Are you too big to fail? Probably not.

Are you too big for arbitration? Probably.*

*If the new rule discussed in this article is enacted, it could drastically affect your credit union's ability to use an arbitration clause to ban consumer class actions.

The CFPB has announced that it intends to propose rules that prohibit financial services companies from including class action waivers in the arbitration clauses of their agreements with consumers. The ban would apply to most consumer financial products such as credit cards, checking and other deposit accounts, prepaid cards, auto loans, specialty finance loans, installment loans and private student loans.

This announcement came on the heels of the CFPB's three-year study of arbitration agreements and other methods for dispute resolution in the consumer financial services/product market. In that study, the bureau found, among other things, that very few consumers bring formal individual disputes against their financial service providers. The bureau did not believe that this was because fewer consumers had been harmed. Instead, it found that consumers' individual injuries were likely to be perceived as too small to make it worth their time or effort to pursue a remedy and/or to find an attorney to handle their cases.

In the bureau's view, consumers are better protected and the market fairer for those companies that comply with the law when consumers can obtain relief by grouping their disputes against providers of consumer financial products/services in private proceedings, including litigation. The CFPB believes that class actions have historically provided significant benefits to consumers through cash settlements and other benefits and from agreements by companies to stop harmful behavior. The bureau also believes that class action settlement agreements also have a deterrent impact on the behavior of other companies.

Thus, in the CFPB's opinion, a contractual prohibition on class actions:

Prevents consumers from obtaining remedies when they are harmed by consumer financial product/service providers;
Reduces the deterrent effect of class actions;
Deprives consumers of positive changes companies may make to avoid liability or remediate harm; and
May facilitate the adoption by companies of business practices that could harm consumers by reducing the risks associated with unlawful behavior.

Not surprisingly, the CFPB is clearly not a fan of class action waivers.

In light of its findings, the CFPB is considering a proposal that would require any arbitration agreement included in a contract for a consumer financial product or service to explicitly provide that it is inapplicable to cases filed in court on behalf of a class unless and until class certification is denied or the class claims are dismissed. Thus, enactment of the rule would mean that credit unions will be prohibited from including class action waivers in their arbitration clauses. The CFPB has indicated that the prohibition will apply only to arbitration agreements entered into at least 180 days from the rule's effective date.

Credit unions will be subject to the new rule if they provide, without limitation, the following products/services for consumer purposes: Extensions of credit under the Truth in Lending Act and Regulation Z and/or the Equal Credit Opportunity Act and Regulation B, depository accounts under the NCUA's implementing regulations, products/services subject to the Electronic Fund Transfer Act and Regulation E, and transmission or exchanges of funds or check cashing under Dodd-Frank.

What Should You Do Now?

If your credit union falls within the purview of the new rule, six months after its enactment, you will no longer be permitted to include class action waivers of any kind in the arbitration clauses of your customer agreements. What this will mean to any particular credit union depends, of course, on many factors. However, a takeaway for everyone is and should be a renewed and more robust focus on compliance. Thus, credit unions should review their policies and procedures with the knowledge that class actions will, once again, be available to consumers and to the lawyers who represent those consumers on a class-wide basis. With that in mind, you should ask yourself two questions:

Is your credit union doing anything that it probably shouldn't be doing?
Is your credit union not doing anything it probably should be doing?

If the answer to either of these questions is yes, credit unions should revise their policies and procedures, as appropriate. They should also ensure that employees who implement them are both aware of the policies and procedures (and any changes that have been made), and also are actually following those procedures at all times.

The bottom line here is that all of a credit union's practices, policies and procedures must now be evaluated in terms of their potential to serve as a basis for a class action. It can be extremely helpful if you can establish that an event of non-compliance is an isolated incident attributable to an employee's failure to follow or implement proper policies and procedures rather than a systematic, company-wide deficiency.

Ensuring that proper procedures are established, implemented and documented has, of course, always been essential. However, it takes on increased significance when and if consumer class actions are easier to assert because the magnitude of non-compliance (from a financial, resource-draining and public relations perspective) is likely to be dramatically higher.

Finally, it's important to note that the validity of the new rule may very well be at issue immediately upon enactment. If it is, enforcement of the rule may be delayed until a decision is made or may never occur if the rule is ultimately invalidated. The validity question will likely be based upon the fact that the United States Supreme Court has recently recognized and affirmed the benefits of arbitration and has struck down efforts to limit arbitration clauses. (In other words, unlike the CFPB, the SCOTUS appears to be a fan of arbitration clauses.) On the other hand, the CFPB has been given explicit authority to prohibit or impose conditions or limitations on the use of arbitration agreements pertaining to consumer financial products or services.

Thus, the bureau is statutorily authorized to act if it finds that the prohibition or imposition of conditions or limitations is in the public interest and for the protection of consumers. When it discussed its proposed rule, the CFPB could not have been clearer with regard to its intent, i.e., it believes that having the right to bring class actions protects consumers and is in their best interest. Thus, the CFPB is acting under the specific mandate of the statute that created it. Its enactment of this rule is likely to present an interesting issue for the SCOTUS to decide. From a practical perspective, it is imperative that credit unions stay abreast of any and all developments regarding the rule's validity and enforceability.

Kathy Delaney Winger is a financial services and data security attorney who represents banks, credit unions, financial services companies and businesses in commercial and corporate transactions, with a focus on compliance. She can be reached at kdwinger@mungerchadwick.com or 520-721-1900, ext. 221.

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Too Big to Fail &hellip; Too Big for Arbitration?

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