I Am the Very Model of a Modern Arbitration Clause
Happy Wednesday, Credit Union Compliance World. As you know, on July 10th, the CFPB finalized its rule on arbitration agreements. We blogged about the basics of the rule and the epic hero's journey that is trying to identify its scope. On Monday, thankfully, the CFPB released its Small Entity Compliance Guide regarding the final arbitration rule. While the amount of footnotes involved in discussing the scope should be a clue to the Bureau that the rule is painfully technical, it is nice to have a version written in Standard American English.
Thanks to the Equifax breach and the breathtaking cascade of bungled responses in its aftermath, arbitration provisions are back in the limelight. If your credit union is seeking to help assist members affected by the breach, visit NAFCU's Equifax Data Breach Resources webpage. If you're angry, know that your feelings are valid and shared. We've written to Congress, the CFPB, the FTC and NCUA to ask them to take action to protect credit unions and their members. In the meantime, perhaps this is a good time to take a deeper look at the arbitration rule's language requirements.
From Agreements to Delegates, In Order Categorical
NAFCU has gotten a few questions about when it is appropriate to use the nine different model clauses included in the rule. Below is a breakdown of the various clauses in the rule and when and how they can be used.
Firstly, all Pre-Dispute Arbitration Agreements entered into on or after March 19, 2018 must include one of two alternative clauses for the agreement:
|
Citation |
Language |
When Required |
|
§1040.4(a)(2)(i) |
“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.” |
Generally, unless other language is applicable. |
|
§1040.4(a)(2)(ii) |
“We are providing you with more than one product or service, only some of which are covered by the Arbitration Agreements Rule issued by the Consumer Financial Protection Bureau. The following provision applies only to class action claims concerning the products or services covered by that Rule: 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.” |
Can be used at the credit union's option as an alternative to the generally required language when the agreement applies to multiple products or services, only some of which are covered under Part 1040. |
In addition to the required clauses discussed above, the Bureau has also identified several optional, add-on clauses:
|
Citation |
Language |
When Required |
|
§1040.4(a)(2)(iv)(A)(1) |
“This provision does not apply to parties that entered into this agreement before March 19, 2018.” |
Optional add-on to the above agreement clauses |
|
§1040.4(a)(2)(iv)(A)(2) |
“This provision does not apply to products or services first provided to you before March 19, 2018 that are subject to an arbitration agreement entered into before that date.” |
Optional add-on to the above agreement clauses |
|
§1040.4(a)(2)(iv)(B) |
“This provision does not apply to persons that are excluded from the Consumer Financial Protection Bureau's Arbitration Agreements Rule.” |
Optional add-on to the above agreement clauses |
Finally, there are two add-on clauses for specific issues:
|
Citation |
Language |
When Required |
|
§1040.4(a)(2)(iv)(B) |
“This provision also applies to the delegation provision.” |
For agreements that contain a delegation provision, the required clause must be included in each delegation provision. Alternatively, credit unions can add this language to the generally required clause to meet that requirement. |
|
§1040.4(a)(2)(vi) |
“However, the defendants in the class action may claim they cannot be sued due to their sovereign immunity. This provision does not create or waive any such immunity.” |
Add-on language applicable for an entity that believes it has sovereign immunity from suit. |
However, suppose a loan is originated by another lender after March 19, 2018, and the loan agreement includes a Pre-Dispute Arbitration Agreement, but it does not include either of the above required clauses. Perhaps the originating lender was exempt.
Imagine that then, a credit union purchases the loan and steps into the shoes of the original lender with regard to the agreement. When the credit union becomes a party to the agreement established on or after March 19, 2018, and the agreement does not contain either of the required clauses, the Bureau requires the credit union to either amend the agreement to add the above clause or to provide the consumer with a written notice within 60 days. If a credit union opts to send the written notice, it must contain the below model language:
|
Citation |
Language |
When Required |
|
§1040.4(a)(2)(iii) |
“We agree not to rely on any pre-dispute arbitration 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.” |
Written notice language applicable when the agreement only applies to covered products and services. |
|
§1040.4(a)(2)(iii) |
“This notice applies only to class action claims concerning the products or services covered by the Arbitration Agreements Rule issued by the Consumer Financial Protection Bureau.” |
Written notice language applicable when the agreement applies to some products, only some of which are covered under Part 1040. |
The final rule and the commentary allow for few other changes; it discusses replacing pronouns and putting it into the same language as the rest of the agreement.
Hope springs eternal that Congress might take action to lift the regulatory burden of this rule with legislation. However, for those of you who are former scouts, you know it's wise to always be prepared. NAFCU members who have questions as they absorb this rule's implications can feel free to reach out to your NAFCU Regulatory Compliance Team.
Elizabeth M. Young LaBerge,