Summary: Proposed Rule
Consumer Financial Protection Bureau
Prepared by NASCUS Legislative and Regulatory Affairs Department
The Consumer Financial Protection Bureau (CFPB) is proposing to establish 12 CFR Part 1040, which would contain regulations pertaining to consumer finance dispute resolution. Specifically, the proposal would prohibit “covered providers” of certain consumer financial products and services from using a consumer agreement that provides for arbitration of future disputes between the parties to bar the consumer from filing or participating in a class action with respect to the covered consumer product or service. The proposal would also require a covered provider that is involved in arbitration pursuant to a pre-dispute arbitration agreement to submit specified “arbitral” records to the Bureau.
Note: This summary highlights a number of the questions posed by comment by the Bureau. However, all requests for comment are not summarized below.
Please see the proposal here. Comments on the proposal rule are due to the CFPB by August 22, 2016.
Section 1040.2 - Definitions
Class Action: A lawsuit in which one or more parties seek to proceed as a representative of other similar situated class members pursuant to Rule 23 of the Federal Rules of Civil Procedure or any State process analogous to Rule 23.
- The Bureau seeks comment on whether the proposed definition of “class action” is appropriate; whether it should use “State process analogous to Rule 23” or an alternative formulation and what types of cases would be captured or excluded by such alternative formulation
Consumer: An individual or an agent, trustee, or representative acting on behalf of an individual.
The Bureau seeks comment on whether the proposed definition would be appropriate and whether it should consider other definitions of the term “consumer.”
Provider: A person (as defined in Dodd-Frank, Section 1002(19)) that engages in offering/providing any of the consumer financial products/services covered by the proposal (Section 1040.3); or an affiliate of a provider as defined in proposed Section 1040.2 when the affiliate would be acting as a service provider to the provider with which the service provider is affiliated.
Note: Dodd Frank Section 1028(b) authorizes the Bureau to issue regulations concerning pre-dispute arbitration agreements between a “covered person” and a consumer. Dodd-Frank, Section 1002(6) defines “covered person” as any person that engages in offering/providing a consumer financial product/service and any affiliate of such a person if the affiliate acts as a service provider to that person. Section 1002(19) further defines person to mean an individual, partnership, company, corporation, association (incorporated or unincorporated), trust, estate, cooperative organization or other entity.
The Bureau seeks comment on the proposed definition of provider and whether proposed comment 2(c)-1 clarifies the scope of the term.
Pre-dispute Arbitration Agreement: An agreement between a provider and a consumer providing for arbitration of any future dispute between the parties.
- The Bureau seeks comment on whether the term “arbitration” should be defined; whether the proposed text provides sufficient guidance as to when an arbitration agreement would be “pre-dispute”; and whether the Bureau should define or provide additional clarification regarding when an arbitration agreement is “pre-dispute.”
Section 1040.3 – Covered Products and Services
- The proposal applies to arbitration agreements between “covered persons” and consumers for “consumer financial products or services.”
- Proposed Section 1040.3 applies to pre-dispute arbitration agreements for the following proceeds or services when they are defined as “consumer financial products or services” in accordance with 12 USC 5481(5). The proposal would cover consumer financial products and services in “core markets of lending money, storing money and moving or exchanging money.” Specifically, where a “covered person” is:
- Providing an “extension of credit” that is “consumer credit” as defined by Regulation B, 12 CFR 1002.2;
- Acting as a “creditor” as defined by 12 CFR 1002.2(l) by regularly participating in a credit decision consistent with its meaning in 12 CFR 1002.2(l) concerning “consumer credit” as defined by 12 CFR 1002.2(h);
- Acting, as a person’s primary business activity, as a “creditor” as defined by 12 CFR 1002.2(l) by referring applicants or prospective applicants to creditors, or selecting or offering to select creditors to whom requests for credit may be made consistent with its meaning in 12 CFR 1002.2(l);
- Acquiring, purchasing or selling an extension of consumer credit covered by paragraph (a)(1)(i) of this section; or servicing an extension of consumer credit covered by paragraph (a)(1)(i) of this section; or
- Servicing an extension of consumer credit covered by paragraph (a)(1)(i) of Section 1040.3; or
- Extending automobile leases as defined by 12 CFR 1090.108 or brokering such leases;
- Providing services to assist with debt management or debt settlement, modify the terms of any extension of consumer credit covered by paragraph (a)(1)(i) of this section, or avoid foreclosure;
- Providing directly to a consumer a consumer report as defined by the Fair Credit Reporting Act, 15 USC 1681a(d), a credit score, or other information specific to a consumer from such a consumer report, except when such consumer report is provided by a user covered by 15 USC 1681m solely in connection with an adverse action as defined in 15 USC 1681a(k) with respect to a product or service not covered by any of paragraphs (a)(1) through (3) or (a)(5) through (10) of this section;
- Providing accounts subject to the Truth in Savings Act, 12 USC 4301 et seq., as implemented by 12 CFR part 707, and Regulation DD, 12 CFR part 1030;
- Providing accounts or remittance transfers subject to the Electronic Funds Transfer Act (EFTA), 15 USC 1693 et seq., as implemented by Regulation E, 12 CFR part 1005;
- Transmitting or exchanging funds as defined by 15 USC 5481(29) except when integral to another product or service that is not covered by this section;
- Accepting financial or banking data or providing a product or service to accept such data directly from a consumer for the purpose of initiating a payment by a consumer via any payment instrument as defined by 15 USC 5481(18) or initiating a credit card or charge card transaction for the consumer, except when the person accepting the data or providing the product or service to accept the data is also selling or marketing the nonfinancial good or service for which the payment or credit card or charge card transaction is being made;
- Check cashing, check collection or check guaranty services; or
- Collecting debt arising from any of the consumer financial products or services described in paragraphs (a)(1) through (9) of Section 1040.3 by:
- A person offering or providing the product or service giving rise to the debt being collected, an affiliate of such person, or a person acting on behalf of such person or affiliate;
- A person purchasing or acquiring an extension of consumer credit covered by paragraph (a)(1)(i) of Section 1040.3, an affiliate of such person, or a person acting on behalf of such person or affiliate; or
- A debt collector as defined by 15 USC 1692a(6).
The Bureau seeks comment on all aspects of its proposed Section 1040.3(a) approach to coverage of “covered” products/services in this rulemaking including:
- Whether any products/services the Bureau has proposed to cover should not be covered or that have not been proposed that should be covered;
- Whether this proposed coverage should be expanded or reduced or whether there are any alternative definitions the Bureau should consider in its proposed coverage of consumer credit transactions and related activities;
- Whether a different limitation should be used, such as an exclusion for referral or selection activities that are incidental to the sale of a nonfinancial good or service; and
- Whether such furnishing, by any person covered by proposed Section 1040.3(a)(1), should also be separately identified as a covered product or service;
- Whether the Bureau should consider alternatives and, if so, what alternatives;
- Whether proposed Part 1040 should also apply to credit counseling services and, if so, what types of services should be covered;
- Whether the reference to a consumer report (as defined in the Fair Credit Reporting Act (FCRA)) is appropriate and whether the coverage proposed in Section 1040.3(a)(4) should be expanded or narrowed and, if so, how;
- Whether the proposed rule should also cover products/services that provide or monitor information obtained from sources other than a consumer report under the FCRA;
- Whether the coverage of products/services under the rule should apply to a broader range of services undertaken by consumer reporting agencies as defined by the FCRA that may have a bearing on the ability of consumers to participate in the credit market and the manner in which they do so;
- Whether the use of arbitration agreements by consumer reporting agencies in the provision of the products/services may have an impact on the ability of consumers to pursue or participate in class actions asserting claims under the FCRA, and if so, whether the proposed rule should mitigate those impacts, and if so, how;
- Whether the Bureau should reference other definitions of deposit or share accounts beyond those also included in proposed Section 1040.3(a)(6);
- Whether Section 1040.3(a)(6), including the reference to accounts or remittance transfers subject to EFTA, should be expanded or narrowed;
- Whether the proposal should cover other types of stored value products/services within the meaning of Dodd-Frank (Section 1002(15)(A)(v), and if so, what are these other products/services, why should they be covered and how should they be defined;
- Whether the Bureau should consider alternatives to defining the terms “transmitting or exchanging of funds” and if so, what particular definitions or changes should the Bureau consider and why;
- Whether the Bureau should adopt a broader, narrower, or different definition of covered payment and financial data processing, and if so, why and how should it do so;
- Whether proposed Section 1040.3(a)(8) should include an exclusion like the exclusion in proposed Section 1040.3(a)(7) for products/services that are integral to another product/service not covered by Section 1040.3, and if so, what examples of such products/services should be excluded and why;
- Whether the Bureau should consider alternatives in defining the scope of coverage for check cashing, consumer check collection and consumer check guaranty services;
- Whether furnishing information to a consumer reporting agency covered by the FCRA, 15 USC 1681s-2, by any person covered by proposed Section 1040.3(a)(10) should also be separately identified as a covered product/service;
- Whether there are any persons who neither provides a product/service covered by any paragraphs of (a)(1) through (9) of Section 1040.3 and are not FDCPA debt collectors but nonetheless engage in debt collection on such products/service, and if so, whether Section 1040.3(a)(10) should be expanded to cover such persons. And, if so, how and why; and
- Whether debt collectors, as defined in the FDCPA, would include anyone not already covered by Section 1040.3(a)(1)(i) and (ii), and if not, whether the proposal should simply clarify that debt collectors, as defined by the FDCPA, are covered under Section 1040.3(a)(1)(i) and (ii), as applicable, rather than separately stating their coverage under proposed Section 1040.3(a)(10)(iii).
Section 1040.3(b), Excluded Persons
The proposal does not apply to the following persons to the extent they are offering or providing any of the following products and services:
- Brokers dealers to the extent that they are providing covered consumer financial products and services that are subject to rules promulgated or authorized by the U.S. Securities and Exchange Commission (SEC) prohibiting the use of pre-dispute arbitration agreements in class action litigation and providing for making arbitral awards public;
- The federal government and any affiliate of the Federal government providing any covered consumer financial product or service directly to a consumer; or a State, local or tribal government, and any affiliate of a State, local or tribal government, to the extent it is providing any covered consumer financial product or service directly to a consumer who resides in the government’s territorial jurisdiction;
- Any person when providing a covered consumer financial product or service that the person and any of its affiliates collectively provide to no more than 25 consumers in the current calendar year and to no more than 25 consumers in the preceding calendar year;
- Merchants, retailers, or other sellers of nonfinancial goods or services to the extent they:
- Provide an extension of consumer credit covered by paragraph (a)(1)(i) of this section that is of the type described in 12 USC 5517(a)(2)(A)(i) and they would be subject to the Bureau’s authority only under 12 USC 5517(a)(2)(B)(i) but not 12 USC 5517(a)(2)(B)(ii) or (iii); or
- Purchase or acquire an extension of consumer credit excluded by paragraph (b)(4)(i) of this section; or
- Any person to the extent the limitations in 12 USC 5517 or 5519 apply to the person or product or service described in paragraph (a) of this section that is offered or provided by the person.
Section 1040.3(b)(1), Records to be submitted
A provider is required to submit the following arbitral records to the Bureau in connection with any claim filed in arbitration by or against the provider concerning any covered consumer financial product or service enumerated in Section 1040.3:
- The initial claim and any counterclaim;
- The pre-dispute arbitration agreement filed with the arbitrator or arbitration administrator;
- The judgment or award, if any, issued by the arbitrator or arbitration administrator; and
- If an arbitrator or arbitration administrator refuses to administer or dismisses a claim due to the provider’s failure to pay filing or administrative fees, any communication the provider receives from the arbitrator or an arbitration administrator related to such refusal; and
- Any communication the provider receives from an arbitrator or an arbitration administrator related to a determination that a pre-dispute arbitration agreement for a covered consumer financial product or service does not comply with the administrator’s fairness principles, rules or similar requirements, if such a determination occurs.
- The provider must submit any required records to the Bureau within 60 days of filing any such record with the arbitrator or arbitration administrator and within 60 days of the provider receiving any such record filed or sent by someone other than the provider, such as the arbitrator or arbitration administrator.
The Bureau requests comment on the exclusions proposed under Section 1040.3(b) including:
- Whether the proposal should include other exclusions;
- Whether the proposal should include an exclusion for small entities;
- How the proposal should interact with potential regulations that may be promulgated by the U.S. Department of Education;
- Whether the broker-dealer exclusion from proposed part 1040 is appropriate and if it should be expanded or narrowed;
- The extent to which any other person, who is acting in an SEC-regulated capacity (such as an investment advisor) may be providing a consumer financial product/service that would be subject to proposed Section 1040.3;
- Whether the proposal should include an exclusion for such persons to the extent they are subject to any SEC rule that is functionally equivalent to the proposal;
- Which types of products/services might be subject to both the Bureau’s proposal and the Commodity Futures Trading Commission’s (CFTC) rule, on the incidence of potentially-classable disputes over these products/services, and on the compatibility of the Bureau’s proposal with the existing CFTC rule;
- Whether the Bureau should exempt consumer financial products/services that are subject to the CFTC rule or more broadly activities that are subject to the CFTC’s jurisdiction in accordance with the Commodity Exchange Act;
- Seeks comment on the use of the terms “government,” “affiliate,” “resides,” and “territorial jurisdiction,” and whether clarifications are needed in general or for specific types of governments or governmental affiliates;
- The exclusions in Section 1040.3(b)(2) from tribal governments under its Policy for Consultation with Tribal Governments;
- Whether a government affiliate created by a government—that doesn’t qualify as an “arm” of the government—should be covered by the proposed exemption;
- Whether government or government affiliates, as described in Section 1040.3(b)(2), should be excluded from coverage entirely;
- Whether the exclusions should be expanded to cover additional actors or narrowed to cover only certain consumer financial products/services, and if so, which products/services;
- Whether the proposed uniform numerical threshold for excluding persons who do not regularly engage in providing a covered product or service is warranted, and if not, what alternatives should be considered;
- Whether the threshold should be higher or lower, determined by aggregating the number of times all covered products are offered or provided or incorporate other elements;
- Whether the numerical threshold exclusion should be based on the total activities in the current and preceding calendar years;
- Whether to adopt a grace period or other transition mechanism for entities when they first cross the 25-consumer threshold; and
- Whether the Bureau should consider alternatives in defining the exception provided in Section 1040.3(b)(4), and if so, what particular definitions and changes should the Bureau consider and why.
Section 1040.4, Limitations on the Use of Pre-dispute Arbitration Agreements
Section 1028(h) of Dodd-Frank authorizes the Bureau to prohibit or impose conditions or limitations on the use of an arbitration agreement between a covered person and a consumer for a consumer financial product or service providing for arbitration of any future dispute between the parties. The proposed rule contains three provisions pertaining to the use of pre-dispute arbitration agreements.
- The provision generally prohibits providers from seeking to rely on a pre-dispute agreement entered into after the compliance date (211 days after publication of the final rule) with respect to any aspect of a class action that is related to any of the consumer financial products and services covered by the proposal (Section 1040.3) including to seek a stay or dismissal of particular claims or the entire action, unless otherwise provided;
- Providers would be required, after entering into a pre-dispute arbitration agreement for a covered consumer financial product and service under Section 1040.3 after the compliance date, to include specified language in their pre-dispute arbitration agreements disclaiming the agreement’s applicability to class actions; and
- Providers that include pre-dispute arbitration agreements in their consumer contracts would be required to submit specified arbitral records to the Bureau for any pre-dispute arbitration agreement entered into after the compliance date.
The Bureau seeks comment on proposed Section 1040.4 including the following:
- Whether further clarification regarding when this provision would apply in the course of litigation would be helpful to providers;
- Whether the language “claim on the same issue,” which appears in proposed comment 4(a)(1)-1.v and vi, is sufficiently limiting;
- Whether entities may seek to circumvent or evade Section 1040.4(a)(1);
- Whether additional clarification would be needed to prevent such circumvention or evasion;
- Whether providers need additional clarification regarding the application of proposed Section 1040.4(a)(1) in class actions for multiple products and services, only some of which are covered by proposed Section 1040.3;
- Whether the rule should mandate that covered entities insert the provision into their pre-dispute arbitration agreements;
- Whether the provision, as drafted, is in plain language and would be understandable to consumers;
- Whether the proposed provision would accomplish its purpose of binding both the provider that forms an initial agreement with the consumer and any future acquirers of it, as well as third parties that may seek to rely on it, such as debt collectors;
- Whether it would be appropriate to permit the use of an alternative provision;
- Whether providers should be permitted to specify which products being provided are covered by the Rule;
- Whether the Bureau should consider making the alternative provision mandatory, rather than optional, in contracts for multiple products/services, only some of which would be covered by the proposal;
- Whether Section 1040.4(a)(2)(A) and (B) would be understandable to consumers;
- Whether 60 days would be an appropriate timeframe for requiring providers to ensure that agreements are amended or provide notice, taking into consideration situations where, for example, providers are acquiring accounts;
- Whether proposed comment 4(a)(2)-3’s explanation that the notice permitted by Section 1040.4(a)(3) may be provided in any way the provider typically communicates with the consumer, including electronically, provides adequate clarification to providers while helping ensure that consumers receive the notice;
- Whether the Bureau should consider fewer, more or different restrictions on individual arbitration;
- Whether it should prohibit individual arbitration altogether;
- Whether it has accurately assessed the harm to consumers that occurs when covered entities include pre-dispute arbitration agreements;
- Whether collecting arbitral records will further the Bureau’s stated goal of monitoring potential harms in providers’ use of arbitration agreements as well as the underlying legal claims;
- Its plan to make an electronic record submission process operational before the compliance date, including what system features would be helpful to providers, their agents or the general public;
- Whether the Bureau should limit the publication of arbitral records due to consumer privacy concerns or if providers would have other confidentiality concerns;
- Whether it should publish arbitral records individually or in the form of aggregated data;
- Whether there are alternatives to publication by the Bureau—such as publication by other entities;
- Whether and by how much the proposal requiring submission of arbitral records would increase the costs of arbitration including administrative fees or covered entities’ time;
- Whether further clarification of the meaning of “claim,” either in proposed Section 1040.2 or in the commentary, would be helpful to providers;
- Whether the Bureau should collect the response of the opposing party, if any, in addition to the claim;
- Whether the providers would encounter other obstacles in complying with the proposed submission requirement and, if so, what those obstacles are;
- Comments generally on the Bureau’s proposal to require submission of pre-dispute arbitration agreements when arbitration claims are filed;
- Comments on the submission of communications from arbitration administrators related to the dismissal or refusal to administer a claim for nonpayment of fees even when such nonpayment is the result of a settlement between the provider and the consumer;
- Whether doing so would serve the policy goal of discouraging non-payment of arbitral fees by providers;
- Whether provisions (Section 1040.4(b)(1)(ii)(B) and comments 4(b)(1)(ii)(B)-1 and -2) would encourage providers to comply with their arbitration administrator’s fairness principles and rules;
- Whether there are other examples of fairness principles the Bureau should list or concerns regarding the principles that the Bureau has proposed to list as examples;
- Whether it should be require redaction of a consumer’s city, State, and zip code, in addition to the consumer’s street address;
- Whether the Bureau should require redaction of any additional types of consumer information, including other types of information that may be considered PIFI (personally identifiable financial information) and that are likely to be present in the arbitral records;
Section 1040.5, Compliance Date and Temporary Exception
Dodd-Frank Section 1028(d) provides that any regulation prescribed by the Bureau under Section 1028(d) shall apply to any agreement between a consumer and covered person that has been entered into after the end of the 180-day period that begins on the effective date of the regulation.
- The Bureau proposes that the effective date of the final rule will be 30 days after publication in the Federal Register and compliance with the provision is required for any pre-dispute arbitration agreement entered into after the 211th day following the final rule’s publication in the Federal Register.
- The proposal does provide an exception from the compliance date requirements for pre-packaged general purpose reloadable prepaid card agreements. Under the proposal, Section 1040.4(a)(2)’s requirement that the provider’s pre-dispute arbitration agreement contain the specified provision by the compliance date. This section would not apply to a provider that enters into a pre-dispute arbitration agreement for a general purpose reloadable prepaid card if certain conditions are met. Specifically,
- For a provider that cannot contact the consumer in writing, the proposal sets out the following requirements:
- The consumer acquires the card in person at a retail store;
- The agreement was inside of packaging material when it was acquired;
- The agreement was packaged prior to the compliance date of the rule
- For the provider that has the ability to contact the consumer in writing, the proposed rule would require the provider to meet all of the following requirements:
- The consumer acquires the card in person at a retail store;
- The agreement was inside of packaging material when it was acquired;
- The agreement was packaged prior to the compliance date of the rule; and
- Within 30 days of obtaining the consumer’s contact information, the provider notifies the consumer in writing that the pre-dispute arbitration agreement complies with the requirements of proposed Section 1040(a)(2) by providing an amended pre-dispute arbitration agreement to the consumer.
The Bureau seeks comment on the following questions regarding Section 1040.5 and the Temporary Exception for pre-paid cards:
- Whether a different formulation would provide greater clarity to providers and consumers as to when the rule’s requirements would begin to apply;
- Whether a period of 211 days between publication of the final rule in the Federal Register and the rule’s compliance date is sufficient time for providers to comply, and if not, what an appropriate effective date should be;
- Whether the temporary exception for pre-packaged general purpose reloadable prepaid card agreements is needed;
- Whether a definition of this term or additional clarification regarding its meaning would be helpful to providers;
- Whether the exception should use a different term describing prepaid products;
- Whether the proposed exception should be available to providers of other products—instead of, or in addition to, prepaid products—or whether the exception’s coverage should not be limited based on product type, but based on other criteria;
- Whether requiring providers who take advantage of the prepaid card exception to make available a compliant pre-dispute arbitration agreement within 30 days after the provider becomes aware that the agreement has been provided to the consumer would be a feasible process for providers while also adequately protecting consumers; and
- Whether alternatives to the proposed exception would better accomplish the objectives of furthering consumer awareness of their dispute resolution rights and ensuring consumers receive accurate disclosures without imposing excessive costs on providers.
Dodd-Frank Act Section 1022(b)(2) Analysis
During the development of this proposal, the Bureau notes that it considered the potential benefits, costs, and impacts required by Section 1022(b)(2) of the Dodd-Frank Act.
- The Bureau request comment on the preliminary analysis required by Section 1022(b)(2) of the Dodd-Frank Act as well as submissions of additional data that could inform the Bureau’s analysis of the benefits, costs, and impacts of the proposed rule.