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Department of Education Proposes Rule to Protect Student Borrowers from Alleged Predatory Practices by Postsecondary Institutions
On June 16, the Department of Education’s (Education) proposed rule to amend the regulations governing the Direct Loan program was published in the Federal Register. The proposal seeks to clarify and expand upon existing regulations intended to protect student borrowers from alleged predatory practices by postsecondary institutions. Specifically, Education proposes to amend existing regulations by, among other things, (i) establishing a more accessible and consistent borrower defense standard and streamlining the borrower defense process to ensure protection from institutions’ alleged predatory actions and omissions resulting in loan discharges; (ii) requiring certain institutions provide Education-issued plain language warnings to prospective borrowers and enrolled students on its Web sites and in all promotional materials and advertisements; (iii) prohibiting the requirement to use arbitration to resolve claims brought by a borrower against the school or waivers of his/her right to initiate or participate in a class action lawsuit regarding such claims; and (iv) prohibiting the requirement for students to engage in internal institutional complaints or grievances before contacting accrediting or government agencies with authority over the school regarding such claims. Comments on the proposed rule must be received by Education on or before August 1, 2016.
Update Regarding CFPB Proposed Rule on Arbitration Agreements
As previously announced, the CFPB published its proposed rule on arbitration agreements in the Federal Register on May 24. To clarify prior summaries, the proposed rule seeks to impose two restrictions on the use of pre-dispute arbitration agreements by covered providers of certain consumer financial products and services. First, the proposed rule would prohibit covered providers from using pre-dispute arbitration agreements to bar consumer class actions in court and would require providers to include a provision in their pre-dispute arbitration agreements reflecting this limitation. Second, the proposed rule would require covered providers to submit certain records related to arbitral proceedings to the CFPB if the covered provider uses pre-dispute arbitration agreements. Comments to the proposed rule must be received by the CFPB on or before August 22, 2016.
CFPB Issues Spring 2016 Rulemaking Agenda
On May 18, the CFPB released an overview of its Spring 2016 Rulemaking Agenda, which outlines the CFPB’s current initiatives. In addition to summarizing the CFPB’s recently released proposed rule to ban pre-dispute arbitration clauses in future consumer agreements, the agenda states that the CFPB expects to release this Summer (i) a Notice of Proposed Rulemaking regarding small dollar loan products, including payday loans and auto title loan; (ii) a rule to finalize its November 2014 proposed rule on prepaid products; (iii) a Notice of Proposed Rulemaking to provide clarity concerning its TRID Know Before You Owe mortgage rule; and (iv) a final rule to amend its 2014 proposed rule revising certain provisions of mortgage servicing requirements under RESPA and TILA. The agenda further comments on the CFPB’s oversight of (i) overdraft services on checking accounts, noting that the agency “is engaged in pre-rule making activities to consider potential regulation” of such services; (ii) debt collection practices, observing that the agency is in the process of developing proposed rules to further regulate the industry; (iii) nonbank institutions, emphasizing the CFPB’s rulemaking efforts to further define larger participants of certain markets for consumer financial products and services; and (iv) mortgage markets, highlighting CFPB efforts to implement “critical consumer protections under the Dodd-Frank Act.” Finally, the agenda comments that the CFPB is in the “very early stages starting work to implement section 1071 of the Dodd-Frank Act, which amends the Equal Credit Opportunity Act to require financial institutions to report information concerning credit applications made by women-owned, minority-owned, and small businesses.”
CFPB Issues Proposed Rule Seeking to Prohibit Mandatory Arbitration Clauses
On May 5, the CFPB released a highly anticipated proposed rule that would ban covered providers of most financial consumer products and services from including mandatory pre-dispute arbitration clauses in future consumer agreements. In addition, the proposed rule would require a covered provider involved in arbitration pursuant to a pre-dispute arbitration agreement to submit specified arbitral records to the CFPB. Following its March 2015 Arbitration Study, the CFPB asserts that the proposed rule would (i) protect consumers’ right to seek justice and relief in court; (ii) deter companies from violating the law, claiming “attention on the practices of one company can affect or influence their business practices and the business practices of other companies more broadly”; and (iii) increase transparency by requiring companies that use arbitration clauses to submit to the CFPB any claims filed or awards issued in arbitration.
The CFPB officially announced its proposed rule during a May 5 field hearing in Albuquerque, New Mexico. In his opening remarks at the field hearing, CFPB Director Cordray opined that, “[i]f arbitration truly offers the benefits that its proponents claim, such as providing a less costly and more efficient means of dispute resolution, then it stands to reason that companies will continue to make it available.” Opponents of the proposal argue that, among other things, by requiring companies to insert language into arbitration clauses that explicitly states the clauses cannot be used to stop consumers from being part of a class action, the CFPB is, in fact, placing a de facto ban on arbitration. In a U.S. Chamber post, Executive Director of Center for Capital Markets Competitiveness Travis Norton, who was present at the CFPB’s field hearing, reasoned that companies can only bear the costs of arbitration because they do not simultaneously have to defend themselves in class actions, writing that “[n]o economically rational company (or individual) is going to spend additional money voluntarily [on arbitration] when it is forced to pay millions in litigation costs imposed by the broken class action system.”
CFPB to Host Field Hearing on Arbitration
On May 5, the CFPB will host a field hearing on arbitration in Albuquerque, New Mexico. Last October, the CFPB assembled its Small Business Review Panel to review proposals to limit pre-dispute arbitration agreements for consumer financial products and services, signaling preliminary stages of the anticipated proposed rulemaking. The May 5 hearing will be the CFPB’s third field hearing on arbitration; the first was in March 2015 and the second in October 2015.
Seventh Circuit Finds No Enforceable Arbitration Agreement Case Involving Chicago-Based Credit Reporting Company
Recently, the U.S. Court of Appeals for the Seventh Circuit issued an opinion affirming a district courts denial of a credit reporting companys motion to compel arbitration in a putative class action. The Seventh Circuit considered whether a particular online process was sufficient to form a contract between the company and its customer. Sgourros v. TransUnion Corp., No. 15-1371 (7th Cir. Mar. 25, 2016). The plaintiff in the case purchased a credit score report from the company that he alleged was inaccurate it was 100 points higher than a lenders report and therefore he alleged that the report was useless. The plaintiff sued the company under various state and federal consumer protection laws. The company sought to compel arbitration, arguing that the plaintiff had agreed to the terms of a service agreement that included a mandatory arbitration clause because he clicked on various acceptance buttons in the online ordering process. In this regard, the company took the position that the plaintiff had agreed to the terms of the service agreement by clicking the I Accept & Continue to Step 3 button. The federal district court disagreed, concluding that no contract had been formed, and the Seventh Circuit affirmed. In reviewing the matter, the appellate court found that the online presentation process was insufficient to form a contract, because the web pages did not include a clear statement that the purchase was subject to the terms and conditions of the service agreement. The court observed that no such statement appeared either in the displayed text of the agreement visible within the scroll box, or in the statement displayed below the scroll box. The company argued that there was additional language in the service agreement stating that the purchase was governed by the service agreement, and the plaintiff should be bound by that language. However, the court held that since the additional language was not readily visible unless the plaintiff scrolled the agreement or opened the printable version, it was insufficient to put him on notice that the service agreement applied to the purchase. The court also observed:
Illinois contract law requires that a website provide a user reasonable notice that his use of the site or click on a button constitutes assent to an agreement. This is not hard to accomplish, as the enormous volume of commerce on the Internet attests. A website might be able to bind users to a service agreement by placing the agreement, or a scroll box containing the agreement, or a clearly labeled hyperlink to the agreement, next to an I Accept button that unambiguously pertains to that agreement. There are undoubtedly other ways as well to accomplish the goal.
Accordingly, the Seventh Circuit found that no enforceable agreement to arbitrate arose between the company and the plaintiff and remanded the case to the District Court for further proceedings on the merits.
CFPB Releases Fact Sheet: Policy Priorities over the Next Two Years
On February 25, the CFPB released a fact sheet outlining its policy priorities over the next two years. The document lists the following nine near-term priority goals: (i) arbitration; (ii) consumer reporting; (iii) debt collection; (iv) demand side consumer behavior; (v) household balance sheets; (vi) mortgages; (vii) open-use credit; (viii) small business lending; and (ix) student lending. Regarding arbitration, the CFPB noted that it “will continue the rulemaking process and propose a rule consistent with its study that will further enable consumers to effectuate their rights and hold institutions accountable for unlawful conduct.” With respect to consumer reporting, the CFPB will focus on issues surrounding the accuracy of consumer reporting and institutions’ dispute resolution processes. In the debt collection space, the CFPB plans to initiate rulemakings on debt collector conduct (including issues relating to the substantiation of consumer debt and the disclosure of information to consumers) while simultaneously pursuing rigorous supervision and enforcement activity to ensure industry compliance. Regarding demand side consumer behavior, the CFPB will focus on financial education for consumers. With respect to household balance sheets, the CFPB will conduct research and data analysis on household financial health and decision making. For mortgages, the CFPB will focus on the implementation of existing rules as well as the supervision and enforcement of issues relating to equal and fair access to credit. In the open-use credit space, the CFPB plans to conduct small-dollar, installment lending, and overdraft market rulemakings while conducting complementary supervision and enforcement work to support its new rules. Regarding small business lending, the CFPB will (i) build a small lending team that will begin conducting research and outreach for a small business lending rulemaking; (ii) employ its consumer response team to build infrastructure to analyze small business complaints; and (iii) examine small business lenders for fair lending compliance. Finally, with respect to student lending, the CFPB will work on servicer alignment as well as supervision and enforcement of servicers’ legal obligations. In addition to these nine priority areas, the CFPB also indicated that it plans to continue to focus on well-established and ongoing work streams, such as fair lending oversight of indirect auto lenders and its rulemaking on prepaid cards.
Second Circuit Upholds District Court Decision to Dismiss Arbitration Case
On November 19, the Court of Appeals for the Second Circuit affirmed the Southern District of New York’s decision to dismiss a case alleging that two leading credit card issuing banks schemed to require that disputes be settled in arbitration, as opposed to class action lawsuits. The plaintiffs challenged the District Court’s decision on the grounds that language in United States v. General Motors Corp. should be used “to adopt a rule that the existence of conspiracy is a legal conclusion subject to review de novo.” Ross v. Citigroup, Inc., No. 14-1610 (2nd Cir. Nov. 19, 2015). Plaintiffs further argued that the District Court’s conclusion that the defendants’ actions did not constitute as conspiracy in violation of the Sherman Act should not be shielded by the “clearly erroneous” test. The District Court analyzed various “plus factors,” including motive, the quantity and nature of inter-firm communications, and whether the arbitration clauses were “artificially standardized” because of an illegal agreement, to determine whether or not conspiracy existed among the credit card issuing banks. The District Court concluded that the credit card issuing banks’ final decision to implement class-action-barring clauses was reached “individually and internally.” Stating that General Motors has never been applied as generously as the plaintiffs argued for it to be, the Second Circuit’s review of the record found the District Court’s conclusion plausible and not “clearly erroneous.”
Alabama District Court Enforces Electronic Arbitration Agreement
On October 13, the Northern District of Alabama entered an order compelling an employer and employee to arbitration where the employer demonstrated the existence of an electronic arbitration agreement. Yearwood v. Dolgencorp, No. 6:15-cv-00898-LSC, 2015 U.S. Dist. LEXIS 138993 (N.D. Ala. Oct. 13, 2015). The employee provided an affidavit denying ever having seen or signed such a form electronically. The court held that under the Alabama version of the Uniform Electronic Transactions Act, the burden of proving attribution of the signature to the employee falls on the employer. In support of its motion to compel arbitration, the employer offered evidence demonstrating its practice of requiring employees to complete a series of electronic forms upon hiring, which included the arbitration agreement. The employer also produced evidence demonstrating that the arbitration agreement was executed by someone using the employee’s unique access credentials (user ID and password) on the employer’s online hiring system, and that the employee’s password had to be re-entered at the time of signing. The employer also produced evidence that the employee agreed to use the electronic signature system and agreed to keep her password confidential. Weighed against the employer's proof of its process and records demonstrating execution, the court held that employee’s blanket denial by affidavit was insufficient to rebut the proof of attribution. The court found that the signature on the arbitration agreement was attributable to the employee and ordered the parties to arbitrate.
CFPB Considering Proposals to Limit Pre-Dispute Arbitration Agreements for Consumer Financial Products and Services, Convenes Small Business Review Panel Seeking Feedback
On October 7, the CFPB issued proposals to limit the use of mandatory pre-dispute arbitration agreements, which it contends are often used to evade class action litigation. Under the proposals, the Bureau would seek to prohibit the use of pre-dispute arbitration agreements in consumer financial contracts, unless the agreements explicitly state that the agreements are not applicable to cases filed as class actions, class certification is denied by a court, or class claims are dismissed by a court. While not prohibiting pre-dispute arbitration agreements in their entirety, for companies that elect to use arbitration agreements in consumer financial contracts, the proposals would require that companies submit to the CFPB arbitration claims filed by consumers and any monetary awards issued therefrom. Furthermore, the CFPB is considering publishing the information submitted by companies on its website.
The Bureau also stated that it will convene a Small Business Review Panel, representing the initial step of a potential rulemaking. The Panel is expected to provide feedback on the impact of the proposals set forth by the Bureau and offer possible alternatives to address arbitration agreements in consumer financial contracts.