Compliance Blog

On July 10^th, the CFPB finalized its rule on arbitration agreements. On July 19^th, the final rule was published in the Federal Register. If you haven't had a change to read it yet, prepare yourself -- it's already a CFPB classic. The final rule establishes Part 1040, which consists of 5 sections regarding the use of arbitration agreements and reporting of arbitration outcomes.

Despite the fact that it only establishes five sections… it still clocks in at 775 pages, making it longer than Ayn Rand's The Fountainhead (and, coincidentally, just as easy to read). In typical CFPB fashion, just understanding the scope of products and services covered in the regulatory text requires cross-referencing multiple portions of the U.S. Code (which then contain their own cross-references) and multiple regulations. It leaves you feeling a bit like this:

Definitions and Coverage in Sections 1040.2 and 1040.3

The general coverage of the rule (in extreme summary) is anyone that provides financial products or services to consumers primarily for personal, family, or household purposes -- or anyone that offers certain ancillary services to a provider of those products or services to consumers. The definition of consumer refers only to individuals, not legal entities, so the rule would not apply to incorporated member businesses or trusts.

Among the broad list of financial products and services included in coverage is the majority of credit union offerings, including deposit accounts covered by Truth in Savings and/or Regulation E, loans, check cashing and fund transfer services, and automobile leasing. Providers may also be covered if they offer certain ancillary services to institutions that offer these products, like settlement services, loan servicing, consumer reporting and debt collection. For the sake of clarity from here on out, I'm going to refer to credit unions that are providers of covered products and services under Part 1040 as "credit unions."

Requirements of Section 1040.4

Section 1040.4(a) prohibits credit unions from relying on arbitration agreement provisions with respect to any class action suits regarding the products and services that are covered. It also requires that any arbitration agreements contain the following language:

“We agree that neither we nor anyone else will rely on this agreement to stop you from being part of a class action case in court. You may file a class action in court or you may be a member of a class action filed by someone else.”

There is separate language if the agreement includes products or services not covered by the rule, or if the agreement was originated by another party. The Bureau also offers some fun optional add-ons like:

“This provision does not apply to parties that entered into this agreement before March 19, 2018.”

Section 1040.4(b) contains the requirements for submitting records from court and arbitration proceedings. These requirements apply to any claim filed in arbitration in connection with a covered product or service that has an arbitration provision under Part 1040. In each of these cases, the section requires a credit union to submit:

• The initial claim and any counterclaim;
• Any answers to the above claims;
• The pre-dispute arbitration agreement;
• The judgment and/or award issued by the arbitrator;
• Any communication refusing or dismissing a case due to the credit union's failure to pay fees;
• Any communication from the arbitrator indicating that the arbitration agreement does not comply with applicable fairness principles, rules or other requirements for arbitration; and
• Any court filings relying on the arbitration to support dismissal, deferral or stay.

The section requires these to be provided to the Bureau within 60 days of filing the applicable document with the court or arbitrator, and allows for the redaction of certain information. The Bureau intends to post these records on the internet, and sets deadlines for itself in doing so.

Effective Dates of Section 1040.5

The rule becomes effective 60 days after publication, i.e. September 18, 2017. However, section 1028 of the Dodd-Frank Act, which was the provision requiring the CFPB to consider arbitration agreement regulations, stated that the provision would not apply to agreements until "after the end of the 180-day period beginning on the effective date of the regulation." To accommodate this delay period, the text of section 1040.5(a) specifies that it only applies to pre-dispute arbitration agreements entered into on, or after, March 19, 2018.

There is an exception for agreements already packaged into general-purpose prepaid cards where the consumer for the card is unknown. If the consumer becomes known and the credit union can contact the consumer in writing, it must amend the arbitration agreement to contain the appropriate language within 30 days of obtaining that contact information.

The commentary discusses when a pre-dispute arbitration agreement is "entered into." Obviously, this means when a new agreement is established, but it also includes when a credit union provides a member with a new covered product or service that is subject to a preexisting arbitration agreement, or when the credit union purchases a loan and obtains the rights under a preexisting arbitration agreement.

The commentary also clarifies instances that are not "entering into" an arbitration agreement, including modifying or amending the terms of a current loan subject to a preexisting arbitration agreement.

We are still digesting this rule and, given the Bureau's appetite for hyper-technical requirements, you will probably be hearing more from us on it as we pick it apart.

NAFCU's Annual Federal Reserve Survey

In preparation for NAFCU’s annual meeting with the Federal Reserve, we would like to know your opinion on a variety of topics, including lending, liquidity and housing conditions, as well as a number of regulatory issues and strategic challenges. Your responses to these survey questions are very important to both the Federal Reserve Board and to the credit union community, and every survey response is helpful and greatly appreciated! The survey results will be summarized in our annual Report on Credit Unions, a publication referenced by the Treasury Department in their recent study. Participants will receive a free copy of the 2017 report later this year.

The deadline for the survey is August 25, 2017. Participants can either complete the survey online or download a fillable pdf version.