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CFPB Sets Date for Second Field Hearing on Arbitration
On September 22, via blog post, the CFPB announced that it will host its second field hearing addressing pre-dispute arbitration agreements in various consumer financial contracts. Scheduled for October 7, 2015, the hearing will take place in Denver, Colorado and feature remarks from CFPB Director Richard Cordray, testimony from consumer groups, industry representatives, and members of the public. Previous InfoBytes coverage on arbitration can be seen here.
U.S. House Appropriations Committee Approves Amendment to Delay CFPB Arbitration Rule
On June 17, the U.S. House Appropriations Committee approved an amendment that would require the CFPB to conduct a peer-reviewed cost-benefit analysis of the use of arbitration agreements prior to issuing a final rule. The amendment is tied to a fiscal year 2016 financial services spending bill, which would bring the Bureau under the congressional appropriations process. U.S. House Representatives Steve Womack (R-AR) and Tom Graves (R-GA) brought forth the amendment, which was adopted by the Committee on a voice vote.
CFPB Releases Final Study on Arbitration
On March 10, the CFPB announced the release of its final arbitration study, accompanied by a fact sheet, to coincide with its field hearing held in Newark, NJ. The study examined approximately 850 consumer financial agreements, of which almost 50% were credit card agreements, to analyze the prevalence of arbitration clauses and their terms. Among other data, the Bureau also reviewed over 1,800 arbitration disputes, more than 3,400 individual federal court lawsuits, 42,000 credit card cases filed in small claims court, and 420 class action settlements filed in federal courts.
CFPB Schedules Arbitration Field Hearing
The CFPB announced on February 23 that it plans to host a field hearing on the issue of arbitration provisions within various consumer financial contracts. According to the CFPB’s blog post, the hearing will take place on March 10 in Newark, New Jersey, and will feature remarks from CFPB Director Richard Cordray, testimony from consumer groups, industry representatives, and members of the public. The Dodd-Frank Act instructs the CFPB to study the use of pre-dispute arbitration provisions in consumer financial contracts (and provide a Report to Congress) and gives the CFPB the authority to issue regulations on the use of arbitration clauses if the CFPB chooses. In December 2013, the CFPB issued a report on its preliminary findings, which indicated that approximately 9 out of 10 arbitration clauses used by large banks in credit card and checking account agreements prevent consumers from participating in class actions.
Eleventh Circuit Ruling Gives Large Bank Another Chance at Arbitration
On an appeal of five putative class actions alleging the unlawful charging of overdraft fees on consumer checking accounts, On February 10, the U.S. Court of Appeals for the Eleventh Circuit vacated a lower court order holding that the defendant’s waiver of its right to compel arbitration with the named plaintiffs precludes the Bank from compelling arbitration with any unnamed members of the putative classes. In re Checking Account Overdraft Litigation, No. 13-12082 (11th Cir. Feb. 10, 2015). The panel held that the lower court lacked jurisdiction to resolve the question. Additionally, it held that the named plaintiffs lacked standing, under Article III of the U.S. Constitution, to advance claims on behalf of those unnamed putative class members, who—in the absence of class certification—have “no justiciable controversy” with the Bank.
Third Circuit Affirms Whistleblowers Must Arbitrate Under Dodd-Frank
On December 8, the U.S. Court of Appeals for the Third Circuit held that application of Dodd-Frank’s Anti-Arbitration provision did not apply to causes of action asserted under the Anti-Retaliation Dodd Frank Provision due to the limiting language of the arbitration law. Khazin v. TD Ameritrade Holding Corp, No. 14-1689 (3rd Cir. Dec.8, 2014). In 2013, the plaintiff filed suit in the District of New Jersey alleging that he had been fired in the preceding year for whistleblowing. According to the complaint, the retaliation occurred after the plaintiff questioned a supervisor about the pricing of a financial product that did not comply with relevant securities regulations. The District Court ruled that Dodd Frank’s Anti-Arbitration Provision did not prohibit the enforcement of arbitration agreements that were signed before the enactment of Dodd-Frank. Rather than deciding on the timing issue, however, the Court of Appeals upheld the decision on statutory construction grounds based on the limiting language of the Anti-Arbitration provision indicating that it only applied to causes of action contained within the same section, and not all allegations under Dodd-Frank.
Eleventh Circuit Refuses To Compel Arbitration In Dispute Between Loan Servicer and Borrower
On October 2, the Eleventh Circuit affirmed a district court’s decision refusing to compel arbitration sought by a servicer in a dispute with a borrower over the terms of a loan agreement. Inetianbor v. Cashcall, Inc. No. 13-13822 (11th Cir. 2014). In Inetianbor, the plaintiff and the servicer had a dispute as to whether the borrower had satisfied his obligations under the terms of the loan agreement. When the borrower refused to pay amounts the servicer believed it was due, the servicer reported the purported default to the various credit agencies. The borrower sued the servicer who subsequently moved to compel arbitration under the terms of the loan agreement. The loan agreement’s forum selection clause required any dispute be resolved in arbitration by the Cheyenne River Sioux Tribal Nation (the “Tribe”). The Tribe, however, declined to arbitrate the dispute. The district court allowed the suit to proceed in federal court on the grounds that the arbitral forum was not available to hear the dispute. On appeal, the Eleventh Circuit affirmed the district court’s refusal to compel arbitration. The Eleventh Circuit held that the forum selection clause was integral to the loan’s arbitration provision. Because the arbitral forum was unavailable to hear the dispute, arbitration was not an option under the terms of the agreement and the district court was correct in refusing to compel arbitration.
New AAA Consumer Arbitration Rules Effective September 1
The American Arbitration Association (AAA) launched new Consumer Arbitration Rules that became effective on September 1. The new Consumer Arbitration Rules, comprised of 55 rules, replace the eight rules in the Consumer-Related Disputes Supplementary Procedures and apply to cases filed on or after September 1, 2014. Most notably under the new rules, the AAA will not administer consumer arbitration for a company unless and until the company submits its arbitration agreement to the AAA for review and the AAA determines that such agreement substantially complies with the AAA’s Consumer Due Process Protocol guidelines. Once reviewed and approved, the name of the business, the address, and the consumer arbitration clause, along with any related documents deemed necessary by the AAA will appear on the newly established and publicly-available Consumer Clause Registry (Registry). There is a non-refundable $500 annual fee to conduct the review and maintain the Registry. However, at least initially, a $650 fee paid in 2014 will be sufficient to maintain the business in the Registry through 2015. If a business does not submit its arbitration agreement for review and a consumer arbitration is filed with the AAA, the AAA will conduct an expedited review of the business’ arbitration agreement at that time, which would require an additional $250 in expediting fees.
Ninth Circuit Affirms Decision Not To Enforce Browsewrap Arbitration Agreement
On August 18, the U.S. Court of Appeals for the Ninth Circuit affirmed a district court’s decision not to enforce a retailer’s online “browsewrap” arbitration agreement because the retailer failed to provide adequate constructive notice. Nguyen v. Barnes & Noble Inc., No. 12-56628,2014 WL 4056549 (9th Cir. Aug. 18, 2014). The consumer filed suit alleging that the retailer’s cancellation of his online purchase of two sale items caused him to buy substitute products at a greater expense. The retailer responded that by making the purchase through the company’s website, the consumer accepted the website’s Terms of Use, which contained an agreement to arbitrate any claims arising out of use of the website. Although this “browsewrap” agreement provided that any user of the website was deemed to have accepted the agreement’s terms by, among other things, making a purchase, the district court held that the consumer did not have constructive notice of the Terms of Use because the site did not require that the consumer affirmatively assent to them. The Ninth Circuit agreed, holding that “where a website makes its terms of use available via a conspicuous hyperlink on every page of the website but otherwise provides no notice to users nor prompts them to take any affirmative action to demonstrate assent, even close proximity of the hyperlink to relevant buttons users must click on—without more—is insufficient to give rise to constructive notice.” The court also rejected the retailer’s argument that the customer had constructive notice of the browsewrap terms based on his prior experience with browsewrap agreements found on other sites, including some popular social media sites.
CFPB Director Announces Prepaid Card Rule Delay, Discusses Other Initiatives
On June 10, CFPB Director Richard Cordray testified before the Senate Banking Committee in connection with the CFPB’s recently released Semiannual Report to Congress. The hearing covered a broad range of topics, including, among several others, prepaid cards, student loans, small dollar loans, and arbitration clauses.
Prepaid Cards
Director Cordray advised in response to an inquiry from Senator Menendez (D-NJ) that the CFPB’s prepaid card proposed rule, which the CFPB recently indicated could be released this month, likely will not come until the end of the summer. He reassured the Senator that the delay does not indicate any particular problem about the rulemaking, only that certain of the issues raised have been “hard to work through.”
Student Loans
Senator Menendez raised concerns about “automatic defaults” in the student loan context, an issue raised in the CFPB Student Loan Ombudsman’s mid-year report on student loans. In that report, the CFPB stated, based on an unidentified number of consumer complaints, that “industry participants are automatically placing loans in default – even when a borrower is paying as agreed” – in circumstances such as when a co-signer dies or goes into bankruptcy. The Ombudsman acknowledged that financial institutions may have legitimate business purposes for exercising contractual acceleration options which demand the full balance of a loan when a borrower’s co-signer has died or filed for bankruptcy. Senator Mendendez described legislation to address the issue. Senator Brown (D-OH) also focused on student loan issues, picking up on the CFPB’s common refrain that problems in the student loans servicing market are similar to those seen in mortgage servicing. He called for the CFPB to establish student loan servicing standards. Director Cordray acknowledged that the two markets are different, but pointed to “poor customer service, problems with transfers, lack of information, and harm to consumers” as “eerie” examples of problems seen in both markets.
Small Dollar Loans
On small dollar loans, Senator Brown expressed concern that an eventual CFPB rule on traditional payday loans could lead to arbitrage and leave gaps in consumer protection related to other small dollar loans, including, for example, online loans, auto title loans, and installment loans. Director Corday described this issue as one of “extreme importance” as the CFPB addresses the small dollar loan market. He stated that implementation of the Military Lending Act has given rise to similar problems, which the CFPB is working with the Department of Defense to address. He explained that the CFPB’s process on a payday loan rule is taking longer as the Bureau attempts to deal with these issues, but believes “it's well worth a little additional time in order to make sure that what we do won't be made a mockery of by people circumventing it through just transforming their product slightly.”
Arbitration
Senator Warren (D-MA) turned her attention, which recently has focused on student loans, to the issue of arbitration. She stated that “arbitration stacks the deck against customers in favor of large corporations,” and that it is “no surprise that many big banks, and other big corporations, force customers to agree to arbitration clauses to get credit cards, or open checking accounts, knowing that this means that the customer will have no real remedy if things go wrong.” Director Cordray responded that in hearing from corporations and consumers on the issue of arbitration clauses, there is almost no relation between the two, which is contrary to CFPB’s experience on other issues. He explained that while the Dodd-Frank Act barred arbitration in mortgage contracts, he only directed the CFPB to study and consider interventions related to arbitration in other consumer finance contracts. He said the CFPB has pursued a very thorough process to conduct the required study, which the Director believes will be completed this year. Senator Warren pressed him to commit to new rules if the study presents evidence such rules are required. Director Cordray declined to describe any possible policy judgments or actions that could follow the study, but promised the CFPB will fulfill its obligation to engage in policymaking that appropriately reflects the conclusions of the study.