Does July's CFPB Rule Signal the End of Consumer Arbitration?

On July 10, the Consumer Financial Protection Bureau (CFPB) announced it was moving forward with the arbitration rule proposed last year.

Under the rule, companies may not use arbitration clauses to stop consumers from taking part in class actions. The rule will be effective 60 days from the date it is published in the Federal Register.

Should a company wish to include an arbitration clause without a class action waiver, the rule makes the individual arbitration process more transparent by requiring companies to submit to the CFPB certain records.

These include initial claims and counterclaims, answers to these claims and counterclaims, and awards issued in arbitration. Issuance of the rule is not the end of the road. Trade associations have been lobbying Congress to use the Congressional Review Act (CRA) to overturn the rule.

Industry is working with congressional leaders to garner the 51 votes needed for Senate passage, and overturn the bill. There are also legal arguments industry is preparing against the rule. Absent positive action through the CRA, however, the rule will go into effect.

By moving the rule forward at this time, CFPB Director Richard Cordray is clearly putting the Trump administration to the test. In the end, the new rule will make plaintiffs’ class action lawyers very happy and wealthy. The CFPB and other regulatory agencies like class action lawsuits. In the grand scheme of things, class actions provide very little benefit for individual consumers, but are a free enforcement arm for the government.

Thus, the proposed arbitration rule will become final, because historically the agency makes no changes based upon industry input.

The rule

Upon the effective date of the rule, entities may not rely in any way on an arbitration agreement that limits a consumer’s right to either file or take part in a class action related to a consumer financial product.

The rule further explains that in all other respects, an arbitration clause may be used, but includes overburdensome reporting requirements on financial institutions that make such agreements impracticable.

The proposed rule is not applicable to motor vehicle dealers predominantly engaged in the sale and servicing of vehicles, and those that routinely assign retail installment agreements to an unaffiliated third-party finance or leasing source.

So why should a franchised auto dealer care about the arbitration changes?

The effect

Dealers will be indirectly affected by the rule because arbitration language currently found in installment agreements approved by finance sources will disappear, or be modified to preclude language limiting class action participation.

Given the requirements of the pending rule, finance companies will simply do away with arbitration clauses in consumer installment agreements altogether, rather than limiting the language and taking part in extensive and costly reporting requirements for consumer arbitrations.

So, dealers, get ready. Here is how to respond:

1. For dealerships not located in a “one-document” state, make sure to have an arbitration clause between you — the dealer — and the customer that is separate from the retail installment agreement being assigned. The dealership arbitration clause may be placed clearly and conspicuously in your Buyer’s Order, or in a standalone agreement.
2. The language in the agreement should not be pro-seller, nor make it a financial burden for consumers to arbitrate.
3. Make sure the arbitration agreement, whether in a separate document or as part of the Buyer’s Order, is signed by all parties to the agreement. That means all buyers — and an authorized signature by the dealership.

In light of the CFPB’s elimination of pre-dispute class action waivers, you should consider use of a “contractual jury waiver” in your agreements.

By agreeing to a jury waiver, consumers waive their right to proceed before a jury, but maintain the right to have their case decided by a state or federal judge in the judicial system. A knowing jury waiver is allowed in many states, and is reviewed by the courts on a case-by-case basis.

In the majority of consumer cases brought against a dealership, those defending the case would rather present the case to a judge than a jury. This has been my experience in more than 25 years of litigation.

Do not sit and wait for Congress or a trade association to act. Get proactive and assess what alternative options you have available to protect your business. Start by looking at your current documents. Sit down with the lawyer who litigates your consumer claims.

And yes, talk with the lawyer that has to rely on your documents in court — not your corporate attorney or CPA — and determine whether you can use a separate arbitration agreement, include a jury waiver in your agreements, or both.

David R. Missimer was general counsel for Automotive Compliance Consultants Inc. He spent 28 years in private practice as a litigator representing lenders, auto dealers, and numerous other entities and individuals. He has worked with dealership compliance issues since 2003 as co-founder of Automotive Compliance Consultants. He is a member of the National Association of Dealer Counsel, American Financial Services Association, and National Automotive Finance Association.