CFPB releases preliminary results of arbitration study

By Christopher Reese

On December 12, 2013, the Consumer Financial Protection Bureau (CFPB) released the preliminary results of its investigation into the use of arbitration agreements in connection with consumer financial products or services. Section 1028(a) of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 required the CFPB to conduct such an investigation and provide a report to Congress summarizing the results.  The CFPB noted that its analysis is preliminary and is subject to change as more results are received.

The preliminary report is likely just the first step toward the issuance of regulations by the CFPB prohibiting or regulating the use of arbitration clauses in agreements concerning consumer financial products and services.  Section 1028(b) of the Dodd-Frank Act permits the CFPB to impose such regulations, if it finds that they are in the public interest and for the protection of consumers based on the results of its study.

The CFPB focused its initial investigation on the use of arbitration agreements in connection with three consumer financial products and services: credit cards, checking accounts, and general purpose reloadable prepaid cards.  The CFPB noted that its investigation going forward may look at additional consumer financial products, such as student loans.  For this preliminary report, the CFPB looked only at what it called the “front-end” of disputes involving consumers – “who files these disputes, in what numbers, against whom, and about what.”  The report states that the CFPB intends to address the “back-end” in the future – “what happens, in how long, and at what cost.”  Additionally, the CFPB notes that it intends to look more deeply at consumer cases filed in federal and state courts other than small claims courts, along with additional investigation into consumer class actions.

The CFPB found that larger bank issuers of credit cards are more likely to include arbitration clauses in their credit card agreements than smaller bank issuers and credit unions.  This means that even though most issuers of credit cards do not include arbitration clauses in their credit card agreements, a majority of outstanding credit card loans are subject to arbitration agreements because issuers of large numbers of credits cards use such agreements.  The CFPB also found that larger banks tend to include arbitration clauses in their consumer checking contracts more often than do smaller banks and credit unions.  The result, again, is that even though most banks and credit unions do not include arbitration clauses in their checking account agreements, a significant percentage of insured deposits in checking accounts are subject to arbitration agreements.  As for prepaid cards, arbitration clauses are included in most agreements.

Ninety percent of the arbitration agreements reviewed by the CFPB include provisions prohibiting class arbitration, and the American Arbitration Association is the arbitration administrator most frequently selected.  Most of the arbitration agreements also contain small claims court carve-outs, which allow either party to file an action in small claims court, and thus avoid arbitration, where the disputed amount falls within the jurisdiction of the relevant small claims court.  Approximately one quarter of the arbitration agreements give consumers the option to opt out of them, and most require the consumer to opt out within either 30 or 60 days.  Very few of the arbitration agreements place time limits on the filing of claims in arbitration, while most provide disclosure to consumers of certain important differences between arbitration and litigation, such as the lack of a jury trial, limited discovery, and limited rights to appeal.

We will continue to closely monitor the CFPB’s activity in this area and will be prepared to provide analysis of any regulations the CFPB may issue based on its findings.

Consumer Financial Protection Bureau Puts Creditors on Notice of Rulemaking Under the Fair Debt Collection Practices Act

By Edward J. Sholinsky

Last week, the Consumer Financial Protection Bureau issued a news release and Advance Notice of Proposed Rulemaking that signals the Bureau’s intention to broadly exercise its claimed power under the Fair Debt Collection Practices Act to regulate creditors and debt collectors.  Most notably, the Bureau is claiming the power to regulate creditors.  Although creditors generally are exempted from liability under the Act, the 113-page Notice touches on nearly every aspect of debt collection under the Act, seeking comments on a wide variety of topics from traditional written notices to how contemporary communication technology – like social media, text messaging, and cell phones – affect debt collection practices.

Even while acknowledging that Congress specifically excluded creditors from the Act’s reach, the Bureau stated that it “believes it is important to examine whether rules covering the conduct of creditors . . . are warranted,” citing the Dodd-Frank Act as its authority for doing so.  The Bureau’s potential reach here is staggering and could impact creditors, like retailers, medical providers, and small business, which would not likely have considered themselves subject to the Bureau’s jurisdiction or the Act itself. The Bureau signaled earlier this fall that it wished to expand its reach when it claimed supervisory authority over any furnisher of information to credit agencies under the Fair Credit Reporting Act.  We discussed that bulletin in an earlier blog post.  This Notice seems to be the next step in the Bureau’s broad claim to jurisdiction over consumer creditors.

While far ranging, the Notice focuses specific attention on the adequacy of information that creditors provide to collectors and buyers of debts, and how creditors transmit that information.  The questions posed by the Bureau suggest that it is contemplating rules governing how creditors provide information to debt collectors and buyers when assigning or selling a debt and the oversight creditors have over the collection of the sold or assigned debt.  Additionally, the Bureau dedicated a section of the Notice to technology that both creditors and debt collectors and buyers can use to share information, and privacy concerns relating to that technology.

This Notice is the second signal since September that the Bureau is looking to expand its purview in the area of debt collection to creditors, who generally are considered to be outside of the reach of federal debt collection laws.

The CFPB Offers Guidance to Companies that Furnish Information to Consumer Reporting Agencies

By Edward J. Sholinsky

On September 4, 2013 the Consumer Financial Protection Bureau issued Bulletin 2013-09, which addresses the obligation of “furnishers” under the Fair Credit Reporting Act (FCRA) to investigate disputed information in a consumer’s credit report.

When, under FCRA, a consumer disputes adverse information on his or her credit report, the credit reporting agencies are supposed to forward any documents and information provided by the consumer concerning the dispute to the business that furnished the information.  According to the Bulletin, the Bureau “expects” furnishers to comply with FCRA by:  (1) having a “system reasonably capable of receiving” documents and information from the credit reporting agencies concerning disputes; (2) investigating disputes, which includes reviewing the information provided by the agencies as well as their own information; (3) reporting the outcome of investigations to the agencies; (4) correcting “inaccurate and incomplete” information reported by the agencies; and (5) “[m]odifying” and “deleting,” inaccurate and incomplete information, and “permanently blocking the reporting of the information” that is inaccurate, incomplete or unverified.  The Bulletin warns that furnishers not currently complying with these standards “should take immediate steps to comply with the requirements of the law.”

The Bulletin states that the Bureau will “evaluate compliance” with these requirements by all “furnishers subject to its supervisory and enforcement authorities.”  Notably, the Bulletin contains no description of the furnishers that the Bureau views as being “subject to its supervisory and enforcement authorities.”  This raises the possibility that the Bureau intends the Bulletin to apply not only to businesses generally understood to fall within the Bureau’s supervisory reach — such as large banks — but to any retailer or small business that reports information about a customer to a credit reporting agency.

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