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Treasury Releases Report Criticizing CFPB Arbitration Rule
On October 23, the Treasury Department released a report criticizing the CFPB’s arbitration rule (Rule)—finding the Rule did not satisfy the statutory prerequisites under the Dodd-Frank Act for banning arbitration agreements. Specifically, the report concludes that “the Bureau has not made a reasoned showing that increased consumer class action litigation will result in a net benefit to consumers or the public as a whole.” Like the OCC’s findings (as covered by InfoBytes previously), the Treasury Department found that the Rule will result in increased costs to consumers as affected businesses are unlikely to absorb the new financial costs associated with increased class action litigation. Moreover, the report notes that (i) the CFPB’s data shows that the majority of class action lawsuits deliver no relief to consumers; (ii) that despite the rule’s high costs, the CFPB did not demonstrate the Rule would help increase compliance with federal consumer laws; and (iii) the CFPB failed to consider less burdensome alternatives to the rule.
In addition to the Treasury Department, the Rule is also under scrutiny by Congress and the subject of a lawsuit filed by the U.S. Chamber of Commerce and other financial industry groups (previously discussed in InfoBytes here and here, respectively).
OCC Acting Comptroller Shares Thoughts on Opportunities to Reduce Regulatory Burdens
On October 5, OCC Acting Comptroller of the Currency Keith Noreika spoke before the 2017 Midsize Bank Coalition of America Chief Risk Officer Meeting to discuss opportunities for regulatory reform.
According to Noreika, one area of concern relates to the adverse effect arbitrary asset thresholds pose to the annual stress test requirements required under the Dodd-Frank Act because the burden “is not commensurate with the systemic risks presented by an institution.” Given the amount of diversity in the business models of banks who have around $10 billion in assets, “regulators need the ability and authority to tailor their supervision to the unique risks presented by individual banks.” Noreika suggested an approach that would give federal banking agencies the authority to tailor statutory stress testing requirements without an asset threshold, thus reducing the risk of banks growing beyond the threshold to offset increased costs or staying below the threshold to avoid unwelcome scrutiny.
Noreika also urged for interagency harmonization of guidance and policies to avoid conflicting regulatory guidance when addressing cybersecurity issues.
Additionally, Noreika addressed the CFPB’s arbitration rule as an example of the need to work “to ensure regulation is balanced and appropriate by speaking up when we see proposed rules that may adversely affect the business of banking, have systemic effects, or result in perverse unintended consequences.” Noreika stated that prior to the publication of the final arbitration rule, the OCC requested access to the data the CFPB used to develop and support the rule in order to conduct an independent review. However, it was not until after the rule was published that the CFPB made the data available. According to OCC findings, the rule will adversely impact consumers by increasing costs. Community banks, Noreika noted, will also bear the burden of increased legal costs from defending lawsuits.
Finally, Noreika commented that banks continue to face challenges when trying to implement Bank Secrecy Act compliance programs and adapt to new requirements under TRID, HMDA, and the Military Lending Act.
California Bans Use of Arbitration Clauses in Fraudulently Created Financial Contracts
On October 4, Governor Jerry Brown signed into law amendments to the state’s code of civil procedure that essentially eliminates the use of forced arbitration in cases of fraudulently created accounts. SB 33 prevents state or federally chartered depository institutions from enforcing arbitration agreements in existing consumer contracts to compel California customers to arbitrate disputes regarding other contracts created “fraudulently without the consumer’s consent or by unlawfully using the consumer’s personal identifying information.”
The law comes at a time when, as previously discussed in InfoBytes, several financial industry groups issued a joint lawsuit challenging the Bureau’s arbitration rule, which prohibits the use of mandatory pre-dispute arbitration clauses in certain contracts for consumer financial products and services. The amendments take effect January 1, 2018.
Financial Industry Groups Sue the CFPB Over Arbitration Rule
On September 29, the U.S. Chamber of Commerce (Chamber) and other financial industry groups joined together to file a lawsuit in a Texas District Court against the CFPB over the constitutionality and legality of the Bureau’s arbitration rule (rule). The complaint alleges four reasons why the rule is invalid and should be set aside:
- the rule is a product of the unconstitutional structure of the CFPB – as covered in a previous InfoBytes, a similar argument is being heard in the U.S. Court of Appeals for the D.C. Circuit in the case brought by PHH;
- the CFPB failed to follow procedures in the Administrative Procedures Act (APA) in adopting the conclusions of a flawed arbitration study. Specifically, the complaint alleges that the study improperly limited public participation, applied flawed methodologies, misunderstood relevant data, and did not address key considerations;
- the rule is a model of arbitrary and capricious agency action because it fails to take into account important aspects of the problem it is attempting to address and runs counter to the record before the Bureau; and
- the rule is a violation of the Dodd Frank Act because it fails to advance the public interest or consumer welfare.
Currently, the rule is also under scrutiny by Congress. As previously discussed in InfoBytes, the House passed a disapproval resolution, under the Congressional Review Act, to repeal the rule. A similar measure is set for discussion in the Senate.
Buckley Sandler will follow up with a more detailed summary of the lawsuit.
Eleventh Circuit Enforces Binding Arbitration Agreement
On September 26, a three-judge panel of the U.S. Court of Appeals for the Eleventh Circuit held that a customer is bound to a mandatory arbitration clause in his deposit account agreement with a national bank. In doing so, the appellate court reversed the Florida district court’s decision, which denied the national bank’s motion to compel arbitration. In 2010, the customer filed a putative class action over the charging of overdraft fees associated with a bank account he held jointly with his wife. The case concerns an account agreement signed by the customer when he transferred an existing account into the joint account in 2001. The appellate court reasoned that the customer “was on notice that signing the 2001 signature card represented the start of a new contractual relationship” and therefore, subject to the updated arbitration clause.
The CFPB’s new arbitration rule, which went into effect September 18, does not allow companies subject to the rule to use arbitration clauses to stop consumers from being part of a class action. However, as previously discussed in InfoBytes, the House passed a disapproval resolution under the Congressional Review Act to repeal the rule. A similar measure is expected to be considered by the Senate within the next week.
CFPB Publishes Small Entity Compliance Guide on Arbitration Rule
On September 15, the CFPB published a small entity compliance guide concerning the Bureau’s final arbitration rule that became effective this month. Compliance is required for “pre-dispute arbitration agreements” entered into on or after March 19, 2018. This guide provides a summary of the rule and highlights the parties and consumer financial products and services covered by the rule, as well as exclusions from the rule’s requirements. In addition, the guide includes descriptions of provisions to be included in pre-dispute arbitration agreements, clarifies the rule’s prohibition on relying on pre-dispute arbitration agreements to block class actions, and explains the record submission requirements under the rule.
However, as previously discussed in InfoBytes, while the arbitration rule went into effect September 18, the House earlier passed a disapproval resolution, in July, to repeal the rule, with a similar measure set for discussion in the Senate.
Second Circuit Reverses Decision Concerning Online Contract Formation
On August 17, 2017, the Second Circuit Court of Appeals vacated and remanded a district court order denying a defendant's motion to compel arbitration where the plaintiff had accepted an arbitration agreement through a smart phone application. See Meyer v. Uber Technologies Inc., et al., 2017 WL 3526682, (2d Cir. 2017). There, the plaintiff had created an account with the defendant by entering personal and payment information into a mobile application. On the final account creation screen, the application presented a button marked “REGISTER,” below which was black text advising users that “[b]y creating an Uber account, you agree to the TERMS OF SERVICE & PRIVACY POLICY.” The capitalized language was a hyperlink, which led to a copy of an agreement containing an arbitration clause. The trial court held that this notice was not “reasonably conspicuous” and, therefore, the plaintiff did not—unambiguously—manifest assent to the arbitration provision by registering an account. On appeal, the Second Circuit reversed, finding that a “reasonably prudent smartphone user” would have been on “reasonably conspicuous notice” of the terms and conditions of service and that the text beneath the registration button put the plaintiff on notice that clicking “REGISTER” meant acceptance of those terms—regardless of whether he actually reviewed them. Relevant to the court’s analysis were proximity of the hyperlink to the “REGISTER” button and the absence of clutter, which might have otherwise impaired the plaintiff’s ability to locate the hyperlink.
SEC Issues Regulatory Notice Approving Amendments to FINRA Arbitration Proceedings
Earlier this month, the SEC released Regulatory Notice 17-25 approving amendments to FINRA customer and industry arbitration procedures, which will impact Rules 12402, 12403, and 13403. The changes will require the Director of FINRA’s Office of Dispute Resolution to make lists of arbitrators available to all parties at the same time “within approximately 30 days after the last answer is due.” Party agreements to extend answer due dates will no longer have any bearing on when the arbitrator list is provided. The amendments will affect cases filed on or after September 18, 2017.
House Financial Services Committee Issues Report Accusing Bureau of Contempt Charges Relating to Investigation into Arbitration Rulemaking
On August 4, the Majority Committee Staff of the House Financial Services Committee (Committee) released a report accusing CFPB Director Richard Cordray of failing to comply with an April 4, 2017 Congressional subpoena concerning the Committee’s on-going investigation into the Bureau’s arbitration rulemaking, and presenting a case for instituting contempt of Congress proceedings. According to the report, the Committee first requested documents relating to the CFPB’s pre-dispute arbitration rulemaking on April 20, 2016 but asserts it received a production that was “far from complete.” Subsequent document requests and “rolling” productions were also allegedly “incomplete.” In April 2017, the Committee issued a congressional subpoena in order to compel the CFPB to produce the relevant records, but the report claims that while Cordray was legally obligated to answer, he failed to adequately respond. Consequently, the Committee accused Cordray of defaulting on the subpoena and concluded that the CFPB’s argument regarding the burdensome nature of the request does not excuse the Bureau from producing records or “searching for and identifying sources of records in an effort to quantify the putative burden.” As a result, the Majority Committee Staff believes there is ample basis to proceed against Cordray for contempt of Congress.
District Judge Denies Motion to Compel Arbitration, Rules Arbitration Agreement Contained in Nested Hyperlink Invalid
On July 21, a federal judge in the U.S. District Court for the Southern District of California denied a Defendant’s motion to compel arbitration, finding that the Plaintiff had not agreed to arbitrate where the Defendant had presented the arbitration agreement electronically to the Plaintiff through a multi-layered set of hyperlinks. See McGhee v. North American Bancard, LLC, 17-CV-0586-AJB-KSC, 2017 WL 3118799 (S.D. Cal. Jul. 21, 2017). The dispute revolved around an agreement for the use of a credit card reader provided by the Defendant. The terms and conditions for this service were presented to the Plaintiff electronically via a hyperlink. The hyperlink was placed next to a checkbox and button labeled with the phrase “I have read and agree to the Terms and Conditions.” But the Terms and Conditions document accessible through that hyperlink did not contain the arbitration agreement. Instead, the arbitration agreement was only accessible by clicking on a second hyperlink contained in the first document. Additionally, the Terms and Conditions document accessible through the first-level hyperlink conflicted with the nested arbitration agreement because the Terms and Conditions document included a forum selection clause designating state and federal courts of Georgia. On these facts, the court found that Plaintiff’s consent applied only to the Terms and Conditions document immediately behind the first hyperlink, and did not apply to the arbitration agreement accessible through the nested hyperlink.