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By Edward H. Warner and Linda Perez Clark

On Thursday, May 5, 2016, the Consumer Financial Protection Bureau (CFPB) issued a notice of proposed rules that would fundamentally change the way certain businesses contract with consumers.  Among other actions, the proposed rule would eliminate class action waivers from pre-dispute arbitration clauses and agreements for certain businesses.  The announcement of the proposed rule was somewhat expected, considering Congress directed the CFPB to study the use of mandatory arbitration clauses in consumer financial markets beginning in 2012.  The CFPB released the results of its three year study in March 2015 and found that class actions were the favored method for consumers to hold certain financial services businesses accountable.  The May CFPB press release states that “the CFPB’s proposal is designed to protect consumers’ right to pursue justice and relief, and deter companies from violating the law.”

What does this proposal intend to change?

Pursuant to the Dodd-Frank Wall Street Reform and Consumer Protection Act, the CFPB is proposing to establish 12 CFR part 1040, which would impose two sets of limitations on the use of pre-dispute arbitration agreements by providers of consumer financial products and services (“Covered Providers”).

First, the proposed rule would prohibit Covered Providers from using an agreement with a consumer that provides for arbitration of any future dispute if such an agreement bars the consumer from filing or participating in a class action with respect to the covered consumer financial product or service.  Second, the proposal would require a Covered Provider that is involved in an arbitration pursuant to a pre-dispute arbitration agreement to submit specified arbitral records to the CFPB.

What does this change mean for your company?

While only a proposal at this point, this development warrants attention if your company uses pre-dispute arbitration agreements containing class action waivers.  If the proposal is approved, Covered Providers would need to eliminate class action waivers from pre-dispute arbitration agreements and clauses.  The proposal would apply to Covered Providers who are typically in the core consumer financial markets of lending money, storing money, and moving or exchanging money.  Additionally, if the rule is passed, any pre-dispute arbitration agreement will need to include a mandatory statement that the consumer cannot be stopped from filing his/her claim as a class action in court, or from participating in a class action filed by someone else.

What are the legal implications and timelines moving forward?

The new regulations would apply to pre-dispute arbitration agreements entered into on the date that is 211 days from the date the final rule is published, and thus would not apply to any agreement in effect prior to that date.  The 90-day period for the public to comment on the proposed regulations expires August 22, 2016.  Businesses should monitor the outcome and enlist counsel to prepare to address these new requirements if adopted.

If you wish to view the proposed rule, or file a public comment, you may do so at the link here.