Has the Era of the Consumer Class Action Waiver Passed?

Financial Institutions may need to revise consumer contracts to remove class action waivers in preparation for a March 2018 federal rule.

On July 19, the U.S. Consumer Financial Protection Bureau, the federal regulator for a sweeping range of depository and non-depository consumer financial services companies (including the largest of U.S. banks), published a final rule that makes it illegal for many of the CFPB’s regulated entities to include consumer class action waivers in pre-dispute arbitration agreements. The Rule’s effective date is September 18, 2017, and applies to contracts entered into after March 19, 2018. (The Rule does not apply to pre-existing contracts.)

As a result, covered consumer contracts entered into after March 19, 2018, will need to: (a) remove language in pre-dispute arbitration provisions that bars consumers from participating in class actions; and (b) add language informing consumers of their rights to participate in class actions. The Rule will also require such companies to provide information on individual arbitration awards to the CFPB for publication in a public database (redacting consumers’ private financial information). Although the Rule does not outright prohibit pre-dispute arbitration agreements themselves (as many expected the CFPB might), companies will need to reconsider the economics behind offering consumers a full arbitration program in light of a future reality of increased class actions.

Unlike the majority of the CFPB’s regulations, which cover specific financial products or services, the Rule applies across a wide swath of traditional and online consumer financial products and services, including among other things deposit accounts, credit cards and consumer reporting products. (Arbitration agreements, themselves, are already prohibited in residential mortgage transactions, so the Rule does not cover those.)

Although the Rule was issued as “final” (as opposed to a mere proposal), the Rule is currently subject to fierce political headwinds from Congressional Republicans, the White House and industry trade groups, all of whom strongly oppose the CFPB’s current director, Richard Cordray, an Obama appointee.

Indeed, the House of Representatives has already passed a resolution that, if adopted by the Senate and signed by the President, would nullify the Rule and bar the CFPB from issuing a similar rule in the future without an express Congressional directive. The catch is that the procedure Congress would invoke to nullify the Rule, the Congressional Review Act, must be used within 60 legislative days of the Rule’s publication of the Federal Register. While the House of Representatives has taken the first step, it remains to be seen if the Senate will have opportunity to act in light of other legislative priorities.

Notwithstanding these potential threats to the Rule from Congress, as of the time of this writing, the CFPB appears to be moving full steam ahead. As a result, companies that fall within the Rule’s coverage are well advised to begin reviewing their consumer agreements and dispute resolution procedures in preparation for the distinct possibility that prohibitions on consumer class action waivers become the law in March 2018.