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 coulddrastically affect your credit union's ability to use anarbitration clause to ban consumer class actions.

The CFPB has announced that it intends to propose rules thatprohibit financial services companies from including class actionwaivers in the arbitration clauses of their agreements withconsumers. The ban would apply to most consumer financial productssuch as credit cards, checking and other deposit accounts, prepaidcards, auto loans, specialty finance loans, installment loans andprivate student loans.

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

In the bureau's view, consumers are better protected and themarket fairer for those companies that comply with the law whenconsumers can obtain relief by grouping their disputes againstproviders of consumer financial products/services in privateproceedings, including litigation. The CFPB believes thatclass actions have historically provided significant benefits toconsumers through cash settlements and other benefits and fromagreements by companies to stop harmful behavior. The bureau alsobelieves that class action settlement agreements also have adeterrent impact on the behavior of other companies.

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

1. Prevents consumers from obtaining remedies when they are harmedby consumer financial product/service providers;
2. Reduces the deterrent effect of class actions;
3. Deprives consumers of positive changes companies may make toavoid liability or remediate harm; and
4. May facilitate the adoption by companies of business practicesthat could harm consumers by reducing the risks associated withunlawful behavior.

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

In light of its findings, the CFPB is considering a proposalthat would require any arbitration agreement included in a contractfor a consumer financial product or service to explicitly providethat it is inapplicable to cases filed in court on behalf of aclass unless and until class certification is denied or the classclaims are dismissed. Thus, enactment of the rule would mean thatcredit unions will be prohibited from including class actionwaivers in their arbitration clauses. The CFPB has indicated thatthe prohibition will apply only to arbitration agreements enteredinto 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 consumerpurposes: Extensions of credit under the Truth in Lending Act andRegulation Z and/or the Equal Credit Opportunity Act and RegulationB, depository accounts under the NCUA's implementing regulations,products/services subject to the Electronic Fund Transfer Act andRegulation E, and transmission or exchanges of funds or checkcashing 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 toinclude class action waivers of any kind in the arbitration clausesof your customer agreements. What this will mean to any particularcredit union depends, of course, on many factors. However, atakeaway for everyone is and should be a renewed and more robustfocus on compliance. Thus, credit unions should review theirpolicies and procedures with the knowledge that class actions will,once again, be available to consumers and to the lawyers whorepresent 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'tbe doing?
• Is your credit union not doing anything it probably should bedoing?

If the answer to either of these questions is yes, credit unionsshould revise their policies and procedures, as appropriate. Theyshould also ensure that employees who implement them are both awareof the policies and procedures (and any changes that have beenmade), and also are actually following those procedures at alltimes.

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

Ensuring that proper procedures are established, implemented anddocumented has, of course, always been essential. However, ittakes on increased significance when and if consumer class actionsare easier to assert because the magnitude of non-compliance (froma financial, resource-draining and public relations perspective) islikely to be dramatically higher.

Finally, it's important to note that the validity of the newrule may very well be at issue immediately upon enactment. Ifit is, enforcement of the rule may be delayed until a decision ismade or may never occur if the rule is ultimately invalidated. Thevalidity question will likely be based upon the fact that theUnited States Supreme Court has recently recognized and affirmedthe benefits of arbitration and has struck down efforts to limitarbitration clauses. (In other words, unlike the CFPB, the SCOTUSappears to be a fan of arbitration clauses.) On the other hand, theCFPB has been given explicit authority to prohibit or imposeconditions or limitations on the use of arbitration agreementspertaining to consumer financial products or services.

Thus, the bureau is statutorily authorized to act if it findsthat the prohibition or imposition of conditions or limitations isin the public interest and for the protection of consumers. When itdiscussed its proposed rule, the CFPB could not have been clearerwith regard to its intent, i.e., it believes that having the rightto bring class actions protects consumers and is in their bestinterest. Thus, the CFPB is acting under the specific mandate ofthe statute that created it. Its enactment of this rule is likelyto present an interesting issue for the SCOTUS to decide. From apractical perspective, it is imperative that credit unions stayabreast of any and all developments regarding the rule's validityand enforceability.

Kathy Delaney Winger is a financial services and datasecurity attorney who represents banks, credit unions, financialservices companies and businesses in commercial and corporatetransactions, with a focus on compliance. She can be reachedat [email protected]or 520-721-1900, ext. 221.