On May 5, 2016, the Consumer Financial Protection Bureau (CFPB) announced a long awaited and highly controversial proposed rule that, if adopted, would prohibit certain financial services companies from banning consumer class actions as part of mandatory pre-dispute arbitration agreements and require companies to report certain arbitration data to the CFPB. If the proposed rule is finalized, it will have a significant impact on the financial industry. Below are the top five things financial institutions need to do to prepare for the rule.

SUBMIT COMMENTS ON THE PROPOSED RULE

As an initial response to the CFPB’s actions, financial institutions must take steps to understand the full scope and ramifications of the proposed rule and those institutions that will be subject the rule should consider submitting comments to the CFPB, either directly or through industry groups, such as bankers associations. Because the rule is so broad and relates to so many types of products and services and providers, there are many opportunities to provide comments to attempt to limit the scope of the final rule. Affected institutions should consult with counsel, such as our team at Stinson Leonard Street LLP, to develop and submit appropriate comments by the deadline of August 22, 2016.

REVIEW AFFECTED CONSUMER AGREEMENTS

Financial institutions must review their consumer finance contracts to get a better understanding of which agreements may be affected. The proposed rule only applies to specific types of products and services. For example, the proposed rule is designed to target financial products and services in the “core consumer financial markets” of lending money, storing money, and moving or exchanging money. Thus, it is possible that certain agreements related to one type of product or service would be subject to the proposed rule, but other agreements related to different products and services would not be subject to the rule. To ensure that appropriate steps are taken related only to affected agreements, financial institutions should work with experienced counsel to identify those agreements.

KEEP OR TOSS CLASS ACTION WAIVER?

The next step is for financial institutions to take a hard look at whether they want to keep that class action waiver and/or arbitration clause in the standard consumer agreements they will use a year from now. The proposed rule essentially precludes enforcement of class action waivers in arbitration agreements. That leaves companies facing at least these key questions: A) Are the other benefits of arbitration worth keeping the arbitration clause, even without the class action waiver? It may be that the confidentiality of arbitration, plus its informality and potential efficiency still make that a preferable forum to court. (Note that if the agreement continues calling for arbitration, the company will have to report on its arbitrations to the CFPB.) But, if avoiding class actions was the primary reason the company adopted an arbitration clause, it may just be time to chuck it. B) Is it possible to seek similar benefits outside the arbitration clause? Maybe under the governing state law the agreement can waive jury trials, or even waive class actions, outside the context of an arbitration clause. C) Wait and see? If a company wants to wait and see if this new CFPB regulation survives the inevitable court challenge and/or the next Administration, there is always the option of leaving the class action waiver intact, but adding some backup language elsewhere in the agreement about waiving juries (or otherwise making the court process more palatable).

ADD NEW CLASS ACTION WAIVERS?

The proposed rule does not affect any agreements currently in existence, or even those entered into for the first 211 days after the rule is published. Therefore, companies who have not previously used class action waivers, but whose existing agreements allow them to make modifications or who will contract with a significant number of consumers in the next year, may want to consider whether now is the time to require individual arbitration in their standard agreements.

WAIT AND WATCH

Because the proposed rule is still in the comment period there is a chance that the final rule will vary slightly from the proposal. Thus, it is important to continue watching for updates on any proposed changes and what the final rule actually says. In addition, because the proposed rule is extremely controversial, if the final rule substantially limits the use of class action waivers in arbitration agreements—as the current proposal seeks to do—there will likely be litigation challenging the rule as well as the rulemaking process, which could ultimately affect the scope and enforceability of the rule. Stay tuned.