Removing Barriers Blog

CFPB Final Arbitration Rule Summary

The CFPB on July 10, 2017 finalized its arbitration rule. The rule changes the scope of the ability to use arbitration clauses in consumer financial contracts. In its analysis, the CFPB makes several arguments for why credit unions should be included in its rule.

What does the Rule Do Specifically?

1) Eliminates the Ability to Use Class Action Waivers
The final rule prohibits credit unions from including class action waivers in pre-dispute arbitration agreements for consumer financial products and services. There are new requirements for use of a "pre-dispute arbitration agreement" that is entered into on or after the compliance date, which is the 241st day after the rule is published in the Federal Register. The form or structure of the agreement is not determinative of whether an agreement is a "pre-dispute arbitration agreement;" rather, the definition applies to any agreement between a covered person and a consumer that provides for arbitration of any future dispute concerning a covered financial product or service. This can be a standalone agreement or take the form of a single clause in a larger contract. The rule prohibits a covered provider from relying on a pre-dispute arbitration agreement with respect to any aspect of a class action that concerns a covered financial product. It also requires that certain language be included in pre-dispute arbitration agreements that informs the consumer that the arbitration agreement may not be used to block class actions.

2) Requires Reporting to the CFPB
There is also a new requirement that credit unions must submit certain arbitration-related records concerning covered financial products to the CFPB. A provider must submit certain records related to arbitration proceedings within 60 days of the date the record was filed with the arbitrator or court. The CFPB will then post the redacted records it obtains from providers on a publicly available website the Bureau will make available by July 2019.

When Does the Rule Take Effect?
The final rule will take effect 60 days after it is published in the Federal Register and it will cover agreements that are entered into beginning 180 days after the rule is published (essentially a 240- day grandfather period).

What Did CUNA Ask the CFPB For?
CUNA asked the CFPB to consider the unique size and structure of credit unions. It pointed out that since credit unions are owned by their members, and, as not-for-profit financial cooperatives, they have incentive to, and a long history of prioritizing the needs of their members. We asked the CFPB to take these differences into account, instead of treating credit unions like the large Wall Street Banks that have abused consumers. CUNA also argued that it is difficult to imagine a case in which class action litigation against a credit union would be a reasonable course of action for credit union members since it would put them in a position of essentially having to sue themselves as owners. Furthermore, CUNA argued that as a result of the unique structure of a credit union, in the rare situation that a group of credit union members feels a credit union is in the wrong, the group, as member-owners, already have direct recourse. Specifically, CUNA pointed to the Telephone Consumer Protection Act as an example of an area where credit unions and members have been harmed by class action litigation, where plaintiffs’ lawyers are seeking to profit from lucrative attorneys’ fees under the guise of consumer protection.

However, the CFPB declined to recognize the unique size and structure of credit unions in the rule or the harm that class action litigation can cause to credit unions and members.

The CFPB instead stated the following:  

“As noted in the proposal, nothing requires a company to resolve a dispute in a particular consumer’s favor, to award complete relief to that consumer, to decide the same dispute in the same way for all consumers, or to reimburse consumers who had not raised their dispute to a company. Regardless of the merits or similarities between the complaints, the company retains discretion to decide how to resolve them. This is true even with respect to providers that are member-owned, like credit unions. For example, if two consumers bring the same dispute to a company, the company might resolve the dispute in favor of a consumer who is a source of significant profit while it might reach a different resolution for a less profitable consumer. Indeed, as the Bureau stated in the proposal, in the Bureau’s experience it is quite common for financial institutions (especially the larger ones that interact with the greatest number of consumers) to maintain profitability scores on each customer and to cabin the discretion of customer service representatives to make adjustments for complaining consumers based on such scores.” 

“For similar reasons, the Bureau further believes that the presence of a financial institution in a community, with the interest of developing and retaining customers in that community, also is not a sufficient compliance incentive to replace a right to enforce relevant laws on a class basis.” 

“With regard to the particular economic structure of credit unions, as further discussed in the section-by-section analysis of § 1040.3 in Part VII and in the Section 1022(b)(2) Analysis below in Part VIII, the Bureau recognizes that to the extent credit unions absorb increased costs as a result of the class rule, at least some of those costs may be passed on to credit union members in the form of lower dividends. It is also true, of course, that the credit union members will benefit from those costs to the extent they reflect increased levels of compliance or redress for wrongful or legally risky conduct. In any event, the Study indicated, and credit union industry commenters acknowledged, that credit unions do not rely heavily on arbitration agreements. Furthermore, even for the small percentage of credit unions that do employ arbitration agreements, the fact that credit unions are member-owned – and the fact that most credit unions are small institutions – suggests that credit unions are unlikely to face a significant increase in the frequency of class actions and thus unlikely to incur a significant cost increase. Similarly, to the extent that creditors hold extra cash reserves or are unable to pass through costs and therefore reduce lending, the Bureau believes that this effect would be relatively modest and does not alter the conclusion that the class rule is in the public interest.” 

“With regard to the exemptions requested by credit union and community bank commenters, the Bureau is not adopting such exemptions in the rule as discussed further in Part VI above and the Section 1022(b)(2) Analysis below. As discussed in the section-by-section analysis of § 1040.3(b)(2) below, the Bureau has determined in the final rule that democratic accountability structures are an insufficient basis for excluding governments from the rule. With regard to an exemption for credit unions, the Bureau similarly believes that shareholder ownership, while providing a form of democratic shareholder accountability over the credit union, is not a sufficient compliance incentive to replace a right to enforce the laws on a class basis. The Bureau further believes that the presence of a financial institution in a community, such as a credit union or community bank, with the interest of developing and retaining customers in that community, also is not a sufficient compliance incentive to replace a right to enforce those laws on a class basis.970 With regard to the potential for pass through of costs of the rule to consumers who also have ownership interests in credit unions, as discussed in the Bureau’s Section 1022(b)(2) Analysis below, the member-ownership structure for credit unions may make it slightly more likely that consumers would face reduced earnings as owners, if costs are not passed through to them as customers. Nonetheless, the Bureau has already considered the potential for pass through of costs of the rule to customers in its Section 1022(b)(2) analysis. The fact that credit unions may pass through costs to consumers as owners, even when costs are not passed through by way of product pricing, does not change the nature of its findings in Part VI above.” 

“Credit union industry commenters asserted that the risk or magnitude of pass-through costs to consumers is effectively greater for credit unions, because unlike traditional banks, credit unions are owned by their members. The Bureau agrees that, at least for any credit unions that use arbitration agreements, this may be true, if somewhat tautological. In general, a cost to a firm must either be passed on to consumers through higher prices or to the owners of the firm through reduced profits. To the extent that credit union customers are also owners, such costs will ultimately fall to consumers one way or another. Nonetheless, given that the Bureau’s preliminary conclusion was only that pass-through was likely greater than zero, and given that most credit unions currently do not use arbitration agreements and so will not be affected by the rule, the Bureau’s analysis is not meaningfully altered by this comment.” 

Additional Advocacy Efforts
CUNA is extremely concerned with this flawed and unsupported analysis from the CFPB in its final rule concerning the impact of its one-size fits all rule on credit unions. Credit unions are very disappointed that the CFPB is treating credit unions the same as large Wall Street banks that have a very different relationship with consumers and a history of abuse, as opposed to member-owned credit unions that have a long history of working amicably with members. 

There are several possible ways that this rule could potentially be modified: 

The Congressional Review Act (CRA) – The CRA is an oversight tool that provides Congress the ability to consider “resolutions of disapproval” to block major regulations issued by federal agencies, including independent agencies like the CFPB. The CRA has 60 legislative days (after a final regulation is published in the Federal Register) to move a resolution of disapproval before the expedited procedures expire. The Chairman of the House Financial Services Committee and the Chairman of the Senate Banking Committee have already indicated their willingness to use this process for the arbitration final rule. 

The Financial Stability Oversight Council (FSOC) -  The FSOC, as a whole, could veto the rule altogether with a two-thirds vote. Secretary Mnuchin has 10 days after publication of the rule to impose a stay (it has not yet been published). This has never been done before for a CFPB rule but could be considered in light of the new Administration. 

Legislation – Both the Financial CHOICE Act and the Financial Services and General Government (FSGG) Appropriations Act for Fiscal Year 2018 include legislation that would alter the CFPB's ability to promulgate an arbitration rule.