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1.7.2.2 The CFPB Proposal to Limit Arbitration of Class Actions

On May 5, 2016, the Consumer Financial Protection Bureau (CFPB) proposed a rule to prohibit contracts that have arbitration requirements unless the contract includes a notice that class actions are not affected and may be brought in court.39 When enacted, this rule will dramatically change consumers’ ability to bring into court as class actions cases involving financial products and services, allowing consumers once again to fully utilize class action procedures in court.

This is a proposed rule, and there is much that could happen before the rule becomes effective, including potential litigation and legislation aimed at stopping the rule. According to the proposal, the rule will have a compliance date 211 days after publication of the final rule and will generally only apply to contracts entered into after that compliance date. “Entered into” includes purchasing or acquiring a contract. As a result, in the best of circumstances a final rule will apply only to contracts entered into or acquired beginning in 2018 at the earliest, and the rule will generally not affect contracts entered into prior to that compliance date, unless a new arbitration clause is added.

The CFPB only has jurisdiction over consumer financial products, and even some of these are excluded from the rule, so the rule is limited in its coverage. For example, the rule will not place obligations on many car dealers, for-profit schools, nursing homes, cell phone providers, and other merchants of goods and services. In addition, in the proposal the CFPB does not extend the rule to the limits of its authority but instead itemizes the transactions to which the rule will apply.

Importantly, however, covered providers cannot rely on any noncompliant arbitration clause, even if the contract was not originally entered into between a consumer and a covered person. In other words, covered providers (like automobile lenders) cannot escape the rule’s reach by purchasing contracts that contain arbitration clauses, even if those clauses were originally entered into between non-covered entities (like automobile dealers) and consumers.

Footnotes

  • 39 {39} 81 Fed. Reg. 32,830 (May 24, 2016).