On May 5, 2016, the Consumer Financial Protection Bureau issued its long-awaited proposed rule on predispute arbitration provisions. This was done as part of a curiously timed CFPB field hearing in which participants were given the opportunity to provide testimony on a proposal already formulated and issued. The proposal will ban class action waivers in predispute arbitration provisions in financing and leasing obligations to financial institutions under the jurisdiction of the CFPB. The proposal raises many questions for dealers.
Q: Given the widespread judicial support for the Federal Arbitration Act, how can a federal bureau seek to alter the law on arbitration?
A: In the Dodd-Frank financial reform legislation, Congress gave the CFPB the right to take action on predispute arbitration provisions consistent with a study by the bureau. The study has been completed, and the CFPB claims that its proposal follows its findings (more about that later).
Q: What does the proposed rule provide?
A: The rule has two requirements. It prohibits financial institutions under the jurisdiction of the CFPB from using a class action waiver in a predispute arbitration provision for financing or for leasing. It also requires financial institutions to report on individual arbitrations that take place so the CFPB can measure the true impact of predispute arbitration provisions on consumers.
Q: The CFPB is going to further study arbitrations?
A: Yes. The CFPB indicated this is an ongoing process. Consumer advocates hope that the CFPB will gather enough information to ban predispute arbitration provisions entirely. Many observers question why the CFPB is proceeding on arbitration if it feels it needs to further study it.
Q: Does this proposal outlaw predispute arbitration provisions?
A: No. It only prohibits class action waivers in predispute arbitration provisions in financing or leasing obligations to financial institutions under the jurisdiction of the CFPB.
Q: Will the finance sources with whom we do business be affected?
A: Yes. The CFPB has jurisdiction over the vast majority of motor vehicle finance and lease transactions because of its oversight of all big banks and most franchisor captives. The regulation will affect franchised motor vehicle dealers despite the CFPB’s limitations involving franchised dealers.
Q: Are there dealers against whom the CFPB can enforce its regulation?
A: Yes. The CFPB may have jurisdiction over buy here/pay here dealers, dealer affiliated finance sources, and used car dealers that do not have service facilities.
Q: How will this affect the predispute arbitration agreement my dealership uses in its buyers order?
A: The CFPB cannot ban a franchised dealership from using a predispute arbitration provision with a class action waiver for disputes other than those arising from financing or leasing. The CFPB cannot ban a franchised dealership from using a class action waiver in a predispute arbitration agreement even for financing or leasing since the dealership is exempt from CFPB jurisdiction. Unfortunately, the rule requires that a finance source ensure that specific language is in the RISC or lease: “We agree that neither we nor anyone else will use this agreement to stop you from being part of a class 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.” There is a variation of this notice if the agreement pertains to products subject to the rule and those that are not. There is a procedure for subsequent amendment or notice if this required language or the variation is not in the agreement when acquired by the finance source. For ease of compliance, finance sources will probably seek to include the required language or the variation in retail installment sales contract or lease forms. This will have the unfortunate impact to make dealers otherwise exempt from CFPB jurisdiction subject to class action lawsuits. The precise language of the notice, and the methods of the delivery, will have to be addressed to attempt to keep the CFPB from imposing class action liability directly on dealers since this is beyond the CFPB’s authority.
Q: How will this impact franchised motor vehicle dealers?
A: Even though franchised motor vehicle dealers are exempt from the jurisdiction of the CFPB, the proposed rule will affect them.
- Financial institutions claim this proposal will eliminate their ability to rely on predispute arbitration provisions. At the New Mexico hearing, an attorney who represents finance sources noted that they have been footing the bill for arbitration because of court requirements. That cost is running about $3,000.00 per arbitration, without even considering the attorneys’ fees involved. If finance sources will have to face class action lawsuits, they will direct their resources to funding protections against those rather than funding arbitrations. If predispute arbitration with a class action waiver is unavailable to finance sources, this may affect the availability of affordable credit for dealer customers. This can have a significant impact on vehicle buyer, particularly those most apt to use the legal system in the event of payment problems – challenged credit customers most in need of affordable credit.
- Under the proposal, franchised dealers will be exempt from the requirement they not use predispute arbitration provisions with class action waivers to protect themselves against class actions. The regulation does not affect the many claims that can be brought against dealers relating to sale matters other than financing or leasing. Even financing or leasing claims against a dealer, as opposed to those against an assignee financial institution, may not be affected by the regulation.
- The language required by the rule, when placed in a credit or lease agreement where the dealer is the initial creditor or lessor, will subject dealers to class action lawsuits. The CFPB should not be permitted to force dealers to be subjected to class action lawsuits over finance and lease matters, even if they take the opportunity to force finance sources to be subjected to such lawsuits. Delivery of the notice and whether there should be changes to it will require further study and comment.
- Even if the notice problem can be solved, nearly all indirect finance and indirect lease agreements contain indemnification agreements that permit finance sources to impose losses on dealers if they contend dealers are the cause. Even if the CFPB cannot directly prohibit dealers to protect themselves against class action lawsuits for finance and lease matters, the indemnification requirements will allow the finance sources to potentially impose on dealers the losses from class actions the finance sources must face.
Q: If the CFPB finalizes this rule, can it be subject to challenge?
A: Yes, there will be challenges to the during the comment period. After that there may be judicial challenges, contending that CFPB is acting without authority.
Q: What can be the basis of those challenges?
A: The proposed regulation exceeds the CFPB’s authority and is bad public policy.
- The CFPB can only take action consistent with the study Congress mandated. The findings of the CFPB’s own study do not provide the data and evidence to support this proposed rule. Of the class actions studied by the CFPB, the consumers benefitted little, if at all. The attorneys were the real winners. Proponents of the proposal contend that most consumers will not arbitrate proceedings because of the small balances involved in financial products like credit cards. They argue that class action lawyers must be rewarded with large fees to bring these cases even where class members receive miniscule compensation. The proposed rule represents the CFPB’s choice to reward plaintiffs’ class action lawyers to the detriment of affordable credit for all consumers.
- The study does not support application of this regulation to large balance disputes such as those involved in auto dealer matters. The CFPB’s own study found that individuals with large balance disputes bring their claims in arbitration. Those claims have resulted in average recovery of 57 cents on the dollar versus pennies on the dollar for class action participants.
- The enhanced costs and enhanced potential liability faced by finance sources under this regulation will affect the availability of affordable credit and leases for consumers. This will affect vehicle sales. As overall policy, this reward to some trial lawyers to the detriment of most motor vehicle buyers is a poor policy choice.
Q: What is the timeline for the CFPB action?
A: Interested parties have ninety days from publication of the proposed regulation in the Federal Register to comment. Following that deadline, the CFPB will take a respectable amount of time to make it appear as if it is considering the comments. Once the CFPB issues a final rule, it will be effective thirty days from publication in the Federal Register, and it will apply to agreements entered following 180 days from the effective date. Given this timeline, the CFPB action is likely to affect consumer obligations beginning spring 2017.