs on the consumer, and loser-pay rules. See id. Ch. 6. Similarly, an arbitration requirement may be unenforceable where it conflicts with federal statutory rights, such as where remedies are limited or the arbitration is too costly for the consumer. Id. § 4.4.
  9. The National Labor Relations Board announced in In re D. R. Horton, Inc., 357 NLRB 2277, 2286–2287 (2012) that the National Labor Relations Act prohibits the use and enforcement of class waivers (whether or not in arbitration clauses) in agreements between employees and employers. The Supreme Court granted certiorari on this issue, and a ruling is expected this term. See Ernst & Young, L.L.P. v. Morris, 137 S. Ct. 809 (2017).
  10. Bankruptcy courts have discretion in certain cases to refuse to enforce an arbitration clause and instead hear the matter themselves. See NCLC’s Consumer Arbitration Agreements § 4.3.3.
  11. The FTC and several federal district courts have held that there can be no binding arbitration of written warranty claims, while two circuit courts and other courts have ruled otherwise. See id. § 4.3.2.
  12. The Department of Education, on November 1, 2016, finalized a rule limiting the ability of schools that receive federal student loan funds from enforcing arbitration requirements, even for existing agreements. See id. § 4.2.4a. The rule was to go into effect on July 1, 2017, and would have applied to agreements even before that date, but the Department has now delayed the rule and litigation is ongoing whether this delay is legal.

When Arbitration May Be to the Consumer’s Advantage
In general, the deck is stacked against the consumer in an arbitration proceeding, so much so that an arbitration clause can be the death knell of a consumer having any practical avenue to remedy even a clear law violation. But there are at least two possible exceptions.

Most arbitration clauses prohibit class arbitration, forcing a consumer to arbitrate as an individual even if the costs of arbitration make this clearly impractical. But there are still some arbitration clauses that are silent as to the availability of class arbitration, and then, if the clause is interpreted as allowing class arbitration, the consumer may be in a position to engage in class arbitration. There is very limited judicial review of class arbitration, which also may allow for a speedy resolution of the case. Defendants may find the uncertainty of class arbitration far worse than litigating a class action in court. See id. Ch. 9.

Similarly, an arbitrator is less likely than a jury to award punitive damages, no matter how justified the award. But there is extremely limited review of an arbitrator’s award of punitive damages, unlike an award by a jury, and the size of the award may not even have to comport with due process. The defendant’s exposure in this situation may give the consumer the upper hand. See id. § 10.7.

Free First Chapters

For more on how to defeat an arbitration requirement, read Chapter One of Consumer Arbitration Agreements for free.

Read from NCLC treatises at no cost:

Automobile Fraud

Consumer Arbitration Agreements

Access to Utility Service

Consumer Bankruptcy Law and Practice

Collection Actions

Consumer Banking and Payments Law

Consumer Credit Regulation

Credit Discrimination

Consumer Class Actions

Consumer Warranty Law

Student Loan Law

Fair Credit Reporting

Fair Debt Collection

Federal Deception Law

Foreclosures and Mortgage Servicing

Mortgage Lending

Repossessions

Truth in Lending

Unfair and Deceptive Acts and Practices

Author Name: 
Jon Sheldon
About Author: 

Jon Sheldon has been a staff attorney with NCLC for over 30 years. Jon specializes in state unfair and deceptive trade practices statutes, automobile leasing, automobile fraud, collection actions, arbitration issues, and is very much involved in the production and editing of NCLC consumer law publications. Prior to joining NCLC, he was a staff attorney with the Division of Special Projects within the Federal Trade Commission in Washington, DC. Jon is a graduate of Harvard College (1970) as well as Harvard Law School (1973). He is also admitted to the Massachusetts bar.

He is co-author of NCLC's Unfair and Deceptive Acts and Practices, Automobile Fraud, Collection Actions, Consumer Arbitration Agreements, Repossessions, and contributor to a number of other NCLC treatises

Date Created: 
Tuesday, October 17, 2017
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