The Industry's Leading Source For F&I, Sales And Technology

Article

Examining the CFPB’s Arbitration Rule

Legal experts break down the Consumer Financial Protection Bureau’s new arbitration rule and how it could affect your dealership.

August 2017, F&I and Showroom - Feature

by Thomas B. Hudson, Esq. - Also by this author

On July 10, the Consumer Financial Protection Bureau announced a new arbitration rule banning companies (called “providers” in the rule) from using pre-dispute arbitration agreements to prohibit consumers from seeking class relief in a court. The new rule follows two CFPB “studies” that were transparent attempts to justify what the bureau’s staffers were determined to do all along — end the use of arbitration agreements in consumer financial transactions.

In the Dodd-Frank Act, Congress instructed the bureau to study the use of arbitration provisions in consumer financial contracts and to take action based on those studies, including anything from regulation of the provisions to an outright ban on them.

Lawyers are still wrestling with the 700-plus page rule and considering issues such as whether the rule permits the financing of a vehicle service contract — sold in both cash and credit transactions — containing an arbitration agreement barring class relief. 

We don’t know what the bureau was thinking when developing the rule, but it’s likely it was aware that dealers and finance companies would be reluctant to use an arbitration agreement that permitted class relief. It’s also likely the bureau did not want to risk the political backlash an outright ban on the use of mandatory pre-dispute arbitration agreements (otherwise permitted by the Federal Arbitration Act) might entail. So, wielding a scalpel rather than a chainsaw, the bureau came up with a rule that permitted mandatory, pre-dispute arbitration for individual cases, but also permitted class actions in court.

As an added deterrent from using arbitration, the bureau has mandated onerous reporting requirements for companies invoking arbitration. The requirements, which direct regular redacted submissions to the bureau of arbitration and court documents, will likely be an operational nightmare for companies.

Why do car dealers care about the new rule? Because, beginning in the ’90s, dealers and the finance companies that buy retail installment sales agreements and leases from them began to incorporate mandatory arbitration agreements into their credit sale and leasing transactions.

They did so primarily because a well-drafted and consumer-friendly arbitration agreement provided a very strong first line of defense against class action lawsuits. The principal strength of arbitration agreements was language prohibiting the consumer from seeking class relief.

Plaintiffs’ lawyers suing businesses such as car dealerships often attempt to leverage the settlement value of their clients’ individual cases by asserting or attempting to assert claims on behalf of the individual and others who are “similarly situated” — magic legal words that mean, “this is a class action.”

The rule’s impact will vary depending on the identity of the dealer or creditor involved and the facts of the transactions at hand. Dealers exempt from the bureau’s jurisdiction under Dodd-Frank will be affected indirectly by the rule, while nonexempt dealers will be impacted directly. Lawyers are still wrestling with the 700-plus page rule and considering issues such as whether the rule permits the financing of a vehicle service contract — sold in both cash and credit transactions — containing an arbitration agreement barring class relief. Suffice it to say, if your sale, finance or lease documents contain an arbitration agreement of any sort, you need to engage your lawyer.

We were predicting, pre-Trump, that the use of arbitration agreements in auto finance and lease transactions would be prohibited by the bureau. Then along came Trump, and, at about the same time, a federal court opinion, since appealed, that the bureau’s structure was unconstitutional. Then came a Trump-issued executive order that might or might not apply to an “independent agency” like the bureau, freezing new federal rules.

These developments gave the industry some real hope that the bureau would not make waves by issuing this rule. Perhaps CFPB Director Richard Cordray, whose term expires in July 2018, eyed the general health care and Russian meddling messes in Washington, figured Congress was scheduled to go home for the summer, and decided it was “now or never.”

The rule was published in the Federal Register on July 19, 2017. It provides that all pre-dispute arbitration agreements entered into on or after the 241st day after the publication of the rule in the Federal Register must comply with the rule. Its effective date is the 60th day after publication in the Federal Register, or Sept. 18, 2017. The compliance date is March 19, 2018.

Some are predicting Congress will overturn the rule by using its power under the Congressional Review Act or by an even more obscure process with the Federal Stability Oversight Council. Others are predicting a new director and possible delays in the compliance date. Still others are predicting legal actions. We think all of these defenses are far from sure bets and dealers and finance sources should be prepared for compliance with the rule come March.

Thomas B. Hudson and Nicole F. Munro are partners in the law firm of Hudson Cook LLP. Email them at tom.hudson@bobit.com or nikki.munro@bobit.com. Copyright CounselorLibrary.com 2017, all rights reserved. Single publication rights only, to F&I and Showroom. (7/17). HC No. 4811-2926-4459

Comment

  1. 1. Barry Leman [ August 29, 2017 @ 09:33AM ]

    This is why it is extremely important for Trump to dump all Obama appointees. Cordray is attempting to make business as difficult as possible, while lining the pockets of attorneys.

  2. 2. Barry Leman [ August 29, 2017 @ 09:33AM ]

    This is why it is extremely important for Trump to dump all Obama appointees. Cordray is attempting to make business as difficult as possible, while lining the pockets of attorneys.

 

Your Comment

Please note that comments may be moderated. 
Leave this field empty:
Your Name:  
Your Email:  

Blog

So Here's the Deal

Ronald J. Reahard
The Dealer Moved My Goal Posts

By Ronald J. Reahard
Top trainer has hard-earned advice — and a word of warning — for F&I pros whose dealers seem to change their pay plans every time they have a good month.

Addressing F&I’s Internet Problem

By Ronald J. Reahard
A frustrated F&I manager poses an increasingly common question: How do you sell protection products to customers who demand the final price by phone and then show up with a bank check?

(Video) Selling Eight Products Without Losing the Customer

By Ronald J. Reahard

He Had a Goal: Remembering David Ressler

By Ronald J. Reahard

Done Deal

Gregory Arroyo
The Repair Is Covered

By Gregory Arroyo
The editor opens up about his first service-contract claim, which resulted in a covered and repaired vehicle as well as a few lessons.

Change Is Happening

By Gregory Arroyo
Saddened by the potential loss of another piece of his childhood, the editor tries to put the pieces together when he realizes there’s a good lesson to be learned in a toy retailer’s likely demise.

Who Will Take Up the CFPB's Torch?

By Gregory Arroyo

Military Lending Act Guidance: The Gift That Keeps On Giving

By Gregory Arroyo

Mad Marv

Marv Eleazer
Is That Legal?

By Marv Eleazer
Is manipulating a sales agreement to accommodate a customer’s request to cash out of a dealer-arranged retail sales contract allowed? His Madness gets answers from the industry’s top legal mind.

Overcome Your F&I Weaknesses

By Marv Eleazer
His Madness issues a challenge to every F&I professional: Eradicate your bad work habits, diversify your lender spread, and check your God complex at the door.

Proper Deal Structure Moves Mountains

By Marv Eleazer

Show Us Some Love

By Marv Eleazer

On the Point

Jim Ziegler
Bound to Fail

By Jim Ziegler
Da Man returns with a message to vehicle manufacturers jumping into the subscription waters: It ain’t gonna happen.

Sharpen Your Survival Skills

By Jim Ziegler
‘Da Man’ has a plan you can use to survive the collapse of the car business and remain profitable through the dealer apocalypse.

Sales Rock Stars Still Exist

By Jim Ziegler

The New Stooges

By Jim Ziegler