On May 5, 2016, the Consumer Financial Protection Bureau (CFPB) announced the issuance of a Notice of Proposed Rulemaking soliciting comments on a proposed rule to prohibit covered institutions from including, in most core consumer contracts, “pre-dispute arbitration agreements” that contain class waivers. The proposed regulations would explicitly require the inclusion of the following disclaimer in a pre-dispute arbitration agreement: “We agree that neither we nor anyone else will use this agreement to stop you from being part of a class action case in court. You may file a class action in court or you may be a member of a class action even if you do not file it.” The regulations would govern all agreements entered into after the effective date of the regulations (211 days after adoption of the final rule).

The coverage of this rule is quite broad.  It includes most core banking depository and credit products and also applies to debt relief providers, certain parties extending or providing automotive leases, and check cashing companies. The rule also applies to general-purpose reloadable prepaid cards, but provides special transition rules for those cards based on whether the institution has the means to contact the cardholders.

Separately, for all new pre-dispute arbitration agreements entered into after the effective date of the proposed regulation, the entity will be required to submit to the CFPB records governing each individual-level arbitration, including a copy of the arbitral claim and any counterclaim, a copy of the pre-dispute arbitration agreement, any award, and certain other materials.

During a field hearing earlier today, CFPB Director Richard Cordray, in announcing the NPRM, asserted that mandatory arbitration agreements effectively function as “legal lockouts” because they preclude consumers from bringing group claims against financial services companies. Director Cordray emphasized the CFPB’s belief that class action waivers prevent consumers from seeking “meaningful relief” because many consumer claims concern dollar amounts too low to warrant filing individual lawsuits over.

The proposed rule flows from the CFPB’s March 2015 study which asserted that few consumers bring actions against financial services companies and claimed that few understood how arbitration clauses worked. The CFPB took the position that class actions provided an effective means for consumers to challenge problematic practices and that class actions have brought about millions of dollars of relief to consumers. According to the CFPB, benefits of the proposed rule include providing a “day in court” to consumers, deterring misconduct by covered institutions, and increasing transparency with respect to how individual arbitrations are conducted.

We note that industry advocates dispute much of the CFPB’s findings. During panel testimony following the May 5 field hearing, Travis Norton of the U.S. Chamber of Commerce, for instance, pointed out  that in some cases arbitration is beneficial for consumers because it is cheaper than litigation, is a more efficient means to resolve disputes, and that the costs are often borne by the institution and not the consumer. Industry advocates have also claimed that eliminating class action waivers is just a boon to plaintiffs-side class action attorneys, who are typically rewarded far more in class litigation than any individual plaintiff.

The proposal states that compliance is required only for agreements entered into 211 days after the final rule is published, which is consistent with Dodd Frank, so the rule should not retroactively apply. But how courts will treat the enforceability of mandatory arbitration clauses (including class waivers) where the contract was executed before the effective date of the rule remains to be seen.

Director Cordray announced that the comment period will be 3 months. We are monitoring this issue closely.  Stay tuned for further developments.