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CFPB Issues Controversial Final Rule Prohibiting Mandatory Arbitration Clauses That Bar Class Actions In Certain Financial Services Agreements

The Consumer Financial Protection Bureau, an independent agency created pursuant to the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, creates and enforces certain rules governing bank and non-bank financial institutions, monitors and reports on markets, and receives and logs consumer complaints. In December 2015, the CFPB published a study indicating that few consumers consider bringing individual actions against financial services providers. In response, in May 2016, the CFPB issued a proposed rule that prohibits mandatory arbitration clauses that bar class actions and permits the CFPB to monitor the fairness of individual arbitration processes by requiring the submission of certain arbitral and litigation documents to the CFPB. With certain exceptions, the rule would generally apply to markets for consumer financial products and services, including those involving the lending, storage, movement, and/or exchange of money.

Many view the rule as a dramatic departure from current law, particularly in light of recent Supreme Court decisions upholding the enforceability of arbitration clauses that bar class actions in AT&T Mobility LLC v. Concepcion, Stolt-Nielsen, S.A. v. AnimalFeeds Int’l Corp., and American Express Co. v. Italian Colors Restaurant. In Stolt-Nielsen, the Court held that, under the Federal Arbitration Act, class arbitration cannot be imposed on parties who have not specifically agreed to it. In Concepcion, in upholding an arbitration clause with a class waiver in a class action case, the Court held that the FAA preempts state laws that prohibit contracts that do not allow class arbitration. And in Italian Colors, an antitrust class action, the Court held that the FAA itself does not provide a basis to invalidate such contractual waivers of class arbitration and enforced the arbitration clause at issue.

After publication of the proposed rule in the Federal Register and a review of the comments received, the final rule and official interpretations were issued on July 10, 2017. The final rule will become law 60 days after its publication in the Federal Register and will apply to agreements entered into more than 180 days after the effective date. One day after the CFPB issued the final rule, U.S. Senator Tom Cotton, a member of the Banking Committee, moved to block the rule under the Congressional Review Act. Some members of the House of Representatives have supported using the CRA to undo the rule, as have pro-banking interest groups. If a vote takes place prior to the rule’s effective date, only a majority vote in both houses of Congress and presidential approval are required to nullify the rule.

We will continue to monitor and keep you apprised of notable developments.

As always, please feel free to contact the authors of this alert, Eric Hochstadt, David Singh, and Alex Shear, or your regular Weil contact, for more information.