Auto dealer retail installment sales contracts are effectively included, as lenders who buy the contracts would be affected by the proposed regulations. They could not buy contracts from dealers that included class action waivers unless after buying such contracts, they amended them to add the class action waiver language in substantially the form below.
The CFPB proposal is seeking comment on the proposed regulations to prohibit companies from putting mandatory arbitration clauses in new consumer credit contracts that prevent class action lawsuits. The proposal would open up the legal system to consumers so they could file a class action or join a class action when someone else files it. Under the proposal, companies would still be able to include arbitration clauses in their contracts. However, for contracts subject to the proposed regulations, the clauses would have to say explicitly that they cannot be used to stop consumers from being part of a class action in court. The proposed regulations include the specific language that companies must use in their contracts to do this (see language below).
The CFPB proposal would also require companies with arbitration clauses to submit to the CFPB claims, awards, and certain related materials that are filed in arbitration cases. This, according to the CFPB, "would allow the Bureau to monitor consumer finance arbitrations to ensure that the arbitration process is fair for consumers. The Bureau is also considering publishing information it would collect in some form so the public can monitor the arbitration process as well."
Section 1028(a) of the 2010 Dodd-Frank Act required the CFPB to do a study of consumer arbitration clauses and issue regulations to prohibit or restrict the use of arbitration agreements if it finds from the study that such action is in the public interest and for the protection of consumers.. The CFPB study was issued over a year ago and focused on large dollar amounts recovered in class actions for small dollar claims that presumably no consumer would file an arbitration proceeding to recover. While the study also showed that consumers do far better if they file an arbitration claim than they do in recovering class action proceeds, that part of the study seemed to be of no import to the CFPB.
Hence the proposed regulations. So, the proposal is based on the CFPB's preliminary findings – which it claims are consistent with the study – that pre-dispute arbitration agreements are being widely used to prevent consumers from seeking relief from legal violations on a class basis, and that consumers rarely file individual lawsuits or arbitration claims to obtain such relief.
Prohibition on Class Action Waiver Clauses in Consumer Credit Agreements
The proposed regulations flat out prohibit class action waiver clauses in a broad swath of consumer credit contracts, including auto leases and, implicitly, auto finance contracts if they are to be purchased by an auto finance lender. Any contract with an arbitration provision must contain the following language:
“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.”
Filings on Arbitrations Brought by Either the Creditor or Consumer
If the contract contains an arbitration clause or a stand-alone arbitration agreement is signed in connection with the transaction, and either the consumer or the creditor elects to arbitrate, the creditor must provide the following information to the CFPB within 60 days of filing or receiving the following documents:
(A) The initial claim and any counterclaim;
(B) The pre-dispute arbitration agreement filed with the arbitrator or arbitration administrator;
(C) The judgment or award, if any, issued by the arbitrator or arbitration administrator; and
(D) (i) If an arbitrator or arbitration administrator refuses to administer or dismisses a claim due to the creditor’s failure to pay required filing or administrative fees, any communication the creditor receives from the arbitrator or an arbitration administrator related to such a refusal; and
(ii) Any communication that a pre-dispute arbitration agreement for a consumer financial product or service does not comply with the administrator’s fairness principles, rules, or similar requirements, if such a determination occurs. (This filing is also required when the American Arbitration Association (AAA) reviews a party's arbitration provision prior to its use if AAA is to be designated the arbitrator),
This rule would become effective for all consumer credit agreements beginning 211 days after publication of the final rule in the Federal Register. All contracts with arbitration and class action waivers signed prior to that time would be grandfathered and remain effective.
The rule is subject to comment for 90 days from its publication in the Federal Register which probably means some time in August 2016. Financial services trade associations will certainly provide comments, pointing out, among other things, that the only people who win more than nominal amounts in class actions are class action lawyers. Also, consumers who do file arbitrations win more often than they lose and recoveries of hundreds, if not thousands, of dollars are not unusual.
But, as occurs with the CFPB, the facts often don't matter. Expect a legal challenge to these regulations if finalized because what the CFPB is essentially doing is overruling the U.S. Supreme Court and the Federal Arbitration Act of 1925. The U.S. Supreme Court has upheld the validity of arbitration clauses with class action waivers under the Federal Arbitration Act, most notably in the AT&T Mobility v. Concepcion case decided on April 27, 2011, when the Court ruled, by a 5–4 margin, that the Federal Arbitration Act preempts state laws that prohibit contracts from disallowing class-wide arbitration
The CFPB believes it has powers that go beyond its statutory authority and this may be an example. overruling the Supreme Court and the U.S. Congress. Hopefully, such a challenge will be heard in court long before these proposed regulations become final and take effect.
© 2016 Randy Henrick & Associates, L.L.C.
Randy Henrick is a leading auto industry compliance consultant. This article is not intended as legal or compliance advice due to the unique nature of a dealer's situation in each state. Randy's articles do provide issues and best practices that you may want to discuss with your attorney or compliance advisor for possible adoption in your dealership. Email Randy at AutoDealerCompliance@gmail.com