Summary: Executive Summary of CFPB Arbitration Agreements Rule
Prepared by the NASCUS Legislative and Regulatory Affairs Department
The Consumer Financial Protection Bureau (CFPB) issued a final rule to regulate pre-dispute arbitration agreements in contracts for certain consumer financial products and services. The rule becomes effective 60 days from its publication in the Federal Register and would only apply to arbitration agreements for covered products/services that were entered into on or after the 241st day the final rule’s publication in the Federal Register—referred to as the rule’s “compliance date.”
“Providers” under the Rule
The arbitration final rule applies to “providers” of covered financial products and services. In addition, the rule would apply to providers of certain consumer financial products/services in the core consumer financial markets of lending money, storing money, and moving or exchanging money. Provider is defined as:
- A person that engages in an activity that is a covered consumer financial product/service if that person has not been specifically excluded from coverage under the rule or:
- An affiliate of such a person when the affiliate is acting as the person’s service provider
The following parties have been specifically excluded from the definition of “provider” under the final rule:
- A person regulated by the Securities and Exchange Commission
- A person to the extent regulated by a state securities commission as either a broker dealer or an investment advisor
- A person regulation by the Commodity Futures Trading Commission or a person with respect to any account, contract, agreement or transaction to the extent subject to the jurisdiction of the CFTC
- A federal agency
- A state (including the District of Columbia and territories/possessions of the United States), federally recognized Indian tribe, or other person to the extent the person has federal sovereign immunity from private suit.
- A person to the extent the person’s activities are not subject to the Bureau’s rulemaking authority. These persons may include auto dealers, attorneys, and other persons.
- Merchants, retailers or other sellers of nonfinancial goods/services to the extent they:
- Offer or provide an extension of consumer credit and are either not subject to the Bureau’s rulemaking authority or would only be subject to the Bureau’s rulemaking authority under a statutory provision relating to certain factoring activity; or
- Purchase or acquire such an extension of consumer credit.
- An employer to the extent that the employer is providing a covered consumer financial product or service to its employees as an employee benefit.
- A person to the extent that the person is engaged in offering or providing a product or service that does not meet the numeric threshold set forth in the Rule. A product does not meet this threshold if the person and any of its affiliates collectively provide the product to 25 or fewer customers I the current calendar year and collectively provided the product to 25 or fewer consumers in the preceding calendar year.
Covered Consumer Products/Services under the Rule
A provider is only required to comply with the arbitration rule for “covered products/services,” which have been defined as:
- A consumer financial product/service as defined in 12 USC 5481(5). Generally, this rule pertains to financial products/services that are offered/provided to consumers primarily for personal, family or household purposes or that are offered/provided in connection with such products; and
- Product/service included in the rule’s list of covered consumer products/services.
Pre-Dispute Arbitration Agreements
The rule prohibits covered providers of certain consumer financial products and services from using an agreement entered into by a consumer that provides for arbitration of any future dispute between the parties to bar the consumer from filing or participating in a class action concerning the covered consumer financial product or service.
- A pre-dispute arbitration agreement may be between a consumer and a covered person, who may or may not be a “provider” under the rule.
- An agreement can be a “pre-dispute arbitration agreement” under the rule regardless of whether it is a standalone agreement, an agreement/provision that is incorporated into, annexed to or otherwise made a part of a larger contract.
Required Pre-dispute Arbitration Agreement Provisions
The final rule requires that any pre-dispute arbitration agreement entered into on or after the compliance date, must include certain language set forth in the rule that informs consumers that the agreement may not be used to block class actions.
- The rule allows a provider to use an alternative method of providing the required language for a pre-existing pre-dispute arbitration agreement. If the agreement does not already contain the required language, the provider must amend the agreement to include the required language or provide written notice to the consumer within 60 days of entering into the pre-dispute arbitration agreement. There are some exceptions to this requirement.
- Under certain circumstances, the rule permits a provider to use different or additional language in a pre-dispute arbitration agreement. Also, if certain conditions are met, the requirement to add certain language does not apply to a pre-dispute arbitration agreement for a general purpose reloadable prepaid card if the agreement was packaged with the card prior to the compliance date.
Submission of Required Records
The rule required providers to submit to the Bureau certain arbitration-related records. This requirement applies to:
- Specified records filed in any arbitration or court proceeding in which a party relies on a pre-dispute arbitration agreement entered into on or after the compliance date;
- Communications the provider receives from an arbitrator or arbitral administrator pertaining to a determination that a pre-dispute arbitration agreement entered into on or after the compliance date does not comply with an arbitral administrator’s due process or fairness standards; and
- Communications the provider received from an arbitrator or arbitral administrator regarding a dismissal of or refusal to administer a claim due to the provider’s failure to pay required filing or administrative fees.
Providers must submit the required record(s) within 60 days of the date that the record was filed with the arbitrator, arbitral administrator or court. The Bureau will post redacted records it obtains from providers on a publicly available website.
- A “person” includes an individual, partnership, company, corporation, association, trust, estate, cooperative organization, or other entity.
- An “affiliate” is any person that controls or is controlled by, or is under common control with another person as defined in 12 USC 5481(1).
- A “consumer” is an individual or an individual’s agent, trustee or representative.
- A “covered person” is any person that engages in offering or providing a consumer financial product or service, and any affiliate of a covered person if such affiliate acts as a service provider to the covered person as defined in 12 USC 5481(6).