July 17, 2017
Authored by: Jed White, Alfred Shaumyan and Douglas Thompson
On July 10, 2017, the Consumer Financial Protection Bureau (CFPB) released a rule prohibiting class action waivers in certain pre-dispute arbitration agreements. The rule drastically impacts arbitration clauses currently used by many financial product and services providers in their consumer agreements.
The rule has three main components. First, the rule prohibits providers from using a pre-dispute arbitration agreement to prevent consumers from bringing or participating in class actions in federal and state court. Second, the rule requires that arbitration agreements inform consumers that their right to bring a class action is unrestricted. Third, the rule requires providers to supply certain records and data relating to arbitral proceedings to the CFPB.
The rule is effective 60 days after publication in the Federal Register and generally applies to agreements entered into more than 180 days after the effective date. Congress, however, can use the Congressional Review Act to prevent the rule from taking effect.
What is the effect of the rule?
The new rule prohibits pre-dispute arbitration agreements for certain consumer financial products or services that block consumer class actions in federal and state courts. The rule accomplishes this in two ways:
- providers cannot rely on any pre-dispute arbitration agreement entered after the compliance date that restricts or eliminates a consumer’s right to a class action in state or federal court (§ 1040.4(a)(1)); and
- providers must include certain specified plain language in arbitration agreements that explicitly disclaims the arbitration agreements applicability to class actions (§ 1040.4(a)(2)).
The rule also requires providers to submit certain records relating to arbitral proceedings to the bureau, including copies of pleadings, the pre-dispute arbitration agreement, and the judgment. (§ 1040(b).)