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Regulatory Advocacy

Working Together to Reduce Regulatory Burdens
Regulation Summary
Agency Consumer Financial Protection Bureau
Rule Name Arbitration
Comment Due Date 08/22/16

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The Consumer Financial Protection Bureau (CFPB) is proposing sweeping changes to the use of pre-dispute arbitration clauses. Congress directed the CFPB to study pre-dispute arbitration agreements in the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act). In 2015, the CFPB published and delivered to Congress a study of arbitration. In the Dodd-Frank Act, Congress also authorized the Bureau, after completing the study to issue regulations restricting or prohibiting the use of arbitration agreements. Despite conflicting findings in the study, some of which show that consumers receive little or no relief from class action litigation, and that there are benefits to arbitration, the CFPB is moving forward with a rulemaking, which eliminates the use of class action waivers in mandatory arbitration agreements. In October 2015, the CFPB published Small Business Regulatory Enforcement Fairness Act (SBREFA) proposals in conjunction with a Small Business Review panel. The CFPB’s rule proposed will be open for a 90 day public comment period ending on August 22, 2016.


What does this proposed rule do?

The proposed rule would eliminate arbitration clauses that are routinely included in many contracts for consumer financial products, which can protect credit unions from class action lawsuits when requiring arbitration as an alternative dispute resolution process. Under the proposed rule, financial institutions could still include arbitration clauses for individual disputes, but not for class-actions. The CFPB would provide specific language that must be used in the contract.  The proposal also requires companies that use arbitration clauses to submit claims, awards and other related materials to the CFPB for monitoring. Further, the proposal also notes that the CFPB intends to publish these materials on its website in some form, with appropriate redactions or aggregation as warranted, to provide greater transparency into the arbitration of consumer disputes.

Why is CFPB proposing this rule?

The CFPB has argued that mandatory arbitration clauses stop consumers from seeking relief in through group claims in court. The proposal illustrates a preference for class action litigation, as opposed to other means of dispute resolution.

What credit unions are impacted by this proposed rule?

Credit unions who are currently using arbitration clauses will be impacted. Additionally, there is some question whether credit unions who work with third-parties who use arbitration clauses may also be impacted. For example, indirect lenders may face additional compliance burdens if the autodealers they are working with are using arbitration clauses. Additionally, as a result of new CFPB rules such as TILA/RESPA and Home Mortgage Disclosure Act, which may leave credit unions more vulnerable to frivolous class action litigation, we are urging credit unions to consider whether the ability to limit frivolous class action lawsuits could be beneficial in the future to protect credit unions and members, even if not currently used.

When will Credit Unions be required to Comply with This Regulation?

The comment period is open for 90 days. Consistent with the Dodd-Frank Act, the proposed rule would apply only to agreements entered into after the end of the 180-day period beginning on the regulation’s effective date. The Bureau is proposing an effective date of 30 days after a final rule is published in the Federal Register.