The Securities Arbitration Commentator has reported many times on the Consumer Financial Protection Bureau‘s (“CFPB”) study of mandatory predispute arbitration agreements (“PDAAs”) in consumer financial products and services. To review, Dodd-Frank, Section 1414, bans outright PDAAs in residential mortgage contracts, and Section 1028 directs the CFPB to study the use of PDAAs in other consumer financial products and services and later report to Congress; the statute also vests authority in CFPB to possibly develop regulations banning, limiting or conditioning their use.
Final Report to Congress
It has been almost five years since Dodd-Frank was enacted, with no Final Report, but we now have some new arbitration stirrings from the CFPB. On February 24th, the Bureau posted on its website notice of a field hearing on arbitration that will take place March 10th at 11 a.m. in Newark, NJ. Conjecture is running rampant that CFPB will use the field hearing to release its final report to Congress. For example, Alan Kaplinsky, writing in his blog at Ballard Spahr on February 24th, states, “Our expectation that the CFPB would issue its arbitration study in early 2015 coupled with the agency’s history of using field hearings as the venue for announcing new developments makes it seem highly likely that the field hearing will coincide with the CFPB’s release of the arbitration study.” Jonnelle Marte, writing in the Washington Post on March 3rd says, “The CFPB’s report, ordered under the Dodd-Frank Wall Street Reform and Consumer Protection Act, is widely expected to lead to new rules limiting how companies can use mandatory arbitration clauses, consumer advocates say. The timing of the release of the report was confirmed by people familiar with the matter who spoke on condition of anonymity because the research has not yet been made public.”
What will CFPB Do?
I stand by my belief that CFPB will ultimately exercise its Dodd-Frank authority to ban or limit PDAA’s in most contracts involving consumer financial products and services, with securities customer-broker agreements being left to the SEC. I actually suspect that CFPB will ban outright PDAAs in a wide range of consumer financial products and services (for example, car loans, payday loans, bank accounts, credit card agreements). And, in my opinion, that would be a mistake. In an article I published last summer, What’s a Regulator to Do?, Mandatory Consumer Arbitration, Dodd-Frank and the Consumer Financial Protection Bureau, 20:4 ABA DISPUTE RESOLUTION MAGAZINE 4 (SUMMER 2014), I explained why and offered an alternative path that I first articulated almost two years ago in this publication.1
What CFPB Should Do
I suggested in my ABA article that CFPB should write rules that impose conditions on the use of PDAAs in contracts for consumer financial products and services – but not ban PDAAs outright. Specifically, the rules should provide: a) in a consumer financial contract, any predispute arbitration agreement must be clearly identified, optional and separately signed or clicked by the consumer; b) a consumer cannot be denied goods or services if the consumer declines the arbitration option; and 3) clear procedural fairness guidelines must be followed in any consumer arbitration system. I then elaborated on what such a CFPB rule should look like, opining that four simple provisions would make for a good CFPB rule.
- Consumer choice, but before a dispute arises. The consumer should have a choice about whether to submit disputes to arbitration, but this choice should be made when the contract is signed. Requiring all parties to agree to arbitration after a dispute arises could actually harm consumers, because businesses offering financial products or services would sometimes decline to arbitrate, making the dispute resolution process unpredictable for the consumer.
- Clear, knowing, and voluntary agreement to arbitrate. To ensure that consumers knowingly and voluntarily agree to arbitrate, CFPB’s rule should require that the individual separately initial/click the arbitration agreement.
- Promote web-based arbitration systems. An arbitration system that steers consumers to travel to a “brick and mortar” arbitration hearing to resolve disputes that typically involve modest amounts is not a good idea. It’s a particularly poor one when the consumer’s interactions with the business have been entirely online. Consumers should have the option of using an online ADR system.
- Establish procedural fairness criteria. The new rules should also require that any consumer arbitration system adhere to basic standards of procedural fairness. These should not be difficult to find. In particular, the CFPB should note FINRA’s (Financial Industry Regulatory Authority) Rule 12204, which allows an investor to opt out of arbitration and instead participate in a class action. Given the recent decisions2 by the Supreme Court allowing PDAAs to contain class action waivers, this provision in a proposed CFPB rule would be crucial, especially if the agency decides not to ban PDAAs, but rather to impose terms for their use.
Parting Words for the SEC
My parting advice to CFPB was to tread carefully and stay focused on its core mission of protecting consumers. Alas, I suspect it may be too late for CFPB’s rulemaking, but I offer the same advice to the SEC. Dodd-Frank takes a different approach to PDAAs used in securities customer-broker contracts. Although the operative language in Dodd-Frank provides similar guidance and direction to both the CFPB and SEC about what the agencies are to do regarding mandatory or forced use of PDAAs, there is a key difference: Dodd-Frank Section 921 does not require the SEC to do anything about PDAAs in customer-broker contracts. Given the more than 90 mandatory study and rulemaking requirements the SEC has under Dodd-Frank, it is not at all surprising that arbitration has not been that high on the agency’s priorities list.
If as I expect CFPB acts next week on mandatory arbitration of consumer financial disputes, I think it will become politically untenable for the SEC to do absolutely nothing about PDAAs, especially in light of the pressure that’s been brought to bear on this issue by some in Congress, NASAA (National American Securities Administrators Association), PIABA (Public Investors Arbitration Bar Association), and others (for example the AFL-CIO). My view is that, at a minimum, the SEC will have to study the subject (it has since 2010 been accepting comments on mandatory arbitration) and eventually require some changes (impose limits or conditions). It should not, in my opinion, ban PDAAs outright. Think about it. To ban PDAAs in customer-broker contracts, the SEC would have to find that doing so is “in the public interest and for the protection of investors.” Essentially, the SEC would be saying, “We’ve been supervising customer-broker arbitration for decades. But, you know, we just realized it’s a terribly unfair system.”
On the other hand, a finding that says, “We’ve studied customer-broker arbitration, and we’ve concluded that it’s a fair process. But, you know, these few changes will make it even better,” is certainly feasible. And then they just need to trot out the Friedman Plan.
1The Arbitration Fairness Act: a Well-intentioned but Potentially Dangerous Overreaction to a Legitimate Concern, 2013:1 SECURITIES ARBITRATION COMMENTATOR 1 (June 2013).
1See, e.g., AT&T Mobility, LLC v. Concepcion, 131 S. Ct. 1740 (2011); American Express Co. v. Italian Colors Restaurant, 133 S. Ct. 2304 (2013).
George H. Friedman, an ADR consultant and chairman of the board of directors of Arbitration Resolution Services, Inc., retired in 2013 as FINRA’s executive vice president and director of arbitration, a position he held from 1998. In his extensive career, he previously held a variety of positions of responsibility at the American Arbitration Association, most recently as senior vice president from 1994 to 1998. He is an adjunct professor of law at Fordham Law School. Mr. Friedman serves on the board of editors of the Securities Arbitration Commentator. He is also a member of the AAA’s nation roster of arbitrators. He holds a B.A. from Queens College, a J.D. from Rutgers Law School, and is a certified regulatory and compliance professional (Wharton-FINRA Institute).