Lifting the Hood on CFPB’s Proposed Consumer Arbitration Rules | Wolters Kluwer
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  • Lifting the Hood on CFPB’s Proposed Consumer Arbitration Rules

    Chip Zyvoloski

    by Chip Zyvoloski, Senior Attorney, Wolters Kluwer

    Published August 04, 2016

    This article originally appeared in the July/August issues of the NIADA State Magazines.

    By now, you’ve read about the Consumer Financial Protection Bureau’s (CFPB) proposed new rules affecting consumer arbitration agreements. Headlights shine on its proposal to prohibit consumer arbitration clauses from blocking consumers’ ability to join class action lawsuits. A lot has already been written about that point. But there are a few details that will help round out your understanding of the proposal. So let’s look under the hood at the proposed rule and how it might affect you if it becomes final.

    1. Ban on prohibiting consumers from joining a class action lawsuit.

      This is the main point that you’ve heard about. Arbitration provisions are often part of the retail sales contract or are separately executed to cover a motor vehicle credit sale. They commonly give either party the right to require the other to arbitrate a future dispute rather than resolve it with a civil lawsuit. This means, for example, that if a buyer files a civil lawsuit or joins a class action civil lawsuit, the dealer can require the buyer to resolve the issue through arbitration. If the CFPB’s proposed rule is finalized, consumer arbitration agreements could no longer allow dealer/creditor to require a buyer to arbitrate instead of filing or joining a class action lawsuit.

      If the proposed rule becomes final, consumer arbitration agreements entered into AFTER the effective date will require the following provision:

      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.

      Dealers will need to modify their consumer arbitration agreements to include the new provision and to make the text consistent with new limitations.

      Of course the other option is for dealers to simply stop using consumer arbitration provisions.

    2. Arbitration Class Actions.

      The proposed rule does not seem to prohibit consumer arbitration provisions that prevent buyers from creating or joining a class-wide arbitration proceeding. Consumer arbitration agreements commonly prohibit class action arbitration proceedings, so those provisions could remain unchanged.

    3. Paying for consumer arbitration.

      In the past, the consumer arbitration process was criticized for potentially being more expensive for consumers than small claims courts or other civil lawsuit alternatives. If it was more expensive, then the prospect of arbitration might cause some consumers not to pursue their claims. The cost of arbitration has been raised in lawsuits to argue that the arbitration agreement should not be enforced.

      Today, many consumer arbitration agreements provide that the dealer will pay most or all of the arbitration filing fees, arbitrator’s fees and other arbitration costs. In addition, arbitration organizations like the American Arbitration Association and JAMS have adopted consumer arbitration rules requiring the dealer to pay most or all of the costs of arbitration.

      The CFPB’s proposed rule does not regulate who pays for consumer arbitration. Since claims will probably be subject to arbitration organization rules anyway, it’s not likely that dealers will change their contract terms on who pays for arbitration. Dealers will probably continue to bear much of the costs of consumer arbitrations.

    4. Required reporting of arbitration results.

      If the proposed rule becomes final, in any arbitration action that results from a consumer pre-dispute arbitration agreement, the creditor must provide the CFPB with certain information about the claim and results of arbitration. The CFPB plans to use the information as part of its research on the topic.

    5. Timeline for proposal to final rule.

      The CFPB is seeking public comments on its proposed rule. Comments must be submitted within 90 days of the date the proposed rule is published in the Federal Register. If the amount of early media attention is any indication, the CFPB will likely receive a number of comments. It will then take some time to analyze the comments and consider any edits to the proposed rule. The proposed rule specifically provides that if it is finalized, it will become effective 211 days after publication of the final rule in the Federal Register. Putting these steps together, if the CFPB publishes a final rule, it probably will become effective no sooner than May 2017.

    The CFPB’s proposed rule is receiving a lot of attention in the auto finance marketplace. Most attention is on the proposal that dealers can’t use an arbitration agreement to prohibit consumers from joining a class action lawsuit. Much will continue to be written about that specific item. But remember that the other details will help determine whether the engine of consumer arbitration agreements will continue to run or end up on the scrap heap.

    Chip Zyvoloski is a senior attorney for Indirect Lending at Wolters Kluwer. For more information, please visit

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