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Monday, May 16, 2016

ABIA: Summary of CFPB’s Proposed Rule on Arbitration

ABIA: Summary of CFPB’s Proposed Rule on Arbitration
Katie Wechsler, Barnett Sivon & Natter, P.C.
May 12, 2016

On Thursday, May 5, the Consumer Financial Protection Bureau (CFPB) issued a proposed rule governing pre-dispute arbitration agreements. This is a brief overview of the proposed rule and its possible implications for insurance providers.

Background: The Dodd-Frank Act required CFPB to study the use of pre-dispute arbitration agreements in connection with consumer financial products or services. After conducting the study, the CFPB could prohibit or impose conditions or limitations on the use of pre-dispute arbitration agreements if the CFPB “finds that such a prohibition or imposition of conditions or limitations is in the public interest and for the protection of consumers. The findings in such rule shall be consistent with the study…” According to the CFPB, the agency’s study on arbitration “showed that very few consumers ever bring – or think about bringing – individual action against their financial service providers either in court or in arbitration. The study found that class actions provide a more effective means for consumers to challenge problematic practices by these companies.” 

Overview of Proposed Rule: There are three main components to the proposal:
  1. Providers of consumer financial products and services would be prohibited from using pre-dispute arbitration agreements to block consumer class actions in court.
  2. Providers of consumer financial products and services would be required to insert the following language into their arbitration agreements to reflect this limitation: “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.”
  3. Providers that use pre-dispute arbitration agreements would be required to submit certain records relating to arbitral proceedings to the CFPB. The CFPB would use this information to monitor arbitral proceedings to determine whether further CFPB action is warranted. Additionally, this information will be made public on the CFPB’s website, with some redactions and aggregation as warranted.
Providers and Products Subject to the Proposed Rule: Persons engaged in offering or providing certain consumer financial products or services and affiliates of those persons, if the affiliate is acting as a service provider, would be subject to the rule. Certain providers, namely those exempt from CFPB’s jurisdiction under the Dodd-Frank Act, would be exempt from the rule. In general, the rule applies to three main types of products: lending money (extending credit, servicing an extension of credit, providing debt management or debt settlement services, providing consumer reports and credit scores, debt collection); storing money (accounts subject to the Truth in Savings Act); and moving or exchanging money (services subject to the Electronic Fund Transfer Act, transmitting or exchanging funds, accepting banking data directly from a consumer to initiate a payment by a consumer unless in relation to a nonfinancial good being sold or marketed by the same person accepting the data, and check cashing).

Possible Implications for Insurance: A person regulated by a state insurance regulator are exempt from the proposed rule unless that person is engaged in the offering or provision of any consumer financial product or service. Separately, the CFPB has indicated that the proposal would apply to:
Extensions of credit by providers of whole life insurance policies (NAICS 524113) to the extent that these companies are ECOA creditors and that activity is not the “business of insurance” under the Dodd-Frank section 1002(15)(C)(i) and 1002(3) and arbitration agreements are used for such policy loans. However, it is unlikely that a significant number of such providers would be affected because a number of state laws restrict the use of arbitration agreements in insurance products and, in any event, it is possible that the loan feature of the whole life policy could be part of the “business of insurance” depending on the facts and applicable law.

Therefore, it is necessary for insurance providers to consider: (1) whether they are a creditor under ECOA; (2) whether their credit product would meet the definition of the “business of insurance” in the Dodd-Frank Act; and (3) whether state laws address these issues, including whether state laws prohibit arbitration agreements.

Effective Date: The CFPB is proposing that the rule would apply to contracts entered into 211 days after the final rule is published in the Federal Register. The proposal includes examples of when an agreement has been “entered into” for purposes of the rule. For example, a provider has not “entered into” a contract if it modifies, amends, or implements the terms of a product or service that is subject to a pre-dispute arbitration agreement that was entered into before the compliance date, unless that modification/amendment/implementation constitutes providing a new product or service.
Comments due: Comments are due 90 days after the proposal is published in the Federal Register (which, as of May 12, has not yet occurred).

Read full summary.