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 [email protected] or [email protected]. Copyright CounselorLibrary.com 2017, all rights reserved. Single publication rights only, to F&I and Showroom. (7/17). HC No. 4811-2926-4459

About the author
Tom Hudson

Tom Hudson


Thomas B. Hudson Esq. was a founding partner of Hudson Cook LLP and is now of counsel in the firm’s Maryland office. He is the CEO of CounselorLibrary.com LLC and a frequent speaker and writer on a variety of consumer credit topics.

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