Arbitration Update

We have advised you that the Consumer Financial Protection Bureau has issued a final regulation that bans class action waivers in predispute arbitration agreements used by finance institutions under its jurisdiction.

If the rule survives Congressional review, it will have a significant impact on dealers. While franchised dealers are not subject to the jurisdiction of the CFPB, they must be careful that the retail installment sale contract forms they use contain permissible language that exempts them from language preserving consumer class action opportunities finance sources must have. Even with that, dealers face substantial risks from indemnification liability owed to financial institutions sued because of alleged wrongdoing by the dealer.

The CFPB published its final rule on July 19, 2017. Based on that publication, the regulation becomes effective September 18, 2017. The date of mandatory compliance (the date by which affected financial institutions may no longer accept retail paper with class action waivers) is March 19, 2018.

The rule is controversial in the financial services industry. For reasons we have discussed in prior issues, the rule is only justified if supported by the CFPB’s study on arbitration. Rather than support the rule, the CFPB study contradicts the need for the rule, most especially because the study supports the finding that consumers do much better in arbitration than they do as members of a class receiving a small portion of a settlement.

The first step of the financial service industry to undo the regulation is Congressional action.  Under the Congressional Review Act, Congress has sixty days from publication to pass a bill and have it signed by the President that overrides a regulation. The House of Representatives has already voted on legislation under the Congressional Review Act invalidating the regulation. In a 231 to 190 vote, representatives voted to overturn the regulation. The bill is now before the Senate where it is facing an uphill battle. Democrats are solidly against the CRA resolution, and enough Republicans have either defected or are on the fence to make passage questionable.