The CFPB has issued a proposed rule to establish a system for the registration of nonbanks subject to CFPB supervision that use “certain terms or conditions that seek to waive consumer rights or other legal protections or limit the ability of consumers to enforce their rights.” Arbitration provisions are among the terms that would trigger registration. The CFPB did not issue an Advance Notice of Proposed Rulemaking to seek public input before issuing the proposal. Comments on the proposal must be filed by March 13, 2023 or 30 days after the date it is published in the Federal Register, whichever is later.
Ever since Rohit Chopra was sworn in more than a year ago as CFPB Director, consumer advocates have been lobbying him to ban the use of arbitration provisions (or at least class action waivers contained therein) in consumer financial services contracts. Until now, he has wisely resisted that pressure because of the Congressional Review Act (CRA), which prohibits a federal agency from promulgating a regulation that is “substantially the same” as one that Congress has overridden in a CRA resolution. On November 1, 2017, then President Trump signed into law a joint CRA resolution passed by the House and Senate overriding the CFPB’s final arbitration rule that (1) banned the use of class action waivers in arbitration provisions in consumer financial services contracts, and (2) required companies to report certain information about consumer financial services arbitrations involving such companies. In the CFPB’s exhaustive report on the study it conducted before proposing the rule, the CFPB had concluded that the record did not support the promulgation of a rule that would ban arbitration altogether.
Unfortunately, Directors Chopra has caved in to the constant pressure of consumer advocates to ban arbitration (or class action waivers contained therein) by proposing a registry for nonbanks supervised by the CFPB that would require reporting to the CFPB and public disclosure about their use of arbitration provisions (and class action waivers contained therein). Director Chopra is undoubtedly hoping that companies will abandon the use of arbitration provisions (and class action waivers contained therein) rather than run the risk of, at worst, an enforcement action by the CFPB, or public shaming. To put it bluntly, the CFPB is trying to accomplish its objective of eliminating arbitration through a back door approach. To avoid the criticism it would face from the industry had the CFPB sought to adopt a new regulation that dealt only with arbitration provisions, the CFPB has broadened the scope of the proposed registry to include other contract provisions that the CFPB Director dislikes.
In issuing the proposal, the Bureau relies on its authority under Consumer Financial Protection Act (CFPA) sections 1022(b) and (c) and 1024(b). CFPA section 1022(b) authorizes the Bureau to prescribe rules “as may be necessary or appropriate to enable the Bureau to administer and carry out the purposes and objectives of the Federal consumer financial laws, and to prevent evasions thereof.” CFPA section 1022(c) authorizes the Bureau to prescribe rules to collect information from covered persons for purposes of monitoring for risks to consumers in the offering or provision of consumer financial products or services, including “rules regarding registration requirements applicable to a covered person, other than an insured depository institution, insured credit union, or related person.” Section 1022(c) also authorizes the Bureau to publicly release information obtained pursuant to section 1022, subject to limitations specified therein. Finally, Section 1024(b) authorizes the Bureau to exercise supervisory authority over certain nonbank covered persons.
Key aspects of the proposal include the following:
Unless covered by one of the proposal’s limited exclusions, any nonbank subject to CFPB supervision that uses “covered form contracts” containing a “covered term or condition” would be a “supervised registrant” required to register. Among the proposal’s limited exclusions are exclusions for companies with less than $1 million in annual receipts and companies that engage in de minimis use of contracts containing covered terms and conditions. Another exclusion applies to:
"A person that used covered terms or conditions in covered form contracts in the previous calendar year solely by entering into contracts for residential mortgages on a form made publicly available on the Internet required for insurance or guarantee by a Federal agency or purchase by the Federal National Mortgage Association, the Federal Home Loan Mortgage Corporation (or its successors), or the Government National Mortgage Association. This exclusion does not apply if the person obtained a court or arbitrator decision in the previous calendar year on the enforceability of a covered term or condition in a covered form contract as described in [the rule]."
Nonbanks subject to CFPB supervision consist of:
- Regardless of its size, a provider of residential mortgage loans or certain related services, payday loans, or private education loans;
- A provider considered to be “a larger participant of a market for other consumer financial products or services;” and
- A nonbank as to which the CFPB has exercised its risk-based supervisory authority.
Covered terms or conditions.
A “covered term or condition” is defined as any provision in “a covered form contract” that expressly purports to establish “a covered limitation on consumer legal protections” applicable to the offering of or provision of a consumer financial product or service. A “covered limitation on consumer legal protections” is defined as any covered term or condition (irrespective of legal validity or enforceability):
- Precluding the consumer from bringing a legal action after a certain period of time;
- Specifying a forum or venue where a consumer must bring a legal action in court;
- Limiting the ability of the consumer to file a legal action seeking relief for other consumers or to seek to participate in a legal action filed by others;
- Limiting liability to the consumer in a legal action including by capping the amount of recovery or type of remedy;
- Waiving a cause of legal action by the consumer, including by stating a person is not responsible to the consumer for a harm or violation of law;
- Limiting the ability of the consumer to make any written, oral, or pictorial review, assessment, complaint, or other similar analysis or statement concerning the offering or provision of consumer financial products or services by the supervised registrant;
- Waiving, whether by extinguishing or causing the consumer to relinquish or agree not to assert, any other identified consumer legal protection, including any specified right, defense, or protection afforded to the consumer under Constitutional law, a statute or regulation, or common law; or
- Requiring that a consumer bring any type of legal action in arbitration.
In its discussion of the proposal, the Bureau notes that if an arbitration agreement contains specific express waivers (such as a jury trial waiver), the waiver would trigger separate reporting. It also notes that in the context of auto finance agreements, if a limitation in the sale also purports to establish a covered limitation on legal protections the consumer may have, including recourse, against a finance company purchasing the associated retail installment contract, the limitation may also qualify as a covered term or condition.
Covered form contract
A “covered form contract” is defined as “a written agreement between a covered person and a consumer that was drafted before the transaction for use in multiple transactions and contains a covered term or condition.” (While the Bureau’s press release announcing the proposal and Director Chopra’s statement about the proposal make numerous references to “non-negotiable” or “take it or leave it” contracts, the Bureau notes in its discussion of the proposal that it “is not proposing to expressly limit the definition of a covered form contract to contracts that do not reflect any negotiation.”) A “supervised registrant” would be required to register if it “use[s] a covered term or condition,” which is defined as “entering into a covered form contract” or “obtaining a court or arbitrator decision ruling on the enforceability of a covered term or condition in a covered form contract.” The proposal lists the circumstances under which a company is considered to “enter into” a covered form contract. In addition to providing a new consumer financial product or service that is governed by a covered form contract, such circumstances include:
- Adding a covered form contract to a pre-existing consumer financial product or service, such as when a loan servicer or debt collector uses a covered form contract for a payment plan, a payment authorization, or a debt modification or settlement;
- Providing a new consumer financial product or service that is subject to a pre-existing covered form contract and the provider is a party to the contract; or
- Acquires or purchases a consumer financial product or service subject to a covered form contract even if the seller is not subject to CFPB supervision or a covered person, such as when a larger participant auto finance lender acquires a retail installment sales contract from an automobile dealer excluded from the Bureau’s supervisory authority.
Each calendar year, a supervised registrant would be required to provide “identifying” and “administrative” information to the Bureau, together with information about its use of covered terms and conditions in the previous calendar year. Such information would include:
- The consumer financial products and services for which the registrant uses covered terms and conditions;
- Each state or jurisdiction in which the products or services are offered or provided;
- For each covered form contract entered into, various items of information that include each type of covered limitation on consumer legal protections and specified information for each type of limitation that varies with the nature of the limitation. For example, for any limitation on liability to the consumer, waiver of a cause of action by the consumer, or limitation on consumer reviews, the registrant must provide the text of the limitation or waiver; and
- Whether, as a party to a legal action, the registrant obtained one or more court or arbitrator decisions regarding enforceability of a covered term or condition in a covered form contract and, if so, certain information relating to such decisions, included the type of covered term or condition involved in the decision and whether the decision enforced or declined to enforce the covered term or condition at issue.
Despite the CFPB’s claim that it should be “straightforward in most cases” for a company to determine whether it must register, the proposal includes an option for a company to file a notice of non-registration. A company using that option would be required to file a notice with the registration system stating that it is not registering “because it has a good faith basis to believe that it is not a supervised registrant, or that it is not registering terms or conditions contained in a contract that it uses because it has a good faith basis to believe that the contract is not a covered form contract or that the terms or conditions are not covered terms or conditions. In its discussion of the proposal, the Bureau states that when a company makes a “non-frivolous filing,” it would not bring an enforcement action based on the company’s failure to comply with the registration requirement unless the Bureau first notified the company that it believed the company did qualify as a supervised registrant or that its contract terms or conditions are covered terms or conditions and has provided the company with a reasonable opportunity to comply.
The Bureau’s proposal has quickly drawn criticism as an attempt by the Bureau to both scare and shame companies that use covered terms and conditions, thereby placing pressure on companies to discontinue their use even if legally permissible. The Bureau’s discussion of how the registry will facilitate its risk-based supervision of nonbanks seems to carry an implicit threat that companies that use covered terms and conditions are more likely to face heightened scrutiny. According to the Bureau, the registry will inform its prioritization of which entities to examine. As an example, the CFPB states “when covered terms and conditions violate anti-waiver and other legal prohibitions in Federal consumer financial law, the proposed registry could highlight where this may be a problem, potentially facilitating prioritization of supervisory action or, in some cases, potentially, enforcement action.” Indeed, the Bureau expresses the view that “a company that uses an unlawful covered term or condition may have a poor compliance management system and thus may be more likely to violate Federal consumer financial law.” And going a step further, the Bureau warns that “the existence of a covered term or condition in some circumstances may be indicative of a violation of law, since a company that would go to such lengths to include certain terms or conditions in its contracts may be acting in other ways to undermine the underlying rights addressed by the waivers or limitations.” Moreover, the Bureau indicates that because use of covered terms and conditions would require a company subject to CFPB supervision to register, the registry would allow the CFPB to identify companies subject to its supervision of which it was previously unaware and which it could then examine.
The Bureau also suggests that the registry may drive business to companies that do not use covered terms and conditions (and therefore would not be registered). It states that “companies that do not include covered terms and conditions in their contracts may consider using their absence from being required to register and other information in the registry from competitors to market their consumer financial products and services as potentially less risky for consumers.”
As we study the proposal in greater depth, an issue that will merit further consideration is whether the proposal is a proper exercise of the various authorities cited by the Bureau. With regard to the proposal’s inclusion of arbitration provisions, we will also be looking at the proposal in light of the Bureau’s previously-issued final arbitration rule. As we note above and as the Bureau acknowledges in its proposal, that rule was overturned by Congress under the CRA in late 2017. The CRA provides that “a new rule may not be reissued in substantially the same form, and a new rule that is substantially the same as [the voided] rule may not be issued, unless the reissued or new rule is specifically authorized by a law enacted after the date of the joint resolution disapproving the original rule”
The proposed rule requires reporting of arbitration awards and court orders enforcing or not enforcing the arbitration provision. Moreover, the Bureau has requested comments on whether it should also require supervised registrants to submit information concerning other terms of the arbitration provision, including the identity of the arbitration administrator. These requirements appear to overlap, at least in part, with the Bureau’s disapproved final arbitration rule insofar as it required the submission of information concerning arbitration proceedings for publication on the Bureau’s website. The Bureau has described the reporting function of the final rule as follows:
"The rule also makes the individual arbitration process more transparent by requiring companies to submit to the CFPB certain records, including initial claims and counterclaims, answers to these claims and counterclaims, and awards issued in arbitration. The Bureau will collect correspondence companies receive from arbitration administrators regarding a company’s non-payment of arbitration fees and its failure to follow the arbitrator’s fairness standards. Gathering these materials will enable the CFPB to better understand and monitor arbitration, including whether the process itself is fair. The materials must be submitted with appropriate redactions of personal information. The Bureau intends to publish these redacted materials on its website beginning in July 2019."
Close scrutiny is warranted to ensure that the Bureau is not starting down a path that would accomplish indirectly what Congress prevented it from doing directly when it disapproved the Bureau’s final arbitration rule, i.e., prohibit the enforcement of class action waivers in consumer arbitration agreements. Throughout its proposal, the Bureau continues to assert its preference for class actions over arbitration, which it characterizes as a “contract term that limits enforcement of consumer rights.” It laments that the “risks that class actions are not available … remain in particular after the Bureau’s 2017 rulemaking to address them was voided by a joint resolution of Congress signed by the President.” And, it cites its 2015 empirical study of arbitration as support for its continuing belief that arbitration is inferior to class actions as a procedure for resolving consumer disputes. Nevertheless, as we have observed on numerous occasions, the data contained in the Bureau’s own study show that individual arbitration is faster, less expensive and more beneficial financially to consumers than class action litigation.
Unfortunately, while the Bureau touts its present proposal as an opportunity to educate consumers on the risks posed by arbitration provisions and other contract terms, it has not spent any resources educating consumers about the benefits of arbitration. Congress obviously concluded that arbitration provisions are not unfair to consumers when it overturned the Bureau’s final rule. Close attention must be paid to ensure that the Bureau does not thwart the will of Congress by characterizing arbitration provisions and class action waivers as being unfair to consumers and implicitly threatening companies with enforcement actions or public shaming if companies do not eliminate them from their consumer contracts