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BUREAU OF CONSUMER FINANCIAL agreements that provide for the collects on its Web site with appropriate PROTECTION arbitration of any future disputes redactions as warranted, to provide between consumers and providers of greater transparency into the arbitration 12 CFR Part 1040 certain consumer financial products and of consumer disputes. [Docket No. CFPB–2016–0020] services. The final rule applies to providers of Congress directed the Bureau to study certain consumer financial products and RIN 3170–AA51 these pre-dispute arbitration agreements services in the core consumer financial in the Dodd-Frank Wall Street Reform markets of lending money, storing Arbitration Agreements and Consumer Protection Act (Dodd- money, and moving or exchanging 2 AGENCY: Bureau of Consumer Financial Frank or Dodd-Frank Act). In 2015, the money, including, subject to certain Protection. Bureau published and delivered to exclusions specified in the rule, Congress a study of arbitration (Study).3 ACTION: Final rule; official providers that are engaged in: In the Dodd-Frank Act, Congress also • interpretations. Extending consumer credit, authorized the Bureau, after completing participating in consumer credit SUMMARY: Pursuant to section 1028(b) of the Study, to issue regulations decisions, or referring or selecting the Dodd-Frank Wall Street Reform and restricting or prohibiting the use of creditors for non-incidental consumer Consumer Protection Act, the Bureau of arbitration agreements if the Bureau credit, each when done by a creditor Consumer Financial Protection (Bureau) found that such rules would be in the under Regulation B implementing the is issuing this final rule to regulate public interest and for the protection of Equal Credit Opportunity Act (ECOA), arbitration agreements in contracts for consumers.4 Congress also required that acquiring or selling consumer credit, specified consumer financial product the findings in any such rule be and servicing an extension of consumer and services. First, the final rule consistent with the Bureau’s Study.5 In credit; prohibits covered providers of certain accordance with this authority, the final • extending or brokering automobile consumer financial products and rule issued today imposes two sets of leases as defined in Bureau regulation; services from using an agreement with limitations on the use of pre-dispute • providing services to assist with a consumer that provides for arbitration arbitration agreements by covered debt management or debt settlement, to of any future dispute between the providers of consumer financial modify the terms of any extension of parties to bar the consumer from filing products and services. First, the final consumer credit, or to avoid foreclosure, or participating in a class action rule prohibits providers from using a and providing products or services concerning the covered consumer pre-dispute arbitration agreement to represented to remove derogatory financial product or service. Second, the block consumer class actions in court information from, or to improve, a final rule requires covered providers and requires most providers to insert person’s credit history, credit record, or that are involved in an arbitration language into their arbitration credit rating; pursuant to a pre-dispute arbitration agreements reflecting this limitation. • providing directly to a consumer a agreement to submit specified arbitral This final rule is based on the Bureau’s consumer report as defined in the Fair records to the Bureau and also to submit findings—which are consistent with the Credit Reporting Act (FCRA), a credit specified court records. The Bureau is Study—that pre-dispute arbitration score, or other information specific to a also adopting official interpretations to agreements are being widely used to consumer derived from a consumer file, the regulation. prevent consumers from seeking relief except for certain exempted adverse from legal violations on a class basis, DATES: Effective date: This regulation is action notices (such as those provided and that consumers rarely file effective September 18, 2017. by employers); Compliance date: Mandatory individual lawsuits or arbitration cases • providing accounts under the Truth compliance for pre-dispute arbitration to obtain such relief. in Savings Act (TISA) and accounts and Second, the final rule requires agreements entered into on or after remittance transfers subject to the providers that use pre-dispute March 19, 2018. Electronic Fund Transfer Act (EFTA); arbitration agreements to submit certain • FOR FURTHER INFORMATION CONTACT: transmitting or exchanging funds records relating to arbitral and court (except when necessary to another Benjamin Cady and Lawrence Lee proceedings to the Bureau. The Bureau Counsels; Owen Bonheimer, Eric product or service not covered by this will use the information it collects to rule offered or provided by the person Goldberg and Nora Rigby Senior continue monitoring arbitral and court Counsels, Office of Regulations, transmitting or exchanging funds), proceedings to determine whether there certain other payment processing Consumer Financial Protection Bureau, are developments that raise consumer _ services, and check cashing, check at 202–435–7700 or cfpb reginquiries@ protection concerns that may warrant cfpb.gov. collection, or check guaranty services further Bureau action. The Bureau is consistent with the Dodd-Frank Act; SUPPLEMENTARY INFORMATION: also finalizing provisions that will and require it to publish the materials it I. Summary of the Final Rule • collecting debt arising from any of the above products or services by a On May 24, 2016, the Bureau of 2 Public Law 111–203, 124 Stat. 1376 (2010), provider of any of the above products or Consumer Financial Protection section 1028(a). 3 services, their affiliates, an acquirer or published a proposal to establish 12 Bureau of Consumer Fin. Prot., ‘‘Arbitration Study: Report to Congress, Pursuant to Dodd-Frank purchaser of consumer credit, or a CFR part 1040 to address certain aspects Wall Street Reform and Consumer Protection Act person acting on behalf of any of these of consumer finance dispute § 1028(a),’’ (2015), available at http:// persons, or by a debt collector as resolution.1 Following a public files.consumerfinance.gov/f/201503_cfpb_ defined by the Fair Debt Collection comment period and review of arbitration-study-report-to-congress-2015.pdf. Specific portions of the Study are cited in this final Practices Act (FDCPA). comments received, the Bureau is now rule where relevant, and the entire Study will be Consistent with the Dodd-Frank Act, issuing a final rule governing included in the docket for this rulemaking at www.regulations.gov. the final rule applies only to agreements 1 Arbitration Agreements, 81 FR 32830 (May 24, 4 Dodd-Frank section 1028(b). entered into after the end of the 180-day 2016). 5 Id. period beginning on the regulation’s

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effective date.6 The Bureau is adopting mechanism, and whether arbitration and their increasing use in markets for an effective date of 60 days after the agreements effectively discourage and consumer financial products and final rule is published in the Federal limit the filing or resolution of certain services. Register. To facilitate implementation claims in court or in arbitration. A. Consumer Rights Under Federal and and ensure compliance, the final rule In recent years, Congress has taken State Laws Governing Consumer requires providers in most cases to steps to restrict the use of arbitration Financial Products and Services insert specified language into their agreements in connection with certain arbitration agreements to explain the consumer financial products and Companies typically provide effect of the rule. The final rule also services and other consumer and consumer financial products and permits providers of general-purpose investor relationships. Most recently, in services under the terms of a written reloadable prepaid cards to continue the 2010 Dodd-Frank Act, Congress contract. In addition to being governed selling packages that contain non- prohibited the use of arbitration by such contracts and the relevant compliant arbitration agreements, if agreements in connection with mortgage State’s contract law, the relationship they give consumers a compliant loans,11 authorized the Securities and between a consumer and a financial agreement as soon as consumers register Exchange Commission (SEC) to regulate service provider is typically governed their cards and the providers comply arbitration agreements in contracts by consumer protection laws at the State with the final rule’s requirement not to between consumers and securities level, Federal level, or both, as well as use an arbitration agreement to block a broker-dealers and investment by other State laws of general class action. advisers,12 and prohibited the use of applicability (such as tort law). arbitration agreements in connection Collectively, these laws create legal II. Background with certain whistleblower rights for consumers and impose duties Arbitration is a dispute resolution proceedings.13 on the providers of financial products process in which the parties choose one In addition, and of particular and services that are subject to those or more neutral third parties to make a relevance here, Congress directed the laws and, depending on the contract final and binding decision resolving the Bureau to study the use of arbitration and the product or service, a service dispute.7 Parties may include language agreements in connection with other, provider to the underlying provider. in their contracts, before any dispute non-mortgage consumer financial Early Consumer Protection in the Law has arisen, committing to resolve future products and services and authorized disputes between them in arbitration the Bureau to prohibit or restrict the use Prior to the twentieth century, the law rather than in court or allowing either of such agreements if it finds that such generally embraced the notion of caveat party the option to seek resolution of a action is in the public interest and for emptor, or ‘‘buyer beware’’ in consumer future dispute in arbitration. Such pre- the protection of consumers.14 Congress affairs.18 State common law afforded dispute arbitration agreements—which also required that the findings in any some minimal consumer protections this final rule generally refers to as such rule be consistent with the study.15 against fraud, usury, or breach of ‘‘arbitration agreements’’§ 8—have a The Bureau solicited input on the contract, but these common law long history, primarily in commercial appropriate scope, methods, and data protections were limited in scope. In the contracts, where companies historically sources for the study in 201216 and first half of the twentieth century, had bargained to create agreements released results of its three-year Study Congress began passing legislation tailored to their needs.9 In 1925, in March 2015.17 Part III of this final intended to protect consumers, such as Congress passed what is now known as rule summarizes the Bureau’s process the Wheeler-Lea Act of 1938.19 The the Federal Arbitration Act (FAA) to for completing the Study and its results. Wheeler-Lea Act amended the Federal require that courts enforce agreements To place these results in greater context, Trade Commission Act of 1914 (FTC to arbitrate, including those entered into this part provides a brief overview of: Act) to provide the FTC with the both before and after a dispute has (1) Consumers’ rights under Federal and authority to pursue unfair or deceptive arisen.10 State laws governing consumer financial acts and practices.20 These early Federal In the last few decades, companies products and services; (2) court laws did not provide for private rights have begun inserting arbitration mechanisms for seeking relief where of action, meaning that they could only agreements in a wide variety of those rights have been violated, and, in be enforced by the government. standard-form contracts, such as in particular, the role of the class action Modern Era of Federal Consumer contracts between companies and device in protecting consumers; and (3) Financial Protections consumers, employees, and investors. the evolution of arbitration agreements As is underscored by the range of In the late 1960s, Congress began comments received on the proposal, the 11 Dodd-Frank section 1414(e) (codified as 15 passing consumer protection laws use of arbitration agreements in such U.S.C. 1639c(e)). focused on financial products, contracts has become a contentious legal 12 Dodd-Frank sections 921(a) and 921(b) beginning with the Consumer Credit (codified as 15 U.S.C. 78o(o) and 15 U.S.C. 80b– and policy issue due to concerns about 5(f)). 18 Caveat emptor assumed that buyer and seller whether the effects of arbitration 13 Dodd-Frank section 922(b) (codified as 18 conducted business face to face on roughly equal agreements are salient to consumers, U.S.C. 1514A(e)). terms (much as English common law assumed that whether arbitration has proved to be a 14 Dodd-Frank section 1028(b). civil actions generally involved roughly equal fair and efficient dispute resolution 15 Id. parties in direct contact with each other). J.R. 16 Bureau of Consumer Fin. Prot., Request for Franke & D.A. Ballam, ‘‘New Application of Information Regarding Scope, Methods and Data Consumer Protection Law: Judicial Activism or 6 Dodd-Frank section 1028(d). Sources for Conducting Study of Pre-Dispute Legislative Directive,’’ 32 Santa Clara L. Rev. 347, 7 ‘‘Arbitration,’’ Black’s Law Dictionary (10th ed. Arbitration Agreements, 77 FR 25148 (Apr. 27, at 351–55 (1992). 2014). 2012) (hereinafter Arbitration Study RFI). 19 Wheeler-Lea Act of 1938, Public Law 75–447, 8 Section 1040.2(d) defines the phrase ‘‘pre- 17 Study, supra note 3. The Bureau also delivered 52 Stat. 111 (1938). dispute arbitration agreement.’’ When referring to the Study to Congress. See also Letter from 20 See FTC Act section 5. Prior to the Wheeler- the definition, in § 1040.2(d), this final rule uses the Catherine Galicia, Ass’t Dir. of Legis. Aff., Bureau Lea Act, the FTC had the authority to reach ‘‘unfair full term or otherwise clarifies the intended usage. of Consumer Fin. Prot., to Hon. Jeb Hensarling, methods of competition in commerce’’ but only if 9 See infra Part II.C. Chairman, Comm. on Fin. Serv. (Mar. 10, 2015) (on they had an anticompetitive effect. See FTC v. 10 9 U.S.C. 1 et seq. file with the Bureau). Raladam Co., 283 U.S. 643, 649 (1931).

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Protection Act (CCPA) in 1968.21 The enforcement.27 The FTC encouraged the resulting from the aggregation of a large CCPA included the Truth in Lending adoption of consumer protection number of claims for statutory Act (TILA), which imposed disclosure statutes at the State level and worked damages.32 Congress addressed this by and other requirements on creditors.22 directly with the Council of State amending TILA in 1974 to cap class In contrast to earlier consumer Governments to draft the Uniform Trade action damages in such cases to the protection laws such as the Wheeler-Lea Practices Act and Consumer Protection lesser of 1 percent of the defendant’s Act, TILA permits private enforcement Law, which served as a model for many assets or $100,000.33 Congress has twice by providing consumers with a private State consumer protection statutes.28 increased the cap on class action right of action, authorizing consumers to Currently, 49 of the 50 States and the damages in TILA: To $500,000 in 1976 pursue claims for actual damages and District of Columbia have State and $1,000,000 in 2010.34 Many other statutory damages and allowing consumer protection statutes modeled statutes similarly cap damages in class consumers who prevail in litigation to on the FTC Act that allow for private actions.35 Further, the legislative history recover their attorney’s fees and costs.23 rights of action.29 of other statutes indicates a particular Congress followed the enactment of intent to permit class actions given the Class Actions Pursuant to Federal TILA with several other consumer potential for a small recovery in many financial protection laws, many of Consumer Protection Laws consumer finance cases for individual which provided private rights of action In 1966, shortly before Congress first damages.36 Similarly, many State for at least some statutory violations. began passing the wave of consumer legislatures contemplated consumers’ For example, in 1970, Congress passed financial protection statutes described filing of class actions to vindicate the FCRA, which promotes the above, the Federal Rules of Civil violations of their versions of the FTC accuracy, fairness, and privacy of Procedure (Federal Rules or FRCP) were Act.37 A minority of States expressly consumer information contained in the amended to make class actions prohibit class actions to enforce their files of consumer reporting agencies, as substantially more available to litigants, FTC Acts.38 well as providing consumers access to including consumers. The class action their own information.24 In 1974, procedure in the Federal Rules, as 32 See, e.g., Ratner v. Chem. Bank N.Y. Trust Co., Congress passed the ECOA to prohibit discussed in detail in Part II.B below, 54 FRD. 412, 416 (S.D.N.Y. 1972). allows an individual to group his or her 33 See Public Law 93–495, 88 Stat. 1518, section creditors from discriminating against 408(a). applicants with respect to credit claims together with those of other, 34 Truth in Lending Act Amendments, Public Law transactions.25 In 1977, Congress passed absent individuals in one lawsuit under 94–240, 90 Stat. 260 (1976); Dodd-Frank section the FDCPA to promote the fair treatment certain circumstances and to obtain 1416(a)(2). of consumers who are subject to debt monetary or injunctive relief for the 35 For example, ECOA provides for the full 26 group. Because TILA and the other recovery of actual damages on a class basis and caps collection activities. punitive damages to the lesser of $500,000 or 1 In the 1960s, States began passing Federal consumer protection statutes percent of a creditor’s net worth; RESPA limits total their own consumer protection statutes discussed above permitted private rights class action damages (including actual or statutory modeled on the FTC Act to prohibit of action, those private rights of action damages) to the lesser of $1,000,000 or 1 percent of the net worth of a mortgage servicer; the FDCPA unfair and deceptive practices. Unlike were enforceable through a class action, limits class action recoveries to the lesser of the FTC Act, however, these State unless the statute expressly prohibited $500,000 or 1 percent of the net worth of the debt statutes typically provide for private class actions.30 collector; and EFTA provides for a cap on statutory Indeed, Congress affirmatively damages in class actions to the lesser of $500,000 21 or 1 percent of a defendant’s net worth and lists Public Law 90–321, 82 Stat. 146 (1968). calibrated enforcement through private factors to consider in determining the proper 22 Id. at title I. class actions in several of the consumer amount of a class award. See 15 U.S.C. 1691e(b) 23 15 U.S.C. 1640(a). protection statutes by specifically (ECOA), 12 U.S.C. 2605(f)(2) (RESPA), 15 U.S.C. 24 Public Law 91–508, 84 Stat. 1114–2 (1970). referring to class actions and adopting 1692k(a)(2)(B) (FDCPA), and 15 U.S.C. 25 Congress amended that law in 1976. Public statutory damage schemes that are 1693m(a)(2)(B) (EFTA). Law 94–239, 90 Stat. 251 (1976). 36 See, e.g., Electronic Fund Transfer Act, H. Rept. 26 Public Law 95–109, 91 Stat. 874 (1977). Other capped by a percentage of the No. 95–1315, at 15 (1978). The Report stated: such Federal consumer protection laws include defendants’ net worth.31 For example, ‘‘Without a class-action suit an institution could those enumerated in the Dodd-Frank Act and made when consumers initially sought to violate the title with respect to thousands of subject to the Bureau’s rulemaking, supervision, bring TILA class actions, a number of consumers without their knowledge, if its financial and enforcement authority: Alternative Mortgage impact was small enough or hard to discover. Class Transaction Parity Act of 1982, 12 U.S.C. 3801; courts applying Federal Rule 23 denied action suits for damages are an essential part of Consumer Leasing Act of 1976, 15 U.S.C. 1667; motions to certify a class because of the enforcement of the bill because all too often, Electronic Fund Transfer Act (EFTA), 15 U.S.C. prospect of extremely large damages although many consumers have been harmed, the 1693 (except with respect to § 920 of that Act); Fair actual damages in contrast to the legal costs to Credit Billing Act, 15 U.S.C. 1666; Home Mortgage individuals are not enough to encourage a 27 Victor E. Schwartz & Cary Silverman, Disclosure Act of 1975, 12 U.S.C. 2801; Home consumer to sue. Suits might only be brought for ‘‘Common Sense Construction of Consumer Owners Protection Act of 1998, 12 U.S.C. 4901; violations resulting in large individual losses while Protection Acts,’’ 54 U. Kan. L. Rev. 1, at 15–16 Federal Deposit Insurance Act, 12 U.S.C. 1831t (b)- many small individual losses could quickly add up (2005). (f); Gramm-Leach-Bliley Act 15 U.S.C. 6802–09 to thousands of dollars.’’ 28 (except with respect to section 505 as it applies to Id. 37 The UDAP laws of at least 14 States expressly section 501(b) of that Act); Home Ownership and 29 Id. at 16. Every State prohibits deception; some permit class action lawsuits. See, e.g., Cal. Bus. & Equity Protection Act of 1994 (HOEPA), 15 U.S.C. prohibit unfair practices as well. See Carolyn L. Prof. Code 17203 (2016); Haw. Rev. Stat. Ann. sec. 1601; Interstate Land Sales Full Disclosure Act, 15 Carter, ‘‘Consumer Protection in the States,’’ Nat’l 480–13.3 (2015); Idaho Code Ann. sec. 48–608(1) U.S.C. 1701; Real Estate Settlement Procedures Act Consumer L. Ctr., at 5 (2009), available at https:// (2015); Ind. Code Ann. sec. 24–5–0.5–4(b) (2015); _ _ of 1974 (RESPA), 12 U.S.C. 2601; S.A.F.E. Mortgage www.nclc.org/images/pdf/udap/report 50 Kan. Stat. Ann. sec. 50–634(c) and (d) (2012); Mass. Licensing Act of 2008, 12 U.S.C. 5101; Truth in states.pdf. Gen. Laws ch. 93A, sec. 9(2) (2016); Mich. Comp. Savings Act (TISA), 12 U.S.C. 4301, and section 626 30 See, e.g., Wilcox v. Commerce Bank of Kansas Laws sec. 445.911(3) (2015); Mo. Rev. Stat. sec. of the Omnibus Appropriations Act of 2009, 15 City, 474 F.2d 336, 343–44 (10th Cir. 1973). 407.025(2) and (3) (2015); N.H. Rev. Stat. sec. 358– U.S.C. 1638. Federal consumer protection laws also 31 A minority of Federal statutes provide private A:10-a (2015); N.M. Stat. sec. 57–12–10(E) (2015); include the Bureau’s authority to take action to rights of action but do not cap damages in class Ohio Rev. Code sec. 1345.09(B) (2016); R.I. Gen. prevent a covered person or service provider from action cases. For example, the Telephone Consumer Laws sec. 6–13.1–5.2(b) (2015); Utah Code secs. 13– committing or engaging in an unfair, deceptive, and Protection Act (47 U.S.C. 227(b)(3)), the FCRA (15 11–19 and 20 (2015); Wyo. Stat. sec. 40–12–108(b) abusive acts or practices, Dodd-Frank section 1031, U.S.C. 1681n, 1681o), and the Credit Repair (2015). and its disclosure authority, Dodd-Frank section Organizations Act (15 U.S.C. 1679g) do not cap 38 See, e.g., Ala. Code sec. 8–19–10(f) (2002); Ga. 1032. damages in class action cases. Code Ann. sec. 10–1–399 (2015); La. Rev. Stat. Ann.

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B. History and Purpose of the Class in the same form to this day.45 Federal Class Action Procedure Pursuant to Action Procedure Rule 23 was amended at least in part to Federal Rule 23 promote efficiency in the courts and to The default rule in United States A class action can be filed and provide for compensation of individuals courts, inherited from England, is that maintained under Federal Rule 23 in when many are harmed by the same only those who appear as parties to a any case where there is a private right conduct.46 The 1966 revisions to given case are bound by its outcome.39 to bring a civil action in Federal court, Federal Rule 23 prompted similar As early as the medieval period, unless otherwise prohibited by law.50 changes in most States. As the Supreme however, English courts recognized that Pursuant to Federal Rule 23(a), a class Court has since explained, class actions litigating many individual cases action must meet all of the following promote efficiency in that ‘‘the . . . regarding the same issue was inefficient requirements: (1) A class of a size such device saves the resources of both the for all parties and thus began to permit that joinder of each member as an courts and the parties by permitting an a single person in a single case to individual litigant is impracticable; (2) issue potentially affecting every [class questions of law or fact common to the represent a group of people with member] to be litigated in an 40 class; (3) a class representative whose common interests. English courts later economical fashion under Rule 23.’’ 47 claims or defenses are typical of those developed a procedure called the ‘‘bill As to small harms, class actions provide of the class; and (4) that the class of peace’’ to adjudicate disputes a mechanism for compensating representative will adequately represent involving common questions and individuals where ‘‘the amounts at stake those interests.51 The first two multiple parties in a single action. The for individuals may be so small that prerequisites—numerosity and process allowed for judgments binding separate suits would be commonality—focus on the absent or all group members—whether or not they impracticable.’’ 48 Class actions have represented class, while the latter two were participants in the suit—and been brought not only by individuals, tests—typicality and adequacy—address contained most of the basic elements of but also by companies, including the desired qualifications of the class what is now called class action financial institutions.49 litigation.41 representative. Pursuant to Federal Rule The bill of peace was recognized in 45 See, e.g., Robert H. Klonoff, ‘‘The Decline of 23(b), a class action also must meet one early United States case law and Class Actions,’’ 90 Wash. U. L. Rev. 729, at 746– of the following requirements: (1) ultimately adopted by several State 47 (2013) (‘‘The Rule 23(a) and (b) criteria, by their Prosecution of separate actions risks courts and the Federal courts.42 terms, have not changed in any significant way either inconsistent adjudications that since 1966, but some courts have become Nevertheless, the use and impact of that increasingly skeptical in reviewing whether a would establish incompatible standards procedure remained relatively limited particular case satisfies those requirements’’). In of conduct for the defendant or would, through the nineteenth and into the 1966, a member of the Advisory Committee as a practical matter, be dispositive of explained that the class action device was designed the interests of others; (2) defendants twentieth centuries. In 1938, the Federal to bind all absent class members because Rules were adopted to govern civil ‘‘Requiring . . . individuals affirmatively to request have acted or refused to act on grounds litigation in Federal court, and Federal inclusion in the lawsuit would result in freezing out generally applicable to the class; or (3) Rule 23 established a procedure for the claims of people—especially small claims held common questions of law or fact 43 by small people—who for one reason or another, predominate over any individual class class actions. That procedure’s ability ignorance, timidity, unfamiliarity with business or to bind absent class members was never legal matters, will simply not take the affirmative member’s questions, and a class action clear, however.44 step. The moral justification for treating such is superior to other methods of That changed in 1966, when Federal people as null quantities is questionable. For them adjudication. the class action serves something like the function These and other requirements of Rule 23 was amended to create the class of an administrative proceeding where scattered action mechanism that largely persists individual interests are represented by the Federal Rule 23 are designed to ensure Government.’’ Benjamin Kaplan, ‘‘Continuing the Work of the Civil Committee: 1966 Amendments of Inc., No.17–01102 (D.Colo. May 4, 2017), ECF No. sec. 51:1409(A) (2006); Mont. Code Ann. sec. 30– the Federal Rules of Civil Procedure (i),’’ 81 Harv. 1 (asserting class action claims on behalf of 14–133(1) (2003); S.C. Code Ann. sec. 37–5–202(1) L. Rev. 356, at 397–98 (1967). financial institutions against Chipotle for data (1999). 46 See American Pipe, 414 U.S. at 553 (‘‘A breach that exposed customers’ names and debit 39 Ortiz v. Fibreboard Corp., 527 U.S. 815, 832– contrary rule allowing participation only by those and credit card numbers to hackers); Consumer 33 (1999). potential members of the class who had earlier filed Plaintiffs’ Consolidated Class Action Complaint at 40 For instance, in early English cases, a local motions to intervene in the suit would deprive Rule 1, 5, In re: The Home Depot, Inc. Customer Data priest might represent his parish, or a guild might 23 class actions of the efficiency and economy of Breach Litig., No. 14–02583 (N.D. Ga. May 27, be represented by its formal leadership. Samuel litigation which is a principal purpose of the 2015), ECF No. 93 (complaint filed on behalf of Issacharoff, ‘‘Assembling Class Actions,’’ 90 Wash procedure.’’). putative class of ‘‘similarly situated banks, credit U. L. Rev. 699, at 704 (2013) (citing Stephen C. 47 Califano v. Yamasaki, 442 U.S. 682, 701 (1979). unions, and other financial institutions’’ that had Yeazell, From Medieval Group Litigation to the 48 Amchem Prod., Inc. v. Windsor, 521 U.S. 591, ‘‘issued and owned payment cards compromised by Modern Class Action 40 (1987)). 616 (1997), citing Fed. R. Civ. P. 23 advisory the Home Depot data breach’’); Memorandum and 41 7A Charles Alan Wright & Arthur R. Miller, committee’s note, 28 U.S.C. app. at 698 (stating that Order at 2, 14, In re: Target Corp. Customer Data ‘‘Federal Practice and Procedure: Civil § 1751’’ (3d a class action may be justified under Federal Rule Security Breach Litig., No. 14–2522 (D. Minn. Sept. ed. 2002). 23 where ‘‘the class may have a high degree of 15, 2015), ECF No. 589 (granting certification to 42 Id. Federal Equity Rule 48, in effect from 1842 cohesion and prosecution of the action through plaintiff class made up of banks, credit unions, and to 1912, officially recognized representative suits representatives would be quite unobjectionable, or other financial institutions that had ‘‘issued where parties were too numerous to be the amounts at stake for individuals may be so payment cards such as credit and debit cards to conveniently brought before the court, but did not small that separate suits would be impracticable’’). consumers who, in turn, used those cards at Target bind absent members to the judgment. Id. In 1912, See also id. at 617 (citing Mace v. Van Ru Credit stores during the period of the 2013 data breach,’’ Federal Equity Rule 38 replaced Rule 48 and Corp., 109 F.3d 338, 344 (7th Cir. 1997) (‘‘The noting that ‘‘given the number of financial allowed absent members to be bound by a final policy at the very core of the class action institutions involved and the similarity of all class judgment. Id. mechanism is to overcome the problem that small members’ claims, Plaintiffs have established that 43 See Fed. R. Civ. P. 23 (1938). recoveries do not provide the incentive for any the class action device is the superior method for 44 See American Pipe & Constr. Co. v. Utah, 414 individual to bring a solo action prosecuting his or resolving this dispute’’); In re TJX Cos. Retail U.S. 538, 545–46 (1974) (‘‘The Rule [prior to its her own rights. A class action solves this problem Security Breach Litig., 246 FRD. 389 (D. Mass. 2007) amendment] . . . contained no mechanism for by aggregating the relatively paltry potential (denying class certification in putative class action determining at any point in advance of final recoveries into something worth someone’s (usually by financial institutions). judgment which of those potential members of the an attorney’s) labor.’’). 50 As one commenter noted, it is a procedural class claimed in the complaint were actual 49 See, e.g., Class Action Complaint, Bellwether right not a substantive one. members and would be bound by the judgment.’’). Community Credit Union v. Chipotle Mexican Grill 51 Fed. R. Civ. P. 23(a)(1) through (4).

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that class action lawsuits safeguard ‘‘reasonable.’’ 59 The court also jurisdiction of Federal courts to allow absent class members’ due process addresses objections from class them to adjudicate most large class rights because they may be bound by members who seek a different outcome actions.64 The Advisory Committee also what happens in the case.52 Further, the to the case (e.g., lower attorney’s fees or periodically reviews and updates courts may protect the interests of a better settlement). These requirements Federal Rule 23. In 1998, the Advisory absent class members through the are designed to ensure that all parties to Committee amended Federal Rule 23 to exercise of their substantial supervisory class litigation have their rights permit interlocutory appeals of class authority over the quality of protected, including defendants and certification decisions, given the unique representation and specific aspects of absent class members. importance of the certification decision, the litigation.53 In the typical Federal In addition to proceedings in Federal which can dramatically change the class action, an individual plaintiff (or court, every State except Virginia and dynamics of a class action case.65 In sometimes several individual plaintiffs), Mississippi has established procedures 2003, the Advisory Committee amended represented by an attorney, files a permitting individuals to file a class Federal Rule 23 to require courts to lawsuit on behalf of that individual and action; almost all of these States have define classes that they are certifying, others similarly situated against a adopted class action procedures increase the amount of scrutiny that defendant or defendants.54 Those analogous to Federal Rule 23.60 courts must apply to class settlement similarly situated individuals may be a proposals, and impose additional Developments in Class Action 66 small group (as few as 40 or even less) Procedure Over Time requirements on class counsel. In or as many as millions that are alleged 2015, the Advisory Committee further to have suffered the same injury as the Since the 1966 amendments, Federal identified several issues that ‘‘warrant individual plaintiff. That individual Rule 23 has generated a significant body serious examination’’ and presented plaintiff, typically referred to as a of case law as well as significant ‘‘conceptual sketches’’ of possible named or lead plaintiff, cannot properly controversy.61 In response, Congress further amendments.67 proceed with a class action unless the and the Advisory Committee on the Federal courts have also shaped class court certifies that the case meets the Federal Rules of Civil Procedure (which action practice through their requirements of Federal Rule 23, has been delegated the authority to interpretations of Federal Rule 23. In the including the requirements of Federal change Federal Rule 23 under the Rules last five years, the Supreme Court has Rule 23(a) and (b) discussed above. If Enabling Act) have made a series of decided several major cases refining the court does certify that the case can targeted changes to Federal Rule 23 to class action procedure. In Wal-Mart go forward as a class action, potential calibrate the equities of class plaintiffs Stores, Inc. v. Dukes, the Court class members who do not opt out of the and defendants. Meanwhile, the courts interpreted the commonality class are bound by the eventual outcome have also addressed concerns about requirement of Federal Rule 23(a)(2), of the case.55 If not certified, the case Federal Rule 23 in the course of holding that in the absence of a common proceeds only to bind the named interpreting the rule and determining its question among putative class members plaintiff. application in the context of particular class certification is not appropriate.68 A certified class case proceeds types of cases. In Comcast Corp. v. Behrend, the Court similarly to an individual case, except For example, Congress passed the held that district courts must undertake that the court has an additional Private Securities Litigation Reform Act a ‘‘rigorous analysis’’ of whether the responsibility in a class case, pursuant (PSLRA) in 1995. Enacted partially in damages model supporting a plaintiff’s to Federal Rule 23 and the relevant case response to concerns about the costs to case is consistent with its theory of law, to actively supervise classes and defendants of litigating class actions, the liability for purposes of satisfying the class proceedings and to ensure that the PSLRA reduced discovery burdens in predominance requirements in Federal lead plaintiff keeps absent class the early stages of securities class Rule 23(b)(3) and that that in the 62 members informed.56 Among its tasks, a actions. In 2005, Congress again absence of such a model of individual court must review any attempts to settle adjusted the class action rules when it damages may foreclose class or voluntarily dismiss the case on behalf adopted the Class Action Fairness Act certification.69 In Campbell-Ewald Co. v. of the class,57 may reject any settlement (CAFA) in response to concerns about Gomez, the Court held that a defendant abuses of class action procedure in some agreement if it is not ‘‘fair, reasonable 63 and adequate,’’T 58 and must ensure that State courts. Among other things, 64 28 U.S.C. 1332(d), 1453, and 1711–15. the payment of attorney’s fees is CAFA expanded the subject matter 65 Fed. R. Civ. P. 23(f). See also Herbert B. Newberg, et al., ‘‘Newberg on Class Actions,’’ at 59 Fed. R. Civ. P. 23(h). § 7:41 (5th ed. Thomson Reuters 2016); Committee 52 See, e.g., Amchem Prod., Inc., 521 U.S. at 619– 60 See Marcy Hogan Greer, ‘‘A Practitioner’s Notes on Rules, 1998 Amendment (‘‘This 21. permissive interlocutory appeal provision is 53 Guide to Class Actions’’ at 142 (A.B.A. 2010). One See Fed. R. Civ. P. 23(e). State, Utah, authorizes providers of closed-end adopted under the power conferred by 28 U.S.C. 54 Federal Rule 23 also permits a class of consumer credit to include in the credit contract a 1292(e). Appeal from an order granting or denying defendants. provision that would waive the consumer’s right to class certification is permitted in the sole discretion 55 In some circumstances, absent class members participate in a class action. Utah Code 70C–3–14; of the court of appeals. No other type of Rule 23 are not given an opportunity to opt out. E.g., Fed. ‘‘Mississippi does not permit class actions of any order is covered by this provision.’’). See 28 U.S.C. R. Civ. P. 23(b)(1)(B) (providing for ‘‘limited fund’’ kind. When Mississippi adopted civil rules app. at 163 (2014). class actions when claims are made by numerous modeled on the Federal Rules of Civil Procedure, 66 Fed. R. Civ. P. 23(c)(2)(B). See also 28 U.S.C. persons against a fund insufficient to satisfy all it expressly omitted Rule 23.’’ (footnote omitted). app. at 168 (2014) (‘‘Rule 23(c)(2)(B) is revised to claims); Fed. R. Civ. P. 23(b)(2) (providing for class Id. at 1013. require that the notice of class certification define actions in which the plaintiffs are seeking primarily 61 See, e.g., David Marcus, ‘‘The History of the the certified class in terms identical to the terms injunctive or corresponding declaratory relief). Modern Class Action, Part I: Sturm und Drang, used in (c)(1)(B).’’). 56 Fed. R. Civ. P. 23(g). 1953–1980,’’ 90 Wash. U. L. Rev. 587, at 610 67 See, e.g., Rule 23 Subcomm. Rept., Advisory 57 See, e.g., Fed. R. Civ. P. 23(e) (‘‘The claims, (participants in the debate ‘‘quickly exhausted Committee on Rules of Civil Procedure, at 243–97 issues, or defenses of a certified class may be virtually every claim for and against an invigorated (2015), available at http://www.uscourts.gov/rules- settled, voluntarily dismissed, or compromised only Rule 23’’). policies/archives/agenda-books/advisory- with the court’s approval.’’). This does not apply to 62 Private Securities Litigation Reform Act of committee-rules-civil-procedure-april-2015. settlements with named plaintiffs reached prior to 1995, Public Law 104–67, 109 Stat. 737 (1995). 68 564 U.S. 338, 131 S. Ct. 2541 (2011); see also the certification of a class. 63 Class Action Fairness Act of 2005, Public Law Klonoff, supra note 45, at 775. 58 Fed. R. Civ. P. 23(e)(2). 109–2, 119 Stat. 4 (2005). 69 133 S. Ct. 1426 (2013).

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cannot moot a class action by offering provide for basic rules of procedure and Under that law, if one party to an complete relief to an individual plaintiff operations support, and generally arbitration agreement refused to proceed before class certification unless the administer the arbitration.77 Parties to arbitration, the statute permitted the individual plaintiff agrees to accept that usually have very limited rights to other party to seek a remedy in State relief.70 In Tyson Foods, Inc. v. appeal from a decision in arbitration to court to enforce the arbitration Bouaphakeo, the Court held that a court.78 Most arbitration also provides agreement.87 In 1925, Congress passed statistical techniques presuming that all for limited or streamlined discovery the United States Arbitration Act, which class members are identical to the procedures as compared to those in was based on the New York arbitration average observed in a sample can be many court proceedings.79 law and later became known as the used to establish classwide liability Federal Arbitration Act (FAA).88 The History of Arbitration where each class member could have FAA remains in force today. Among relied on that sample to establish The use of arbitration to resolve other things, the FAA makes agreements liability had each brought an individual disputes between parties is not new.80 to arbitrate ‘‘valid, irrevocable, and action.71 Finally, in Spokeo, Inc. v. In England, the historical roots of enforceable, save upon such grounds as Robins, a class action alleging a arbitration date to the medieval period, exist at law or in equity for the violation of Federal law, the Court when merchants adopted specialized revocation of any contract.’’ 89 reiterated that to have standing in rules to resolve disputes between Expansion of Consumer Arbitration and Federal court a plaintiff must allege an them.81 English merchants began Arbitration Agreements injury in fact—specifically, ‘‘‘an utilizing arbitration in large numbers invasion of a legally protected interest’ during the nineteenth century.82 From the passage of the FAA through that is ‘concrete and particularized’ and However, English courts were hostile the 1970s, arbitration continued to be ‘actual or imminent, not conjectural or towards arbitration, limiting its use used in commercial disputes between hypothetical.’’’ 72 The case was through doctrines that rendered certain companies.90 Beginning in the 1980s, remanded to the Ninth Circuit to types of arbitration agreements however, companies began to use determine whether the plaintiff had unenforceable.83 Arbitration in the arbitration agreements in form contracts alleged an actual injury under the United States in the eighteenth and with consumers, investors, employees, FCRA.73 nineteenth centuries reflected both and franchisees that were not the result traditions: It was used primarily by of individually negotiated terms.91 By C. Arbitration and Arbitration merchants, and courts were hostile the 1990s, this trend began to spread Agreements toward it.84 Through the early 1920s, more broadly within the consumer As described above at the beginning United States courts often refused to financial services industry.92 of Part II, arbitration is a dispute enforce arbitration agreements and resolution process in which the parties awards.85 87 Id. choose one or more neutral third parties In 1920, New York enacted the first 88 9 U.S.C. 1, et seq. The FAA was codified in modern arbitration statute in the United 1947. Public Law 282, 61 Stat. 669 (July 30, 1947). to make a final and binding decision James E. Berger & Charlene Sun, ‘‘The Evolution of resolving the dispute.74 The typical States, which strictly limited courts’ Judicial Review Under the Federal Arbitration Act,’’ arbitration agreement provides that the power to undermine arbitration 5 N.Y.U. J. L. & Bus. 745, at 754 n.45 (2009). parties shall submit any disputes that decisions and arbitration agreements.86 89 9 U.S.C. 2. may arise between them to arbitration. 90 See, e.g., Soia Mentschikoff, ‘‘Commercial Arbitration agreements generally give 77 See id. section 2 at 34–40. Arbitration,’’ 61 Colum. L. Rev. 846, at 850 (1961) 78 See 9 U.S.C. 9. See also Hall Street Assocs., (noting that, as of 1950, nearly one-third of trade each party to the contract two distinct L.L.C. v. Mattel, Inc., 552 U.S. 576, 584 (2008) associations used a mechanism like the American rights. First, either side can file claims (holding that parties cannot expand the grounds for Arbitration Association as a means of dispute against the other in arbitration and vacating arbitration awards in Federal court by resolution between trade association members, and 75 contract); Preliminary Results, infra note 150, at 6 that over one-third of other trade associations saw obtain a decision from the arbitrator. members make their own individual arrangements Second, with some exceptions, either n.4. 79 See Study, supra note 3, section 4 at 16–17. for arbitrations); see also id. at 858 (noting that AAA heard about 240 commercial arbitrations a side can use the arbitration agreement to 80 The use of arbitration appears to date back at year from 1947 to 1950, comparable to the volume require that a dispute that has been filed least as far as the Roman Empire. See, e.g., Amy J. of like cases before the U.S. District Court of the 76 Schmitz, ‘‘Ending a Mud Bowl: Defining in court instead proceed in arbitration. Southern District of New York in the same time Arbitration’s Finality Through Functional The typical agreement also specifies an period). Arbitration was also used in the labor Analysis,’’ 37 Ga. L. Rev. 123, at 134–36 (2002); context where unions had bargained with organization called an arbitration Derek Roebuck, ‘‘Roman Arbitration’’ (Holo. Books employers to create specialized dispute resolution administrator. Administrators, which 2004). mechanisms pursuant to the Labor Management 81 may be for-profit or nonprofit See, e.g., Jeffrey W. Stempel, ‘‘Pitfalls of Public Relations Act. 29 U.S.C. 401–531. Policy: The Case of Arbitration Agreements,’’ 22 St. organizations, facilitate the selection of 91 Stephen J. Ware, ‘‘Arbitration Clauses, Jury- Mary’s L. J. 259, at 269–70 (1990). an arbitrator to decide the dispute, Waiver Clauses and Other Contractual Waivers of 82 Id. Constitutional Rights,’’ 67 L. & Contemp. Probs. 179 83 See, e.g., Schmitz, supra note 80, at 137–39. 70 Campbell-Ewald Co. v. Gomez, 136 S. Ct. 663, (2004). 84 See, e.g., Stempel, supra note 81, at 273–74. 92 670 (2016). See Sallie Hofmeister, ‘‘Bank of America is 85 David S. Clancy & Matthew M.K. Stein, ‘‘An 71 Tyson Foods, Inc. v. Bouaphakeo, 136 S. Ct. Upheld on Consumer Arbitration,’’ N.Y. Times, Uninvited Guest: Class Arbitration and the Federal 1036, 1046–48 (2016). Aug. 20, 1994 (‘‘‘The class action cases is where the Arbitration Act’s Legislative History,’’ 63(1) Bus. L. real money will be saved [by arbitration 72 Spokeo, Inc. v. Robins, 135 S. Ct. 1892 (2015). 55, at 58 and n.11 (2007) (citing, inter alia, Haskell agreements],’ Peter Magnani, a spokesman for the 73 Id. Following remand, the Spokeo case remains v. McClintic-Marshall Co., 289 F. 405, 409 (9th Cir. bank, said.’’); John P. Roberts, ‘‘Mandatory pending in the Ninth Circuit. See Robins v. Spokeo 1923) (refusing to enforce an arbitration agreement Arbitration by Financial Institutions,’’ 50 Consumer Inc., No. 11–56843 (9th Cir). because of a ‘‘settled rule of the common law that Fin. L. Q. Rep. 365, at 367 (1996) (identifying an 74 See ‘‘Arbitration,’’ supra note 7. a general agreement to submit to arbitration did not anonymous bank ‘‘ABC’’ as having adopted 75 Id. oust the courts of jurisdiction, and that rule has arbitration provisions in its contracts for consumer 76 As described in the Study, however, most been consistently adhered to by the Federal credit cards, deposit accounts, and safety deposit arbitration agreements in consumer financial courts’’); Dickson Manufacturing Co. v. Am. boxes); Hossam M. Fahmy, ‘‘Arbitration: Wiping contracts contain a ‘‘small claims court carve-out’’ Locomotive Co., 119 F. 488, 490 (C.C.M.D. Pa. 1902) Out Consumers Rights?,’’ 64 Tex. Bus. J. 917, at 917 that provides the parties with a contractual right to (refusing to enforce an arbitration agreement where (2001) (citing Barry Meier, ‘‘In Fine Print, pursue a claim in small claims court. Study, supra plaintiff revoked its consent to arbitration). Customers Lose Ability to Sue,’’ N.Y. Times, Mar. note 3, section 2 at 33–34. 86 43 N.Y. Stat. 833 (1925). Continued

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One notable feature of these Since the early 1990s, the use of settlement with the Minnesota Attorney agreements is that they could be used to arbitration agreements in consumer General pursuant to which it agreed to block class action litigation and often financial contracts has become stop administering consumer class arbitration as well.93 The widespread, as shown by Section 2 of arbitrations completely, although NAF agreements could block class actions the Study (which is discussed in detail did not admit liability.100 Further, a filed in court because when sued in a in Part III.D below). By the early 2000s, series of class actions filed against NAF class action, companies could use the a few consumer financial companies were consolidated in a multidistrict arbitration agreement to dismiss or stay had become heavy users of arbitration litigation, and NAF settled those in 2011 the class action in favor of arbitration. proceedings to obtain debt collection by agreeing to suspend $1 billion in Yet the agreements often prohibited judgments against consumers. For pending debt collection arbitrations.101 class arbitration as well, rendering example, in 2006 alone, the National The American Arbitration Association plaintiffs unable to pursue class claims Arbitration Forum (NAF) administered (AAA) likewise announced a in either litigation or arbitration.94 More 214,000 arbitrations, most of which moratorium on administering company- recently, some consumer financial were consumer debt collection filed debt collection arbitrations, providers themselves have disclosed in proceedings brought by companies.96 articulating significant concerns about their filings with the SEC that they rely due process and fairness to consumers Legal Challenges to Arbitration on arbitration agreements for the subject to such arbitrations.102 Agreements express purpose of shielding themselves Specifically, shortly after the NAF from class action liability.95 The increase in the prevalence of settlement, the AAA offered testimony arbitration agreements coincided with to Congress that—independent of the 10, 1997, at A1 (noting in 2001 that ‘‘[t]he use of various legal challenges to their use in NAF settlement—AAA ‘‘had consumer arbitration expanded eight years ago consumer contracts. One set of independently reviewed areas of the when Bank of America initiated its current policy,’’ challenges focused on the use of when ‘‘notices of the new arbitration requirements process and concluded that it had some were sent along with monthly statements to 12 arbitration agreements in connection weaknesses’’ in its own debt collection million customers, encouraging thousands of other with debt collection disputes. In the late arbitration program, and noted that companies to follow the same policy’’). 2000s, consumer groups began to generally that ‘‘areas needing attention 93 See, e.g., Alan S. Kaplinsky & Mark J. Levin, criticize the fairness of debt collection . . . include[d] consumer notification, ‘‘Excuse Me, But Who’s the Predator? Banks Can arbitration proceedings administered by Use Arbitration Clauses as a Defense,’’ 7 Bus. L. arbitrator neutrality, pleading and Today 24 (1998) (‘‘Lenders that have not yet NAF, which was the most widely used evidentiary standards, respondents’ implemented arbitration programs should promptly arbitration administrator for debt defenses and counterclaims, and consider doing so, since each day that passes brings collection.97 In 2008, the San Francisco arbitrator training and recruitment.’’ 103 with it the risk of additional multimillion-dollar City Attorney’s office filed a civil action class action lawsuits that might have been avoided A second group of challenges asserted had arbitration procedures been in place.’’); see also against NAF alleging that NAF was that the invocation of arbitration Bennet S. Koren, ‘‘Our Mini Theme: Class Actions,’’ biased in favor of debt collectors.98 In agreements to block class actions was 7 Bus. L. Today 18 (1998) (industry attorney 2009, the Minnesota Attorney General unlawful. Because the FAA permits recommends adopting arbitration agreements sued NAF, alleging an institutional because ‘‘[t]he absence of a class remedy ensures challenges to the validity of arbitration that there will be no formal notification and most conflict of interest because a group of agreements on grounds that exist at law claims will therefore remain unasserted.’’). investors with a 40 percent ownership or in equity for the revocation of any 94 Even if a pre-dispute arbitration agreement stake in an affiliate of NAF also had a contract,104 challengers argued that does not prohibit class arbitration, an arbitrator may majority ownership stake in a debt not permit arbitration to go forward on a class basis collection firm that brought a number of 100 Press Release, State of Minnesota, Office of the unless the arbitration agreement itself shows the 99 parties agreed to do so. See Stolt-Nielsen S.A. v. cases before NAF. A few days after the Attorney General, ‘‘National Arbitration Forum AnimalFeeds Int’l Corp., 559 U.S. 662, 684 (2010) filing of the lawsuit, NAF reached a Barred from Credit Card and Consumer Arbitrations (‘‘[A] party may not be compelled under the FAA Under Agreement with Attorney General Swanson,’’ to submit to class arbitration unless there is a (July 19, 2009), available at http://pubcit.typepad. 2015) at 45 (‘‘[H]istorically the arbitration provision com/files/nafconsentdecree.pdf. NAF settled the contractual basis for concluding that the party in our customer agreements generally has limited agreed to do so.’’) (emphasis in original). Both the City of San Francisco’s claims in 2011 by agreeing our exposure to consumer class action to cease administering consumer arbitrations in AAA and JAMS class arbitration procedures reflect litigation. . . .’’). the law; both require an initial determination as to California in perpetuity and to pay a $1 million 96 Carrick Mollenkamp, et al., ‘‘Turmoil in penalty. Press Release, City Attorney Dennis whether the arbitration agreement at issue provides Arbitration Empire Upends Credit-Card Disputes,’’ for class arbitration before a putative class Herrera, ‘‘Herrera Secures $5 Million Settlement, Wall St. J., Oct. 16, 2009. See also Public Citizen, Consumer Safeguards Against BofA Credit Card arbitration can move forward. See AAA, ‘‘The Arbitration Trap: How Credit Card Companies ‘‘Supplementary Rules for Class Arbitrations,’’ at Subsidiary,’’ (Aug. 22, 2011), available at https:// Ensnare Consumers,’’ (2007), available athttps:// www.sfcityattorney.org/2011/08/22/herrera-secures- Rule 3 (effective Oct. 8, 2003) (‘‘Upon appointment, www.citizen.org/our-work/access-justice/ the arbitrator shall determine as a threshold matter, 5-million-settlement-consumer-safeguards-against- arbitration-trap. bofa-credit-card-subsidiary/. in a reasoned, partial final award on the 97 See Mollenkamp, supra note 96. In addition to 101 Memorandum and Order, In re National construction of the arbitration clause, whether the cases relating to debt collection arbitrations, NAF Arbitration Forum Trade Practices Litig., No. 10– applicable arbitration clause permits the arbitration was later added as a defendant to the Ross v. Bank 02122 (D. Minn. Aug. 8, 2011), ECF 120. to proceed on behalf of or against a class (the of America case, a putative class action pertaining 102 ‘‘Clause Construction Award.’’); JAMS, ‘‘Class to non-disclosure of foreign currency conversion See Press Release, AAA, ‘‘The American Action Procedures,’’ at Rule 2: Construction of the fees; NAF was alleged to have facilitated an Arbitration Association Calls for Reform of Debt Arbitration Clause (effective May 1, 2009) (‘‘[O]nce antitrust conspiracy among credit card companies Collection Arbitration,’’ (July 23, 2009), available at appointed, the Arbitrator, following the law to adopt arbitration agreements. NAF settled those https://www.nclc.org/images/pdf/arbitration/ applicable to the validity of the arbitration clause allegations. See Order Preliminarily Approving testimonysept09-exhibit3.pdf. See also AAA, as a whole, or the validity of any of its terms, or Class Action Settlement as to Defendant National ‘‘Consumer Debt Collection Due Process Protocol any court order applicable to the matter, shall Arbitration Forum Inc., In re Currency Conversion Statement of Principles,’’ (2010), available at determine as a threshold matter whether the Fee Antitrust Litig., No. 1409 (S.D.N.Y. Dec. 13, https://www.adr.org/aaa/ShowProperty?nodeId=%2 arbitration can proceed on behalf of or against a 2011). FUCM%2FADRSTG_003865. JAMS has reported to class.’’). 98 California v. National Arbitration Forum, Inc., the Bureau that it only handles a small number of 95 See, e.g., Discover Financial Services, Annual No. 473–569 (S.F. Sup. Ct. Mar. 2009). debt collection claims and often those arbitrations Report (Form 10–K) (Feb. 25, 2015) at 43 (‘‘[W]e 99 See Complaint at 2, State of Minnesota v. are initiated by consumers. 81 FR 32830, 32836 have historically relied on our arbitration clause in National Arbitration Forum, Inc., No. 09–18550 (4th n.97 (May 24, 2016). agreements with customers to limit our exposure to Jud. Dist. Minn. July 14, 2009), available at https:// 103 See Press Release, AAA, supra note 102. consumer class action litigation . . .’’); Synchrony www.nclc.org/images/pdf/unreported/ 104 9 U.S.C. 2 (providing that agreements to Financial, Annual Report (Form 10–K) (Feb. 23, naf_complaint.pdf. arbitrate ‘‘shall be valid, irrevocable, and

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provisions prohibiting arbitration from with the absence of multilayered SEC approved this rule in 1992.115 In proceeding on a class basis—as well as review).110 As a result of the Court’s addition, since 1976, the regulations of other features of particular arbitration holding, parties to litigation could no the Commodity Futures Trading agreements—were unconscionable longer prevent the use of an arbitration Commission (CFTC) implementing the under State law or otherwise agreement to block a class action in Commodity Exchange Act (CEA) have unenforceable.105 Initially, these court on the ground that a prohibition required that arbitration agreements in challenges yielded conflicting results. on class arbitration in the agreement commodities contracts be voluntary.116 Some courts held that class arbitration was unconscionable under the relevant In 2004, the Federal National Mortgage waivers were not unconscionable.106 State law.111 The Court further held, in Association (Fannie Mae) and the Other courts held that such waivers a 2013 decision, that a court may not Federal Home Loan Mortgage were unenforceable on use the ‘‘effective vindication’’ Corporation (Freddie Mac)— 107 unconscionability grounds. Some of doctrine—under which a court may government-sponsored enterprises that these decisions also held that the FAA invalidate an arbitration agreement that purchase a large share of mortgages— did not preempt application of a State’s ceased purchasing mortgages that 108 operates to waive a party’s right to unconscionability doctrine. pursue statutory remedies—to contained arbitration agreements.117 Before 2011, courts were divided on invalidate a class arbitration waiver on Since 1975, FTC regulations whether arbitration agreements that bar the grounds that the plaintiff’s cost of implementing the Magnuson-Moss class proceedings were unenforceable Warranty Act (MMWA) have barred the because they violated a particular individually arbitrating the claim exceeds the potential recovery.112 use, in consumer warranty agreements, State’s laws. Then, in 2011, the of arbitration agreements that would Supreme Court held in AT&T Mobility Regulatory and Legislative Activity result in binding decisions.118 Some v. Concepcion that the FAA preempted courts in the late 1990s disagreed with application of California’s As arbitration agreements in unconscionability doctrine to the extent consumer contracts became more 115 See Self-Regulatory Organizations; National it would have precluded enforcement of common, Federal regulators, Congress, Ass’n of Securities Dealers, Inc.; Order Approving a consumer arbitration agreement with a and State legislatures began to take Proposed Rule Change Relating to the Exclusion of provision prohibiting the filing of notice of their impact on the ability of Class Actions from Arbitration Proceedings, Exchange Act Release No. 31371, 1992 WL 324491, arbitration on a class basis. The Court consumers to resolve disputes. One of (Oct. 28, 1992) (citing Securities and Exchange Act, concluded that any State law—even one the first entities to regulate arbitration section 19(b)(1) and Rule 19b–4). In a separate that serves as a general contract law agreements was the National context, the SEC has opposed attempts by defense—that ‘‘[r]equir[es] the companies to include arbitration agreements in Association of Securities Dealers—now their securities filings in order to force shareholders availability of classwide arbitration known as the Financial Industry to arbitrate disputes rather than litigate them in interferes with fundamental attributes of Regulatory Authority (FINRA)—the self- court. See, e.g., Carl Schneider, ‘‘Arbitration arbitration and thus creates a scheme regulating body for the securities Provisions in Corporate Governance Documents,’’ inconsistent with the FAA.’’ 109 The Harv. L. Sch. Forum on Corp. Governance and Fin. industry that also administers Reg. (Apr. 27, 2012), available at https:// Court reasoned that class arbitration arbitrations between member companies corpgov.law.harvard.edu/2012/04/27/arbitration- eliminates the principal advantage of and their customers.113 Under FINRA’s provisions-in-corporate-governance-documents/ arbitration—its informality—and Code of Arbitration for customer (‘‘According to published reports, the SEC advised increases risks to defendants (due to the Carlyle that it would not grant an acceleration order disputes, FINRA members have been permitting the registration statement to become high stakes of mass resolution combined prohibited since 1992 from enforcing an effective unless the arbitration provision was arbitration agreement against any withdrawn.’’). Carlyle subsequently withdrew its enforceable, save upon such grounds as exist at law member of a certified or putative class arbitration provision. or in equity for the revocation of any contract.’’). 116 Arbitration or Other Dispute Settlement 105 See, e.g., Opening Brief on the Merits at 5, unless and until the class treatment is Procedures, 41 FR 42942, 42946 (Sept. 29, 1976); 17 Discover Bank v. Superior Court, No. S113725, 2003 denied (or a certified class is CFR 166.5(b). WL 26111906, (Cal. 2005) (‘‘[A] ban on class actions decertified) or the class member has 117 See Kenneth Harney, ‘‘Fannie Follows Freddie in an adhesive consumer contract such as the one opted out of the class or class relief.114 in Banning Mandatory Arbitration,’’ Wash. Post, at issue here is unconscionable because it is one- FINRA’s code also requires this Oct. 9, 2004, available at http:// sided and effectively non-mutual—that is, it www.washingtonpost.com/wp-dyn/articles/ benefits only the corporate defendant, and could limitation to be set out in any member A18052–2004Oct8.html. never operate to the benefit of the consumer.’’). company’s arbitration agreement. The 118 16 CFR 703.5(j). The FTC’s rules do permit 106 See, e.g., Strand v. U.S. Bank N.A., 693 NW.2d warranties that require consumers to resort to an 918 (N.D. 2005); Edelist v. MBNA America Bank, informal dispute resolution mechanism before 110 Id. at 348–51. 790 A.2d 1249 (Sup. Ct. of Del., New Castle Cty. proceeding in a court, but decisions from such 111 2001). See Robert Buchanan Jr., ‘‘The U.S. Supreme informal proceedings are not binding and may be 107 See, e.g., Brewer v. Missouri Title Loans, Inc., Court’s Landmark Decision in AT&T Mobility v. challenged in court. (By contrast, most arbitration 323 SW.3d 18 (Mo. 2010) (en banc); Feeney v. Dell, Concepcion: One Year Later,’’ Bloomberg Legal awards are binding and may only be challenged on Inc., 908 NE.2d 753 (Mass. 2009); Fiser v. Dell News, May 8, 2012, available at http:// very limited grounds as provided by the FAA.) The Computer Corp., 188 P.3d 1215 (N.M. 2008); www.bna.com/att-v-concepcion-one-year-later/ FTC’s rulemaking was based on authority expressly Tillman v. Commercial Credit Loans, Inc., 655 (noting that 45 out of 61 cases involving a class delegated by Congress in its passage of the MMWA SE.2d 362 (N.C. 2008); Dale v. Comcast Corp., 498 waiver in an arbitration agreement were sent to pertaining to informal dispute settlement F.3d 1216 (11th Cir. 2007) (holding that class action arbitration). The Court did not preempt all State law procedures. 15 U.S.C. 2310(a)(2). Until 1999, courts ban in arbitration agreement substantively contract defenses under all circumstances; rather, upheld the validity of the rule. See 80 FR 42719; unconscionable under Georgia law); Scott v. these doctrines remain available provided that they see also Jonathan D. Grossberg, ‘‘The Magnuson- Cingular Wireless, 161 P.3d 1000 (Wash. 2007) (en are not applied in a manner that disfavors Moss Warranty Act, the Federal Arbitration Act, banc); Kinkel v. Cingular Wireless LLC, 857 NE.2d arbitration. and the Future of Consumer Protection,’’ 93 Cornell 250 (Ill. 2006); Muhammad v. Cnty. Bank of 112 American Express Co. v. Italian Colors L. Rev. 659, at 667 (2008). After 1999, two appellate Rehoboth Beach, Del., 912 A.2d 88 (N.J. 2006); Restaurant, 133 S. Ct. 2304, 2309 (2013). courts questioned whether the MMWA was Discover Bank v. Superior Court, 113 P.3d 1100 113 See FINRA, ‘‘Arbitration and Mediation,’’ intended to reach arbitration agreements. See Final (Cal. 2005). https://www.finra.org/arbitration-and-mediation Action Concerning Review of the Interpretations of 108 See, e.g., Feeney, 908 NE.2d at 767–69; Scott, (last visited Feb. 8, 2017). Magnuson-Moss Warranty Act, 80 FR 42710, 42719 161 P.3d at 1008–09; Discover Bank, 113 P.3d at 114 FINRA, ‘‘Class Action Claims,’’ at Rule and nn.115–116 (July 20, 2015) (citing Davis v. 1110–17. 12204(d). For individual disputes between brokers Southern Energy Homes, Inc., 305 F.3d 1268 (11th 109 AT&T Mobility LLC v. Concepcion, 563 U.S. and customers, FINRA requires individual Cir. 2002); Walton v. Rose Mobile Homes, LLC, 298 333, 344 (2011). arbitration. F.3d 470 (5th Cir. 2002).

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the FTC’s interpretation, but the FTC the Military Lending Act (MLA), which, Section 921 of the Act authorized the promulgated a final rule in 2015 that among other things, prohibited the use SEC to issue rules to prohibit or impose ‘‘reaffirm[ed] its long-held view’’ that of arbitration provisions in extensions of conditions or limitations on the use of the MMWA ‘‘disfavors, and authorizes credit to active servicemembers, their arbitration agreements by investment the Commission to prohibit, mandatory spouses, and certain dependents.126 As advisers.131 Section 922 of the Act binding arbitration in warranties.’’119 In first implemented by Department of invalidated the use of arbitration doing so, the FTC noted that the Defense (DoD) regulations in 2007, the agreements in connection with certain language of the MMWA presupposed MLA applied to ‘‘[c]losed-end credit whistleblower proceedings.132 Finally, that the kinds of informal dispute with a term of 91 days or fewer in which and as discussed in greater detail below, settlement mechanisms the FTC would the amount financed does not exceed section 1028 of the Act required the permit would not foreclose the filing of $2,000.’’ 127 In July 2015, DoD Bureau to study the use of arbitration a civil action in court.120 promulgated a final rule that agreements in contracts for consumer More recently, the Department of significantly expanded that definition of financial products and services and Labor finalized a rule addressing ‘‘consumer credit’’ to cover closed-end authorized this rulemaking.133 The conflicts of interest in retirement loans that exceeded $2,000 or had terms authority of the Bureau and the SEC are advice.121 To be eligible for an longer than 91 days as well as various similar under the Dodd-Frank Act exemption from part of that rule, a forms of open-end credit, including except that the SEC does not have to covered entity cannot employ an credit cards.128 In 2008, Congress complete a study before promulgating a arbitration agreement that can be used amended Federal agriculture law to rule. to block a class action, although require, among other things, that State legislatures have also taken agreements mandating arbitration of livestock or poultry contracts containing steps to regulate the arbitration process. individual disputes will continue to be arbitration agreements disclose the right Several States, most notably California, permitted.122 Other agencies are of the producer or grower to decline the require arbitration administrators to reevaluating their arbitration initiatives. arbitration agreement; the Department of disclose basic data about consumer The Department of Education recently Agriculture issued a final rule arbitrations that take place in the sought to postpone implementation of a implementing the statute in 2011.129 State.134 However, States are rule that was intended to limit the As previously noted, Congress again constrained in their ability to regulate impact of arbitration agreements in addressed arbitration agreements in the arbitration because the FAA preempts certain college enrollment agreements 2010 Dodd-Frank Act. Dodd-Frank conflicting State law.135 by addressing the use of arbitration section 1414(a) prohibited the use of Arbitration Today agreements to bar students from arbitration agreements in mortgage bringing group claims.123 The Centers contracts, which the Bureau Today, the AAA is the primary for Medicare and Medicaid Services implemented in its Regulation Z.130 administrator of consumer financial (CMS) have proposed revisions to a rule arbitrations.136 The AAA’s consumer finalized in late 2016 regarding the under which a motor vehicle manufacturer, financial arbitrations are governed by requirements that long-term health care importer, or distributor sells motor vehicles to any the AAA Consumer Arbitration Rules, other person for resale to an ultimate purchaser and which includes provisions that, among facilities must meet to participate in the authorizes such other person to repair and service Medicare and Medicaid programs.124 the manufacturer’s motor vehicles.’’ Id. at section other things, limit filing and Congress has also taken several steps 11028(a)(1)(B), 116 Stat. 1835, codified at 15 U.S.C. administrative costs for consumers.137 to address the use of arbitration 1226(a)(1)(B). The AAA also has adopted the AAA 126 John Warner National Defense Authorization Consumer Due Process Protocol, which agreements in different contexts. In Act for Fiscal Year 2007, Public Law 109–364, 120 2002, Congress amended Federal law to Stat. 2083 (2006). creates a floor of procedural and require that, whenever a motor vehicle 127 Limitations on Terms of Consumer Credit substantive protections and affirms that franchise contract contains an Extended to Service Members and Dependents, 72 ‘‘[a]ll parties are entitled to a arbitration agreement, arbitration may FR 50580 (Aug. 31, 2007) (codified at 32 CFR 232). fundamentally-fair arbitration 128 See 32 CFR 232.8(c). Creditors must comply be used to resolve the dispute only if, with the requirements of the rule for transactions require arbitration or any other nonjudicial after a dispute arises, all parties to the or accounts established or consummated on or after procedure as the method for resolving any October 3, 2016, subject to certain exemptions. 32 dispute consent in writing to the use of controversy or settling any claims arising out of the 125 CFR 232.13(a). The rule applies to credit card arbitration. In 2006, Congress passed transaction.’’); 12 CFR 1026.36(h)(1). accounts under an open-end consumer credit plan 131 only on October 3, 2017. 32 CFR 232.13(c)(2). Dodd-Frank section 921(b). 119 See 80 FR 42710, 42719 (July 20, 2015). Earlier, Congress passed an appropriations 132 Dodd-Frank section 922(c)(2). 120 See id. provision prohibiting Federal contractors and 133 Dodd-Frank section 1028(a). 121 Best Interest Contract Exemption, 81 FR 21002 subcontractors receiving Department of Defense 134 Cal. Civ. Proc. Code sec. 1281.96 (amended (Apr. 8, 2016). funds from requiring employees or independent effective Jan. 1, 2015); DC Code sec. 16–4430; Md. 122 81 FR 21002, 21020 (Apr. 8, 2016). contractors to arbitrate certain kinds of employment Comm. L. Code, secs. 14–3901–05; 10 M.R.S.A. sec. 123 See Student Assistance General Provisions, 82 claims. See Department of Defense Appropriations 1394 (Maine). FR 27621 (June 16, 2017); see also Student Act of 2010, Public Law 111–118, 123 Stat. 3454 135 See Doctor’s Assocs., Inc. v. Casarotto, 517 Assistance General Provisions, 81 FR 75926, 76021– (2010), section 8116. U.S. 681, 687 (1996) (‘‘Courts may not, however, 31 (Nov. 1, 2016). 129 Food, Conservation, and Energy Act of 2008, invalidate arbitration agreements under state laws 124 The recent proposal seeks to amend the 2016 Public Law 110–234, section 11005, 122 Stat. 1356– applicable only to arbitration provisions.’’); Perry v. rule’s required terms for the use of arbitration 58 (2008), codified at 7 U.S.C. 197c; Thomas, 482 U.S. 483, 492 n.9 (1987) (‘‘[S]tate law, agreements between long-term care facilities and Implementation of Regulations Required Under whether of legislative or judicial origin, is residents of those facilities. 82 FR 26649 (June 5, Title XI of the Food, applicable if that law arose to govern issues 2017); see also Centers for Medicare & Medicaid Conservation and Energy Act of 2008; Suspension concerning the validity, revocability, and Services, Medicare and Medicaid Programs, Reform of Delivery of Birds, Additional Capital Investment enforceability of contracts generally. A state-law of Requirements for Long-Term Care Facilities, 81 Criteria, Breach of Contract, and Arbitration, 76 FR principle that takes its meaning precisely from the FR 68688 (Oct. 4, 2016). 76874, 76890 (Dec. 9, 2011). fact that a contract to arbitrate is at issue does not 125 21st Century Department of Justice 130 See Dodd-Frank section 1414(a) (codified as comport with this requirement of [FAA] sec. 2.’’). Appropriations Authorization Act, Public Law 107– 15 U.S.C. 1639c(e)(1)) (‘‘No residential mortgage 136 See infra Part III.D. 273, section 11028(a)(2), 116 Stat. 1835 (2002), loan and no extension of credit under an open end 137 AAA, ‘‘Consumer Arbitration Rules,’’ codified at 15 U.S.C. 1226(a)(2). The statute defines consumer credit plan secured by the principal (effective Sept. 1, 2014), available at https://adr.org/ ‘‘motor vehicle franchise contract’’ as ‘‘a contract dwelling of the consumer may include terms which sites/default/files/Consumer%20Rules.pdf.

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process.’’ 138 A second entity, JAMS, product types filed over a period of sources for the Study. Specifically, the administers consumer financial three years, the Study found only Bureau asked for input on how it should arbitrations pursuant to the JAMS three.142 Industry has criticized class address three topics: (1) The prevalence Streamlined Arbitration Rules & arbitration on the ground that it lacks of arbitration agreements in contracts for Procedures 139 and the JAMS Consumer procedural safeguards. For example, consumer financial products and Minimum Standards.140 These class arbitration generally has limited services; (2) arbitration claims involving administrators’ procedures for judicial review of arbitrator decisions, consumers and companies; and (3) other arbitration both differ in several respects for example, on a decision to certify a impacts of arbitration agreements on from the procedures found in court, as class or an award of substantial consumers and companies, such as discussed in Section 4 of the Study and damages.143 impacts on the incidence of consumer summarized below at Part III.D. claims against companies, prices of III. The Arbitration Study Further, although virtually all consumer financial products and arbitration agreements in the consumer Section 1028(a) of the Dodd-Frank Act services, and the development of legal financial context expressly preclude directed the Bureau to study and precedent. The Bureau also requested arbitration from proceeding on a class provide a report to Congress on ‘‘the use comment on whether and how the basis, the major arbitration of agreements providing for arbitration Study should address additional topics. administrators do provide procedures of any future dispute between covered In response to the RFI, the Bureau for administering class arbitrations and persons and consumers in connection received and reviewed 60 comment have occasionally administered them in with the offering or providing of letters. The Bureau also met with class arbitrations involving providers of consumer financial products or numerous commenters and other consumer financial products and services.’’ Pursuant to section 1028(a), stakeholders to obtain additional services.141 These procedures, which the Bureau conducted a study of the use feedback on the RFI. are derived from class action litigation of pre-dispute arbitration agreements in The feedback received through this procedures used in court, are described contracts for consumer financial process substantially affected the scope in Section 4.8 of the Study. These class products and services and, in March of the Study the Bureau undertook. For arbitration procedures will only be used 2015, delivered to Congress its example, several industry trade by the AAA or JAMS if the arbitration Arbitration Study: Report to Congress, association commenters suggested that administrator first determines that the Pursuant to Dodd-Frank Wall Street the Bureau study not only consumer arbitration agreement can be construed Reform and Consumer Protection Act financial arbitration but also consumer as permitting class arbitration. These § 1028(a).144 financial litigation in court. The Study class arbitration procedures are not This Part describes the process the incorporated an extensive analysis of widely used in consumer financial Bureau used to carry out the Study and consumer financial litigation—both services disputes: Reviewing consumer summarizes the Study’s results. Where individual litigation and class financial arbitrations pertaining to six relevant, this Part then sets forth actions.146 Commenters also advised the comments received in response to the Bureau to compare the relationship 138 AAA, ‘‘Consumer Due Process Protocol proposal that were specific to the Study between public enforcement actions and Statement of Principles,’’ at Principle 1, available and its results. The Bureau generally private class actions. The Study at http://info.adr.org/consumer-arbitration/. Other included extensive research into this principles include that all parties are entitled to a addresses the outcome of its Study, neutral arbitrator and administrator (Principle 3), including analyses of the results of the subject, including an analysis of public that all parties retain the right to pursue small Study, in Part VI, Findings, below. In enforcement actions filed over a period claims (Principle 5), and that face-to-face arbitration some instances, the Bureau has elected of five years by State and Federal should be conducted at a ‘‘reasonably convenient’’ regulators and the relationship, or lack location (Principle 6). The AAA explained that it to address issues related to both the adopted these principles because, in its view, Study and the Findings in Part VI. of relationship of these cases to private 147 ‘‘consumer contracts often do not involve arm’s class litigation. Commenters also length negotiation of terms, and frequently consist A. April 2012 Request for Information recommended that the Bureau study of boilerplate language.’’ The AAA further At the outset of its work, on April 27, whether arbitration reduces companies’ explained that ‘‘there are legitimate concerns regarding the fairness of consumer conflict 2012, the Bureau published a Request dispute resolution costs and the resolution mechanisms required by suppliers. This for Information (RFI) in the Federal relationship between any such cost is particularly true in the realm of binding Register concerning the Study.145 The savings and the cost and availability of arbitration, where the courts are displaced by RFI sought public comment on the consumer financial products and private adjudication systems.’’ Id. at 4. services. To investigate this, the Study 139 JAMS, ‘‘Streamline Arbitration Rules & appropriate scope, methods, and data Procedures,’’ (effective July 1, 2014), available at included a ‘‘difference-in-differences’’ http://www.jamsadr.com/rules-streamlined- 142 Study, supra note 3, section 5 at 86–87. The regression analysis using a arbitration/. If a claim or counterclaim exceeds review of class action filings in five of these markets representative random sample of the $250,000, the JAMS Comprehensive Arbitration also identified one of these two class arbitrations, Bureau’s Credit Card Database, to look Procedures, not the Streamlined Rules & as well as an additional class action arbitration filed Procedures, apply. Id. at Rule 1(a). with JAMS following the dismissal or stay of a class for price impacts associated with 140 See JAMS, ‘‘JAMS Policy on Consumer litigation. Id. section 6 at 59. changes relating to arbitration Arbitrations Pursuant to Pre-Dispute Clauses: 143 In a recent amicus curiae filing, the U.S. agreements for credit cards, an analysis Minimum Standards on Procedural Fairness,’’ Chamber of Commerce argued that ‘‘[c]lass that had never before been (effective July 15, 2009), available at https:// arbitration is a worst-of-all-worlds Frankenstein’s 148 www.jamsadr.com/consumer-minimum-standards/ monster: It combines the enormous stakes, formality conducted. (setting forth 10 standards). This policy explains and expense of litigation that are inimical to In some cases, commenters to the RFI that ‘‘JAMS will administer arbitrations pursuant to bilateral arbitration with exceedingly limited encouraged the Bureau to study a topic, mandatory pre-dispute arbitration clauses between judicial review of the arbitrators’ decisions.’’ Brief but the Bureau did not do so because companies and consumers1 only if the contract of the Chamber of Commerce of the United States certain effects did not appear arbitration clause and specified applicable rules of America as Amicus Curiae in Support of comply with the following minimum standards of Plaintiff-Appellants at 9, Marriott Ownership fairness.’’ Id. Resorts, Inc. v. Sterman, No. 15–10627 (11th Cir. 146 See generally Study, supra note 3, sections 6 141 See AAA, ‘‘Class Arbitration Case Docket,’’ Apr. 1, 2015). and 8. https://www.adr.org/casedockets (last visited Feb. 144 Study, supra note 3. 147 Id. at section 9. 9, 2017). 145 Arbitration Study RFI, supra note 16. 148 Id. section 10 at 7–14.

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measurable. For example, some which are published in Section 3 of the on several of these topics drew in part commenters suggested that the Bureau Study). The Bureau obtained approval upon data sources previously study the effect of arbitration for the consumer survey from the Office unavailable to researchers. For example, agreements on the development, of Management and Budget (OMB), and the AAA voluntarily provided the interpretation, and application of the each version of the materials submitted Bureau with case files for consumer rule of law. The Bureau did not identify to OMB during this process included arbitrations filed from the beginning of a robust data set that would allow draft versions of the survey 2010, approximately when the AAA empirical analysis of this phenomenon. instrument.153 In June 2013, the Bureau began maintaining electronic records, to Nonetheless, legal scholars have published a Federal Register notice that the end of 2012. Compared to data sets subsequently attempted to quantify this solicited public comment on its previously available to researchers, the effect in relation to consumer law.149 proposed approach to the survey and AAA case files covered a much longer received 17 comments in response. In B. December 2013 Preliminary Results period and were not limited to case files July 2013, the Bureau hosted two for cases resulting in an award. Using In December 2013, the Bureau issued roundtable meetings to consult with this data set, the Bureau conducted the a 168-page report summarizing its various stakeholders including industry first analysis of arbitration frequency preliminary results on a number of groups, banking trade associations, and and outcomes specific to consumer topics (Preliminary Results).150 One consumer advocates. After considering financial products and services.154 purpose of releasing the Preliminary the comments and conducting two focus Similarly, the Bureau submitted orders Results was to solicit additional input groups to help refine the survey, but to financial service providers in the from the public about the Bureau’s work before undertaking the survey, the checking account and payday loan on the Study to date. In the Preliminary Bureau published a second Federal markets, pursuant to its market Results, the Bureau also included a Register notice in May 2014, which section that set out a detailed roadmap monitoring authority under Dodd-Frank generated an additional seven section 1022(c)(4), to obtain a sample set of the Bureau’s plans for future work, comments. including the Bureau’s plans to address of agreements of those institutions. topics that had been suggested in D. The March 2015 Arbitration Study Using these agreements, among others response to the RFI.151 The Bureau ultimately focused on gathered from other sources, the Bureau In February 2014, the Bureau invited nine empirical topics in the Study: conducted the most comprehensive stakeholders for in-person discussions 1. The prevalence of arbitration analysis to date of the arbitration with staff regarding the Preliminary agreements in contracts for consumer content of contracts for consumer Results, as well as the Bureau’s future financial products and services and financial products and services.155 work plan. Several external their main features (Section 2 of the The results of the Study also broke stakeholders, including industry Study); new ground because the Study, associations and consumer advocates, 2. Consumers’ understanding of compared to prior research, generally took that opportunity and provided dispute resolution systems, including considered larger data sets than had additional input regarding the Study. arbitration and the extent to which been reviewed by other researchers dispute resolution clauses affect C. Comments on Survey Design while also narrowing its analysis to consumer’s purchasing decisions consumer financial products and Pursuant to the Paperwork Reduction (Section 3 of the Study); Act services. In total, the Study included the 3. How arbitration procedures differ review of over 850 agreements for In the Preliminary Results, the Bureau from procedures in court (Section 4 of certain consumer financial products and indicated that it planned to conduct a the Study); services; 1,800 consumer financial survey of consumers. The purpose of the 4. The volume of individual consumer services arbitrations filed over a three- survey was to assess consumer financial arbitrations, the types of year period; a random sample of the awareness of arbitration agreements, as claims, and how they are resolved nearly 3,500 individual consumer well as consumer perceptions of, and (Section 5 of the Study); finance cases identified as having been 5. The volume of individual and class expectations about, dispute resolution filed over a period of three years in consumer financial litigation, the types with respect to disputes between Federal and selected State courts; and of claims, and how they are resolved consumers and financial services all of the 562 consumer finance class providers.152 Pursuant to the Paperwork (Section 6 of the Study); 6. The extent to which consumers sue actions identified in Federal and Reduction Act (PRA), the Bureau also selected State courts of the same time undertook an extensive public outreach companies in small claims court with respect to disputes involving consumer period. The Study also included over and engagement process in connection 40,000 filings in State small claims with its consumer survey (the results of financial services (Section 7 of the Study); courts over the course of a single year. The Bureau supplemented this research 149 See Myriam Gilles, ‘‘The End of Doctrine: 7. The size, terms, and beneficiaries of Private Arbitration Public Law and the Anti- consumer financial class action by assembling and analyzing all of the Lawsuit Movement,’’ (Benjamin N. Cardozo Sch. of settlements (Section 8 of the Study); more than 400 consumer financial class L. Faculty Res. Paper No. 436, 2014) (analyzing 8. The relationship between public action settlements in Federal courts over cases under ‘‘counterfactual scenarios’’ as to ‘‘what enforcement and consumer financial a five-year period and more than 1,100 doctrinal developments in antitrust and consumer law . . . would not have occurred over the past class actions (Section 9 of the Study); State and Federal public enforcement 156 decade if arbitration clauses had been deployed to and actions in the consumer finance area. the full extent now authorized by the Supreme 9. The extent to which arbitration Court’’). agreements lead to lower prices for 154 Study, supra note 3, section 5 at 19–68. 150 Bureau of Consumer Fin. Prot., ‘‘Arbitration consumers (Section 10 of the Study). 155 See generally id. section 2. Study Preliminary Results,’’ (Dec. 12, 2013), As described further in each 156 Since the publication of the Study, the Bureau available at http://files.consumerfinance.gov/f/ determined that 41 FDIC enforcement actions were _ _ 201312 cfpb arbitration-study-preliminary- subsection below, the Bureau’s research inadvertently omitted from the results published in results.pdf. Section 9 of the Study. The corrected total number 151 Id. at 129–131. 153 The survey was assigned OMB control number of enforcement actions reviewed in Section 9 was 152 Id. at 129. 3170–0046. 1,191. Other figures, including the identification of

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The Study also included the findings of study while still obtaining by the Credit Card Accountability, the Bureau’s survey of over 1,000 credit representative data. Responsibility and Disclosure Act card consumers, focused on exploring Beyond that, it is worth noting that it (CARD Act) as implemented by their knowledge and understanding of is the case with any research—even Regulation Z.160 Taken together, these arbitration and other dispute resolution research as extensive and painstaking as contracts covered nearly all consumers mechanisms. The sections below the Study—that it is always possible, ex in the credit card market. For deposit describe in detail the process the Bureau post, to think of additional questions accounts, the Bureau identified the 100 followed in undertaking each section of that could have been asked, additional largest banks and the 50 largest credit the Study, summarize the main results data that could have been procured, or unions, and constructed a random of each section, and then summarizes additional analyses that could have sample of 150 small and mid-sized and addresses criticisms of the Study been performed. The Bureau does not banks. The Bureau obtained the deposit results.157 interpret section 1028’s direction to account agreements for these Before doing so, one preliminary study the use of arbitration agreements institutions by downloading them from observation is in order. With rare in consumer finance to require the the institutions’ Web sites and through exception, the commenters did not Bureau to research every conceivably orders sent to institutions using the criticize the methodologies the Bureau relevant question or to exhaust every Bureau’s market monitoring authority. used to assemble the various data sets conceivable data source as a For GPR prepaid cards, the Bureau’s used in the Study or the analyses the precondition to exercising the sample included agreements from two Bureau conducted of these data. Rather, regulatory authority contained in that sources. The Bureau gathered to the extent commenters addressed the section. As discussed in substantial agreements for 52 GPR prepaid cards Study itself—as distinguished from the detail below in Part VI, the Bureau that were listed on the Web sites of two interpretation or significance of the believes that its extensive research major card networks and a Web site that Study’s findings—in the main the provides ample evidence that the provided consolidated card information commenters suggested that the Bureau restrictions on the use of arbitration as of August 2013. The Bureau also should have engaged in additional agreements contained in this Rule are in obtained agreements from GPR prepaid analyses. the public interest and for the protection card providers that had been included As explained in more detail below, in of consumers. in several recent studies of the terms of many instances the analyses that 1. Prevalence and Features of GPR prepaid cards and that continued commenters suggested were not feasible to be available as of August 2014.161 For given the limitations on the data Arbitration Agreements (Section 2 of Study) the storefront payday loan market, the available to the Bureau. For example, as Bureau again used its market monitoring discussed below, the Bureau did not Section 2 of the Study addressed two authority to obtain a sample of 80 have a feasible way of studying the central issues relating to the use of payday loan contracts from storefront actual costs that financial service arbitration agreements: How frequently payday lenders in California, Texas, and providers incur in defending class such agreements appear in contracts for Florida.162 For the private student loan actions or studying the outcomes of consumer financial products and market, the Bureau sampled seven arbitration or individual litigation cases services and what features such private student loan contracts plus the that were settled (or resolved in a agreements contain. Among other form contract used by 250 credit unions manner consistent with a settlement) findings, the Study determined that that use a leading credit union service unless the case records reflected the arbitration agreements are commonly organization.163 For the mobile wireless settlement terms. In other instances, the used in contracts for consumer financial market, the Bureau reviewed the analyses the commenters suggested— products and services and that the AAA wireless contracts of the eight largest such as studying the satisfaction of the is the primary administrator of facilities-based providers of mobile small number of consumers who file consumer financial arbitrations. wireless services 164 which also govern arbitration cases—were not, in the To conduct this analysis, the Bureau third-party billing services.165 Bureau’s judgment, relevant to reviewed contracts for six product markets: Credit cards, checking determining whether limitations on 160 12 CFR 1026.58(c) (requiring credit card arbitration agreements are in the public accounts, general purpose reloadable issuers to submit their currently-offered credit card interest and for the protection of (GPR) prepaid cards, payday loans, agreements to the Bureau to be posted on the consumers. And, in other instances, private student loans, and mobile Bureau’s Web site). resource limitations required the Bureau wireless contracts governing third-party 161 Study, supra note 3, section 2 at 18. billing services.158 Previous studies that 162 Id. section 2 at 21–22. This data was to deploy random sampling techniques supplemented with a smaller, non-random sample or to limit the number of years under analyzed the prevalence and features of of payday loan contracts from Tribal, offshore, and arbitration agreements in contracts for other online payday lenders, which is reported in public enforcement cases with overlapping private consumer financial products and Appendix C of the Study. actions, were not affected by this omission. services either relied on small samples 163 Id. section 2 at 24. 157 Overall, the markets assessed in the Study or limited their study to one market.159 164 Facilities-based mobile wireless service represent lending money (e.g., small-dollar open- providers are wireless providers that ‘‘offer mobile ended credit, small-dollar closed-ended credit, As a result, the Bureau’s inquiry in voice, messaging, and/or data services using their large-dollar unsecured credit, large-dollar secured Section 2 of the Study represents the own network facilities,’’ in contrast to providers credit), storing money (i.e., consumer deposits), and most comprehensive analysis to date of that purchase mobile services wholesale from moving or exchanging money. The Study also the arbitration content of contracts for facilities-based providers and resell the services to included debt relief and debt collection disputes consumers, among other types of providers. Federal arising from these consumer financial products and consumer financial products and Communications Commission, ‘‘Annual Report and services. Study, supra note 3, section 1 at 7–9. services. Analysis of Competitive Market Conditions with While credit scoring and credit monitoring were not The Bureau’s sample of credit card Respect to Mobile Wireless,’’ at 37–39 (2013), included in these product categories, settlements contracts consisted of contracts filed by available at https://www.fcc.gov/document/16th- regarding such products were included in the 423 issuers with the Bureau as required mobile-competition-report. Study’s analysis of class action settlements, as well 165 Study, supra note 3, section 2 at 25–26. In as the Study’s analysis of the overlap between mobile wireless third-party billing, a mobile public enforcement actions and private class action 158 Id. section 2 at 3. wireless provider authorizes third parties to charge litigation. 159 Id. section 2 at 4–6. Continued

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The analysis of the agreements that found that the AAA was the The Bureau’s analysis also found, the Bureau collected found that tens of predominant arbitration administrator among other things, that nearly all the millions of consumers use consumer for all the consumer financial products arbitration agreements studied included financial products or services that are the Bureau examined in the Study. The provisions stating that arbitration may subject to arbitration agreements, and contracts studied specified the AAA as not proceed on a class basis. Across that, in some markets such as checking at least one of the possible arbitration each product market, 85 percent to 100 accounts and credit cards, large administrators in 98.5 percent of the percent of the contracts with arbitration providers are more likely to have the credit card contracts with arbitration agreements—covering over 99 percent of agreements than small providers.166 In agreements; 98.9 percent of the checking market share subject to arbitration in the the credit card market, the Study found account contracts with arbitration six product markets studied—included that small bank issuers were less likely agreements; 100 percent of the GPR such no-class-arbitration provisions.178 to include arbitration agreements than prepaid card contracts with arbitration Most of the arbitration agreements that large bank issuers.167 Likewise, only 3.3 agreements; 85.5 percent of the included such provisions also contained percent of credit unions in the credit storefront payday loan contracts with an ‘‘anti-severability’’ provision stating card sample used arbitration arbitration agreements; and 66.7 percent that, if the no-class-arbitration provision agreements.168 As a result, while 15.8 of private student loan contracts with were to be held unenforceable, the percent of credit card issuers included arbitration agreements.175 The contracts entire arbitration agreement would 179 such agreements in their contracts, 53 specified the AAA as the sole option in become unenforceable as a result. percent of credit card loans outstanding 17.9 percent of the credit card contracts The Study found that most of the were subject to such agreements.169 In with arbitration agreements; 44.6 arbitration agreements contained a small the checking account market, the Study percent of the checking account claims court ‘‘carve-out,’’ permitting again found that larger banks tended to either the consumer or both parties to contracts with arbitration agreements; 180 include arbitration agreements in their 63.0 percent to 72.7 percent of the GPR file suit in small claims court. The consumer checking contracts (45.6 prepaid card contracts with arbitration Study similarly explored the number of percent of the largest 103 banks, agreements; 27.4 percent of the payday arbitration provisions that allowed representing 58.8 percent of insured loan contracts with arbitration consumers to ‘‘opt out’’ or otherwise deposits).170 In contrast, only 7.1 agreements; and one of the private reject an arbitration agreement. To percent of small-and mid-sized banks student loan contracts the Bureau exercise the opt-out right, consumers must follow stated procedures, which and 8.2 percent of credit unions used reviewed.176 arbitration agreements.171 In the GPR usually requires all authorized users on In contrast, JAMS is specified in prepaid card and payday loan markets, an account to physically mail a signed relatively fewer arbitration agreements. the Study found that the substantial written document to the issuer The Study found that the contracts majority of contracts—92.3 percent of (electronic submission is permitted only specified JAMS as at least one of the GPR prepaid card contracts and 83.7 rarely), within a stated time limit. With possible arbitration administrators in percent of the storefront payday loan the exception of storefront payday loans 40.9 percent of the credit card contracts contracts—included such and private student loans, the with arbitration agreements; 34.4 agreements.172 In the private student substantial majority of arbitration percent of the checking account loan and mobile wireless markets, the agreements in each market studied contracts with arbitration agreements; Study found that most of the large generally did not include opt-out 52.9 percent of the GPR prepaid card 181 companies—85.7 percent of the private provisions. contracts with arbitration agreements; student loan contracts and 87.5 percent The Study analyzed three different 59.2 percent of the storefront payday of the mobile wireless contracts—used types of cost provisions: Provisions loan contracts with arbitration arbitration agreements.173 addressing the initial payment of agreements; and 66.7 percent of private In addition to examining the arbitration fees; provisions that student loan contracts with arbitration prevalence of arbitration agreements, addressed the reallocation of arbitration agreements. JAMS was specified as the Section 2 of the Study reviewed 13 fees in an award; and provisions sole option in 1.5 percent of the credit features sometimes included in such addressing the award of attorney’s card contracts with arbitration 182 agreements.174 One feature the Bureau fees. Most arbitration agreements agreements (one contract); 1.6 percent of studied was which entity or entities reviewed in the Study contained the checking account contracts with were designated by the contract to provisions that had the effect of capping arbitration agreements (one contract); administer the arbitration. The Study consumers’ upfront arbitration costs at 63.0 percent to 72.7 percent of the GPR or below the AAA’s maximum consumers, on their wireless bill, for services prepaid card contracts with arbitration consumer fee thresholds. These same provided by the third parties. agreements; and none of the payday arbitration agreements took noticeably 166 Id. section 1 at 9. loan or private student loan contracts different approaches to the reallocation 167 Id. section 2 at 10. the Bureau reviewed.177 168 Id. 178 Id. section 2 at 44–47. 169 Id. As the Study noted, the Ross settlement— 175 Id. section 2 at 38. 179 Id. section 2 at 46–47. a 2009 settlement of an antitrust case in which four 176 Id. section 2 at 36. The prevalence of GPR 180 Id. section 2 at 33–34. of the 10 largest credit card issuers agreed to prepaid cards with arbitration agreements 181 Id. section 2 at 31–32. remove their arbitration agreements—likely specifying AAA as the sole option is presented as 182 impacted these results. Had the settling defendants Id. section 2 at 58. Many contracts— a range because two GPR prepaid firms studied in Ross continued to use arbitration agreements, particularly checking account contracts—included each used two different form cardholder 93.6 percent of credit card loans outstanding would general provisions about the allocation of costs and agreements, with different agreements pertaining to be subject to arbitration agreements. Id. section 2 at expenses arising out of disputes that were not different features. Because of this, it was unclear 11. specific to arbitration costs. Indeed, such provisions precisely how much of the prepaid market share were commonly included in contracts without 170 Id. section 2 at 14. represented by each provider was covered by a arbitration agreements as well. While such 171 Id. particular cardholder agreement. As such, for GPR provisions could be relevant to the allocation of 172 Id. section 2 at 19, 22. prepaid cards, prevalence by market share is expenses in an arbitration proceeding, the Study 173 Id. section 2 at 24, 26. presented as a range rather than a single figure. did not address such provisions because they were 174 Id. section 2 at 30. 177 Id. not specific to arbitration agreements.

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of arbitration fees in the arbitrator’s rights are more limited in arbitration.190 offer. The Study found that such award, with approximately one-fifth of The Study found that this language was provisions were uncommon; they the arbitration agreements in credit often capitalized or in boldfaced appeared in three out of the six private card, checking account, and storefront type.191 student loan agreements the Bureau payday loan markets permitting shifting The Study also examined whether reviewed, but, in markets other than company fees to consumers.183 The arbitration agreements limited recovery student loans, they appeared in 28.6 Study also found that only a small of damages—including punitive or percent or less of the agreements the number of agreements representing consequential damages—or specified Bureau studied.196 negligible shares of the relevant markets the time period in which a claim had to Comments received regarding the directed or permitted arbitrators to be brought. The Study determined that scope of Section 2 are addressed in Part award attorney’s fees to prevailing most agreements in the credit card, III.E below. companies.184 A significant share of payday loan, and private student loan 2. Consumer Understanding of Dispute arbitration agreements across almost all markets did not include damages Resolution Systems, Including markets did not address attorney’s limitations. However, the opposite was Arbitration (Section 3 of Study) fees.185 true of agreements in checking account Aside from costs more generally, the contracts, where more than three- Section 3 of the Study presented the Study found that many arbitration fourths of the market included damages results of the Bureau’s telephone survey limitations; GPR prepaid card contracts, of a nationally representative sample of agreements permit the arbitrator to 197 reallocate arbitration fees from one party almost all of which included such credit card holders. The survey to the other. About one-third of credit limitations; and mobile wireless examined two main topics: (1) The card arbitration agreements, one-fourth contracts, all of which included such extent to which dispute resolution of checking account arbitration limitations. A review of consumer clauses affected consumer’s decisions to agreements, and half of payday loan agreements without arbitration acquire credit cards; and (2) consumers’ arbitration agreements expressly agreements revealed a similar pattern, awareness, understanding, and permitted the arbitrator to shift albeit with damages limitations being knowledge of their rights in disputes 192 against their credit card issuers. In late attorney’s fees to the consumer.186 somewhat less common. 2014, the Bureau’s contractor completed However, as the Study pointed out, the The Study also found that a minority telephone surveys with 1,007 AAA’s consumer arbitration fee of arbitration agreements in two markets respondents who had credit cards.198 schedule, which became effective March set time limits other than the statute of The consumer survey found that 1, 2013, restricts such reallocation.187 limitations that would apply in a court when presented with a hypothetical With respect to another type of proceeding for consumers to file claims situation in which the respondents’ provision that affects consumers’ costs in arbitration. Specifically, these types credit card issuer charged them a fee in arbitration—where the arbitration of provisions appeared in 28.4 percent they knew to be wrongly assessed and must take place—the Study noted that and 15.8 percent of the checking in which they exhausted efforts to most, although not all, arbitration account and mobile wireless agreements 193 obtain relief from the company through agreements contained provisions by market share, respectively. Again, customer service, only 2.1 percent of requiring or permitting hearings to take a review of consumer agreements respondents stated that they would seek place in locations close to the without arbitration agreements showed legal advice or consider legal consumer’s place of residence.188 that 10.7 percent of checking account agreements imposed a one-year time proceedings.199 Almost the same Further, most of the arbitration limit for consumer claims.194 No proportion of respondents stated that agreements the Bureau studied storefront payday loan, private student they would simply pay for the contained disclosures describing the 200 loan, or mobile wireless contracts in the improperly assessed fee (1.7 percent). differences between arbitration and sample without arbitration agreements A majority of respondents (57.2 percent) litigation in court. Most agreements had such time limits.195 said that they would cancel their disclosed expressly that the consumer 201 The Study assessed the extent to cards. would not have a right to a jury trial, which arbitration agreements included and most disclosed expressly that the 196 contingent minimum recovery Id. section 2 at 70–71 (albeit covering 43.0 consumer could not be a party to a class percent of the storefront payday loan market subject provisions, which provide that action in court.189 Depending on the to arbitration agreements and 68.4 percent of the consumers would receive a specified product market, between one-quarter mobile wireless market subject to arbitration minimum recovery if an arbitrator agreements). and two-thirds of the agreements 197 awards the consumer more than the The Bureau focused its survey on credit cards disclosed four key differences between amount of the company’s last settlement because credit cards offer strong market penetration arbitration and litigation in court: No with consumers across the nation. Further, because jury trial is available in arbitration; major credit card issuers are required to file their 190 Id. section 2 at 72–79. agreements with the Bureau (12 CFR 1026.58(c)), parties cannot participate in class 191 Id. section 2 at 72 and n.144. limiting the survey to credit cards permitted the actions in court; discovery is typically 192 Id. section 2 at 49. More than one-third (35 Bureau to verify the accuracy of many of the more limited in arbitration; and appeal percent) of large bank checking account contracts respondents’ default assumptions about their without arbitration agreements included either a dispute resolution rights by examining the actual consequential damages waiver or a consequential credit card agreements to which the consumers 183 Id. section 2 at 62–66. damages waiver together with a punitive damages were subject to at the time of the survey. Id. section 184 Id. section 2 at 67. waiver. Similarly, one-third of GPR prepaid card 3 at 2. 185 Id. section 2 at 66–76. As described supra contracts without arbitration agreements included a 198 Based on the size of the Bureau’s sample, its when the arbitration agreement did not address the consequential damages waiver, a punitive damages results were representative of the national issue, the arbitrator is able to award attorney’s fees waiver, or both. The only mobile wireless contract population, with a sampling error of plus or minus when permitted elsewhere in the agreement or by without an arbitration agreement limited any 3.1 percent, though the sampling error is larger in applicable law. damages recovery to the amount of the subscriber’s connection with sample sets of fewer than the 1,007 186 Id. section 2 at 62–66. bill. Id. respondents. Id. section 3 at 10. 187 Id. section 2 at 61–62. 193 Id. section 2 at 50. 199 Id. section 3 at 18. 188 Id. section 2 at 53. 194 Id. section 2 at 51. 200 Id. 189 Id. section 2 at 72. 195 Id. 201 Id.

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Respondents also reported that factors similar proportion of respondents commenter said that the survey is relating to dispute resolution—such as without an arbitration agreement in their meaningless. the presence of an arbitration contract—7.7 percent compared to 6.8 A law firm commenter writing on agreement—played little to no role percent—reported that they could not behalf of an industry participant when they were choosing a credit card. sue their issuers in court.207 When suggested that the Study’s consumer When asked an open-ended question asked if they could participate in class survey was flawed because the Bureau about all the factors that affected their action lawsuits against their credit card only surveyed credit card consumers decision to obtain the credit card that issuer, more than half of the and that the Bureau should not draw they use most often for personal use, no respondents whose contracts had pre- general conclusions about consumers’ respondents volunteered an answer that dispute arbitration agreements thought understanding of dispute resolution referenced dispute resolution they could participate (56.7 percent).208 systems from survey results in a single procedures.202 When presented with a market in part because credit card Respondents were also generally list of nine features of credit cards— agreements are often provided unaware of any opt-out opportunities features such as interest rates, customer simultaneously with an access device afforded by their issuer. Only one service, rewards, and dispute resolution rather than when a consumer applies for respondent whose current credit card procedures—and asked to identify those a card. This is because, the commenter features that factored into their decision, contract permitted opting out of the suggested, that credit card contracts are arbitration agreement recalled being unique, because consumers do not respondents identified dispute 209 resolution procedures as being relevant offered such an opportunity. receive the complete loan agreement less often than any other option.203 Comments Received on Section 3 of the until they receive the card itself. As for consumers’ knowledge and Study Response to Comments Received on default assumptions as to the means by Section 3 which disputes between consumers and An industry commenter suggested financial service providers can be that the Bureau should conduct further The Bureau disagrees with the resolved, the survey found that analyses to gain a better understanding commenter that suggested that the consumers generally lacked awareness of consumer comprehension with Bureau should have conducted further regarding the effects of arbitration respect to arbitration agreements. The analyses of consumer comprehension. agreements. Of the survey’s 1,007 commenter asserted that this was The Bureau, in Section 3 of the Study, respondents, 570 respondents were able appropriate given statements from the explored in detail consumer to identify their credit card issuer with Bureau that many consumers do not comprehension issues with respect to sufficient specificity to enable the even know that they are bound by an arbitration agreements using a Bureau to find the issuer’s standard arbitration agreement. A different nationally representative telephone credit card agreement and thus to industry commenter thought the Bureau survey. As is discussed in the Study, compare the respondents’ beliefs with should have asked consumers if they among other findings, the Bureau respect to the terms of their agreements would decline to file a class action determined that a majority of with the agreements’ actual terms.204 against their credit card issuer because respondents whose credit cards include Among the respondents whose credit the presence of an arbitration agreement pre-dispute arbitration agreements did card contracts did not contain an would substantially lower their not know if they could sue their issuers arbitration agreement, when asked if likelihood of classwide relief. This in court. Nor does the Bureau agree that they could sue their credit card issuer commenter also said that, rather than asking consumers about their likelihood in court, 43.7 percent answered ‘‘Yes,’’ asking consumers hypothetical to file a class action given an arbitration 7.7 percent answered ‘‘No,’’ and 47.8 questions about what they would do if agreement would result in useful percent answered ‘‘Don’t Know.’’ 205 At an improper charge appeared on their information. As the Study showed, the the same time, among the respondents account in the future, the Bureau should proposal and this final rule discuss, and whose credit card agreements did have asked whether such a charge had several industry commenters contain arbitration requirements, 38.6 appeared on a consumer’s account in acknowledged, regardless of the level of percent of respondents answered ‘‘Yes,’’ the past and, if so, what the consumer individual consumer awareness, while 6.8 percent answered ‘‘No,’’ and did about it. Relatedly, an industry arbitration agreements do in fact have 54.4 percent answered ‘‘Don’t commenter suggested that the Bureau the effect of blocking class actions that Know.’’ 206 Even the 6.8 percent of should have surveyed consumers about are filed and suppressing the filing of respondents who stated that they could their baseline level of understanding of many more cases, consumers’ awareness not sue their credit card issuers in court other key provisions of their card of this fact does not seem relevant. may not have had knowledge of the agreements. With such a baseline, the Insofar as cases are blocked, further arbitration agreement: As noted above, a commenter said that the Bureau could focus on consumers’ comprehension of have evaluated whether consumers pay this fact is unnecessary. 202 The Bureau acknowledges it did not Id. section 3 at 15. greater, less, or the same attention to 203 Id. develop a baseline of understanding of dispute resolution clauses as to other 204 Id. section 3 at 18. other key credit card agreement terms. 205 clauses important to them—and why Id. section 3 at 18–20. However, the Bureau disagrees that the 206 that might be so. Absent such data, the Id. These respondents were asked additional failure to do so renders the survey questions to account for the possibility that respondents who answered ‘‘Yes’’ meant suing their ‘‘meaningless.’’ The survey found that 207 Id. section 3 at 18–20. issuers in small claims court; that meant they could consumers do not shop for credit cards 208 Id. section 3 at 25. bring a lawsuit even though they are subject to an based on the type of dispute resolution arbitration agreement; or that they had previously 209 Id. section 3 at 21 and n.44. Eighteen other ‘‘opted out’’ of their arbitration agreements with respondents recalled being offered an opportunity process provided in the credit card their issuers. With those caveats in mind and after to opt out of their arbitration requirements. But, for agreement and that consumers do not accounting for demographic weighting, the Study the respondents whose credit card agreements the understand the consequences of found that the consumers whose credit cards Bureau could identify, none of their 2013 choosing a card with an arbitration included arbitration requirements were wrong at agreements actually contained opt-out provisions. least 79.8 percent of the time. Id. section 3 at 20– In fact, four of the agreements did not even contain provision. Whether consumers have 21. pre-dispute arbitration provisions. greater or lesser understanding of other

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provisions of credit card agreements $350 plus a $50 administrative fee— individual they want to serve as does not seem to the Bureau to be paid by the party filing suit, regardless arbitrator, they can choose that person relevant in assessing whether of the amount being sought—and the fee to decide their dispute; if the parties limitations on the use of arbitration for a small claims filing in Philadelphia cannot agree on the arbitrator, the agreements is for the protection of Municipal Court ranges from $63 to arbitrator is selected following the consumers and in the public interest.210 $112.38.211 In arbitration, under the procedure specified in their contract or Regarding the commenter that AAA consumer fee schedule that took in the governing arbitration rules.220 suggested that the survey of credit card effect March 1, 2013, the consumer pays Discovery. The Study stated that the customers cannot be extrapolated to a $200 administrative fee, regardless of Federal Rules provide a variety of other markets because credit card the amount of the claim and regardless means by which a party can discover agreements are often provided of the party that filed the claim; in evidence in the possession of the simultaneously with an access device JAMS arbitrations, when a consumer opposing party or a third party, while (and not at the time of application), the initiates arbitration against the the right to discovery in arbitration is Bureau disagrees that this is a relevant company, the consumer is required to more limited.221 reason not to extrapolate the results of pay a $250 fee.212 Prior to March 1, Dispositive Motions. The Study noted the survey. Even if consumers do not 2013, arbitrators in AAA consumer that the Federal Rules provide for a receive the terms at the time of arbitrations had discretion to reallocate variety of motions by which a party can application, they do receive them before fees in the final award. After March 1, seek to dispose of the case, either in they activate a credit card. At that point, 2013, arbitrators can only reallocate whole or in part, while arbitration rules they are free to reject the credit card and arbitration fees in the award if required typically do not expressly authorize its terms. The survey showed that few by applicable law or if the claim ‘‘was dispositive motions.222 make that choice; the Bureau has no filed for purposes of harassment or is Class Proceedings. The Study reason to believe that such a decision is patently frivolous.’’ 213 described the procedural rules for class different in other markets. Nor has this Parties in court generally bear their actions under Federal Rule 23 and noted or any other commenter provided own attorney’s fees, unless a statute or that the Bureau was unaware of a class evidence to the contrary. contract provision provides otherwise or action procedure for small claims 223 a party is shown to have acted in bad court. The Study further noted that 3. Comparison of Procedures in faith. However, under several consumer the AAA and JAMS have adopted rules, Arbitration and in Court (Section 4 of protection statutes, providers may be derived from Federal Rule 23, for Study) liable for attorney’s fees.214 For administering arbitrations on a class 224 While the Study generally focused on example, under the AAA’s Consumer basis. empirical analysis of dispute resolution, Rules, ‘‘[t]he arbitrator may grant any Privacy and Confidentiality. The Section 4 of the Study provided a brief remedy, relief, or outcome that the Study stated that court litigation qualitative comparison between the parties could have received in court, (including small claims court) is a procedural rules that apply in court and including awards of attorney’s fees and public process, with proceedings in arbitration. Particularly given costs, in accordance with the law(s) that conducted in public courtrooms and the changes to the AAA consumer fee applies to the case.’’ 215 record generally available for public schedule that took effect March 1, 2013, Representation. The Study noted that review; by comparison, arbitration is a the procedural rules are relevant to in most courts, individuals can either private process in that there is no understanding the context from which represent themselves or hire an attorney particular mechanism for public the Study’s empirical findings arise. as their representative.216 In arbitration, transparency. Absent an agreement by The Study’s procedural overview the rules are more flexible than in many the parties, however, it is not by law 225 described court litigation as reflected in courts about the identity of party required to be confidential. the Federal Rules and, as an example of representatives. For example, the AAA 220 a small claims court process, the Consumer Rules permit a party to be Id. section 4 at 15. Philadelphia Municipal Court Rules of 221 Arbitration rules on discovery give the represented ‘‘by counsel or other arbitrator authority to manage discovery ‘‘with a Civil Practice. It compared those authorized representative, unless such view to achieving an efficient and economical procedures to arbitration procedures as choice is prohibited by applicable resolution of the dispute, while at the same time set out in the rules governing consumer law.’’ 217 Some States, however, prohibit promoting equality of treatment and safeguarding arbitrations administered by the two each party’s opportunity to present its claims and non-attorneys to represent parties in defenses.’’ AAA Commercial Rules, Rule R–22, leading arbitration administrators in the arbitration.218 cited in Study, supra note 3, section 4 at 16–17. United States, the AAA and JAMS. The Selecting the Decisionmaker. The Arbitration rules do not allow for broad discovery Study compared arbitration and court Study noted that court rules generally from third parties, which were not parties to the procedures according to eleven factors: underlying agreement to arbitrate disputes. Section do not permit parties to reject the judge 7 of the FAA, however, grants arbitrators the power The process for filing a claim, fees, legal assigned to hear their case.219 In to subpoena witnesses to appear before them (and representation, the process for selecting arbitration, if the parties agree on the bring documents). 9 U.S.C. 7. Appellate courts are the decision maker, discovery, split on whether section 7 of the FAA authorizes subpoenas for discovery before an arbitral hearing. dispositive motions, class proceedings, 211 Study, supra note 3, section 4 at 10. As the Study, supra note 3, section 4 at 17 n.78. As Study noted, a Federal statute permits indigent privacy and confidentiality, hearings, described above, many arbitration agreements plaintiffs filing in Federal court to seek to have the judgments and awards, and appeals. highlighted the difference in discovery practices in court waive the required filing fees. Id. (citing 28 arbitration proceedings as compared to litigation. Filing a Claim and Fees. The Study U.S.C. 1915(a)). See id. described the processes for filing a 212 Id. section 4 at 11–12. 222 Study, supra note 3, section 4 at 18. claim in court and in arbitration. With 213 Id. 223 Id. section 4 at 18–20. respect to fees, the Study noted that the 214 See, e.g., 15 U.S.C. 1640(a)(3) (TILA). 224 Id. section 4 at 20. 215 Study, supra note 3, section 4 at 12. fee for filing a case in Federal court is 225 Id. section 4 at 21–22. A small minority of 216 Id. section 4 at 13. arbitration agreements, primarily in the checking 210 As is noted in Section 2 at 72 of the Study, 217 Id. section 4 at 13–14. account market, included provisions requiring that many arbitration agreements are already printed in 218 Id. section 4 at 14. the proceedings remain confidential. Id. section 2 bolded text or with all capital letters. 219 Id. at 51–53.

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Hearings. The Study stated that if a information would aid the Bureau’s resolved on the merits. The Study case in court does not settle before trial analysis of the effectiveness of performed this analysis for arbitrations or get resolved on a dispositive motion, arbitration clauses for consumers. concerning credit cards, checking it will proceed to trial in the court in accounts, payday loans, GPR prepaid Response to Comments Received on cards, private student loans, and which the case was filed. A jury may be Section 4 available for these claims. On the other automobile purchase loans. To conduct hand, if an arbitration filing does not While the review of arbitration this analysis, the Bureau used electronic settle, the arbitrator can resolve the procedures was shorter than other case files from the AAA.233 Pursuant to parties’ dispute based on the parties’ chapters that report on the results of a non-disclosure agreement, the AAA submission of documents alone, by a empirical analyses undertaken for the voluntarily provided the Bureau its telephone hearing, or by an in-person Study, the Bureau believes its analysis electronic case records for consumer hearing.226 to be fulsome; the commenter—other disputes filed during the years 2010, Judgments/Awards. The Study further than offering the transaction cost 2011, and 2012.234 Because the AAA noted that the outcome of a case in court criticism as discussed in the rest of this provided the Bureau with case records is reflected in a judgment, which the paragraph—did not explain what more for all disputes filed in arbitration prevailing party can enforce through the Bureau’s analysis could have done during this period, Section 5 of the various means of post-judgment relief, nor did it identify other specific topics Study provided a reasonably complete and that the outcome of a case in for analysis. With regard to the picture of the frequency and typology of arbitration is reflected in an award, comparison of costs, the Bureau notes claims that consumers and companies which, once turned into a court that the Study provided a detailed file in arbitration.235 judgment, can be enforced the same as discussion of the fees a consumer would The Study identified about 1,847 any other court judgment.227 need to pay in (a) Federal court; (b) filings in total—about 616 per year— Appeals. The Study stated that parties small claims court, using Philadelphia with the AAA for the six product in court can appeal a judgment against Municipal Court as an example; and (c) markets combined.236 According to the them to an appellate court; by arbitration, using the AAA and JAMS as standard AAA claim forms, about 411 230 comparison, parties can challenge examples. The Bureau notes that the arbitrations per year were designated as arbitration awards in court only on the Study included a discussion regarding having been filed by consumers alone; more limited grounds set out in the available fee waivers for indigent the remaining filings were designated as FAA.228 plaintiffs, as well as the ability of the having been filed by companies or filed arbitrator to reallocate the initial fee as mutual submissions by both the Comments Received on Section 4 of the distribution.231 The Study also assessed consumer and the company.237 Forty Study the frequency with which consumers percent of the arbitration filings A nonprofit commenter criticized the proceeded without counsel in involved a dispute over the amount of Bureau’s analysis of arbitration arbitration proceedings and in court debt a consumer allegedly owed to a procedures by noting that it is the proceedings. shortest section of the Study and that As for the commenter that suggested 233 See Christopher R. Drahozal & Samantha the Bureau did not attempt to estimate that the Bureau should have looked at Zyontz, ‘‘An Empirical Study of AAA Consumer the actual transaction cost for how judges supervise arbitration, the Arbitrations,’’ 25 Ohio St. J. on Disp. Res. 843, 845 commenter did not explain what (2010) (reviewing 301 AAA consumer disputes consumers in pursuing claims in court covering a nine-month period in 2007, but limiting as compared to arbitration. A research additional insights could be gained from analysis to disputes actually resolved by center commenter suggested that the such an analysis. As for the arbitrators); Christopher R. Drahozal & Samantha Bureau should have performed a more commenter’s contentions regarding Zyontz, ‘‘Creditor Claims in Arbitration and in Concepcion-like clauses, the Bureau Court,’’ 7 Hastings Bus. L. J. 77 (2011) (follow-on detailed analysis of how judges study that compared debt collection claims by supervise arbitration and how many notes that Section 2 found such clauses companies in AAA consumer arbitrations with debt businesses have adopted provisions to be rare in consumer finance.232 collection claims in Federal court and in State court proceedings in jurisdictions in Virginia and similar to that at issue in the 4. Consumer Financial Arbitrations: Oklahoma). 229 Concepcion case because this Frequency and Outcomes (Section 5 of 234 Study, supra note 3, section 5 at 17. Study) 235 While the analysis did not provide a window 226 Id. section 4 at 22–24. into how arbitrations are resolved in other arbitral 227 Id. section 4 at 24. Section 5 of the Study analyzed fora, the AAA is the predominant administrator of 228 Courts may vacate arbitration awards under arbitrations of consumer finance consumer financial arbitrations. Id. section 2 at 35. the FAA only in limited circumstances. 9 U.S.C. 10 disputes between consumers and 236 Id. section 5 at 9. (arbitration awards can be vacated (1) where the consumer financial services providers. 237 Id. section 1 at 11. Under the AAA policies award was procured by corruption; the arbitrator is This section tallied the frequency of that applied during the period studied, a company partial or corrupt, the arbitrator was guilty of could unilaterally file a debt collection dispute misconduct in certain specified ways, the arbitrator such arbitrations, including the number against a consumer in arbitration only if a preceding exceeded his powers or the arbitrator so imperfectly of claims brought and a classification of debt collection litigation had been dismissed or executed his powers that an award was not made). which claims were brought. It also stayed in favor of arbitration. Companies could file Cf. supra notes 104–112 and accompanying text examined outcomes, including how disputes mutually with consumers; they could also (identifying the narrow grounds upon which a court file counterclaims in dispute filed by consumers may determine an arbitration agreement to be cases were resolved and how consumers against them. Id. section 5 at 27 n.56. As noted in unenforceable). and companies fared in the relatively the Study, the Bureau did not attempt to verify 229 The arbitration provision at issue in small share of cases that an arbitrator whether the representation on the claim forms as Concepcion provided that the company would pay to the party filing the case was accurate. For all costs of the arbitration for the consumer; that the example, in a number of cases that were designated arbitration would take place in the county where the consumer prevailed he could seek double the as having been filed by a consumer, the record the consumer resided or could take place by amount of his attorney’s fees. AT&T Mobility LLC indicates that the consumer failed to prosecute the telephone or document submission; that the v. Concepcion, 563 U.S. 333, 337 (2011). action and that the company actually paid the fees arbitrator was not limited in the damages it could 230 See Study, supra note 3, section 4 at 10. and obtained a quasi-default judgment. In other award the consumer; that if the consumer received 231 See id. section 4 at 10 n.40 (citing 28 U.S.C. cases, a law firm representing consumers filed a an award that was higher than the company’s last 1915(a)). number of student loan disputes but indicated on written settlement offer, the company would have 232 Study, supra note 3, section 2 at 70–71 and the checkbox that the action was being filed by the to pay $7,500 in addition to the award; and that if tbl. 15. company. Id. section 5 at 19 n.38.

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company, with no additional affirmative example, if parties settled all strong With respect to disputes that involved claim by either party; in 31 percent of consumer (or company) claims, then company claims in 2010 and 2011, the the filings, parties brought affirmative consumers (or companies) may appear Bureau determined the terms of claims with no formal dispute about the to do poorly before arbitrators because arbitrator awards relating to company amount of debt owed; in another 29 only weak claims are heard at hearings. claims in 244 of the 421 disputes.253 percent of the filings, consumers As the Study explained, these Arbitrators provided companies some disputed alleged debts but also brought limitations are inherent in a review of type of relief in 227, or 93.0 percent, of affirmative claims against companies.238 this nature and unavoidable. those disputes. In those 227 disputes, Although claim amounts varied by With those significant caveats noted, companies won a total of $2,806,662.254 product, in disputes involving the Study determined that in 32.2 The Study found that consumers affirmative claims by consumers, the percent of the 1,060 disputes filed appealed very few arbitration decisions average amount of such claims was during the first two years of the Study and companies appealed none. approximately $27,000 and the median period (341 disputes) arbitrators Specifically, it found four arbitral amount of such claims was $11,500.239 resolved the dispute on the merits. In appeals filed between 2010 and 2012. In debt disputes, the average disputed 23.2 percent of the disputes (246 Consumers without counsel filed all debt amount was approximately disputes), the record showed that the four. Three of the four were closed after $15,700; the median was approximately parties settled. In 34.2 percent of the parties failed to pay the required $11,000.240 Across all six product disputes (362 disputes), the available administrator fees and arbitrator markets, about 25 cases per year AAA case record ended in a manner deposits. In the fourth, a three-arbitrator involved affirmative claims of $1,000 or that was consistent with settlement—for panel upheld an arbitration award in less.241 example, a voluntary dismissal of the favor of the company after a 15-month Overall, consumers were represented action—but the Bureau could not appeal process.255 by counsel in 63.2 percent of arbitration definitively determine that settlement The Study also found that very few cases.242 The rate of representation, occurred. In the remaining 10.5 percent class arbitrations were filed. The Study however, varied widely based on the of disputes (111 disputes), the available identified only two filed with AAA product at issue; in payday and student AAA case record ended in a manner between 2010 and 2012. One was still loan disputes, for example, consumers that suggested the dispute is unlikely to pending on a motion to dismiss as of had counsel in about 95 percent of all have settled; for example, the AAA may September 2014. The other file cases filed.243 have refused to administer the dispute contained no information other than the To analyze the outcomes in because it determined that the arbitration demand that followed a State arbitration, the Bureau confined its arbitration agreement at issue was court decision granting the company’s analysis to claims filed in 2010 and inconsistent with the AAA’s Consumer motion seeking arbitration.256 2011 in order to limit the number of Due Process Protocol.247 The Study also found that, when there cases that were pending at the close of As noted above, only a small portion was a decision on the merits by an the period for which the Bureau had of filed arbitrations reached a decision. arbitrator, the average time to resolution data. The Bureau’s analysis of The Study identified 341 cases filed in was 179 days, and the median time to arbitration outcomes was limited by a 2010 and 2011 that were resolved by an resolution was 150 days. When the number of factors that are unavoidable arbitrator and for which the outcome record definitively indicated that a case in any review of dispute resolution.244 was ascertainable.248 Of these 341 cases, had settled, the median time to Among other issues, settlement terms 161 disputes involved an arbitrator settlement was 155 days from the filing were rarely known in cases in which the decision on a consumer’s affirmative of the initial claim.257 Further, the parties settled their disputes. Indeed, in claim. Of the cases in which the Bureau Study found that more than half of the many cases, even the fact that a determined the results, consumers filings that reached a decision were settlement occurred was difficult to obtained relief on their affirmative resolved by ‘‘desk arbitrations,’’ discern because the parties were not claims in 32 disputes (20.3 percent).249 meaning that the proceedings were required to notify the AAA of a Consumers obtained debt forbearance in resolved solely on the basis of 245 settlement. Accordingly, on the one 19.2 percent of the cases in which an documents submitted by the parties hand, an incomplete file could indicate arbitrator could have provided some (57.8 percent). Approximately one-third a settlement, or, on the other hand, that form of debt forbearance (46 cases).250 (34.0 percent) of proceedings were the proceeding was still in progress but The total amount of affirmative relief resolved by an in-person hearing, 8.2 relatively dormant. Because parties awarded in all cases was $172,433 and percent by telephonic hearings, and 2.4 settled claims strategically, disputes that total debt forbearance was $189,107.251 did reach an arbitrator’s decision on the Of the 52 cases filed in 2010 and 2011 253 This includes cases filed by companies as well merits were not a representative sample that involved consumer affirmative as cases in which companies asserted counterclaims of the disputes that were filed.246 For claims of $1,000 or less, arbitrators in consumer-initiated disputes. Id. section 5 at 14. resolved 19, granting affirmative relief 254 Of the 244 cases in which companies made 238 Id. section 1 at 11. 252 claims or counterclaims that the Bureau determined to consumers in four such cases. were resolved by arbitrators, companies obtained 239 Id. section 5 at 10. relief in 227 disputes. The total amount of relief in 240 Id. filed in litigation and that ‘‘[t]hese various those cases was $2,806,662. These totals included 241 Id. considerations warrant caution in drawing 60 cases in which the company advanced fees for 242 Id. section 5 at 29. conclusions as to how well consumers or the consumer and obtained an award without 243 Id. section 5 at 28–32. companies fare in arbitration as compared to participation by the consumer. Excluding those 60 244 Id. section 5 at 4–7. As a result, the Bureau litigation.’’ Id. For example, the Study found that cases, the total amount of relief awarded by was only able to determine a substantive outcome the disputes that parties filed in arbitration differ arbitrators to companies was $2,017,486. Id. section in 341 cases. from the disputes filed in litigation. Id. 5 at 43–44. 247 245 Id. section 5 at 6. Id. section 5 at 11. 255 Id. section 5 at 85. 248 246 Id. section 5 at 7 (noted that it is ‘‘quite Id. section 5 at 13. 256 Id. section 5 at 86–87. The Study’s analysis of 249 challenging to attempt to answer even the simple Id. class action filings identified a third class action question of how well do consumers (or companies) 250 Id. arbitration filed with JAMS following the dismissal fare in arbitration’’). The Study noted further that 251 Id. section 5 at 41, 43. or stay of a class litigation. Id. section 6 at 59. the same selection bias concerns apply to disputes 252 Id. section 5 at 13. 257 Id. section 5 at 71–73.

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percent through a dispositive motion outcomes, the Bureau notes that the case Study. Thus, the Bureau believes that with no hearing.258 When there was an records available for the Study did not the relevant data supports a conclusion in-person hearing, the Study estimated necessarily include the terms of the that the AAA cases represent a that consumers travelled an average of arbitration agreement and that, except substantial majority of consumer 30 miles and a median of 15 miles to for the cases that were decided by an finance arbitrations that occur. Further, attend the hearing.259 arbitrator, the case records also did not even if the Bureau were to assume that include the terms of the outcomes. JAMS handled a consumer finance Comments Received on Section 5 of the Thus, the analysis of arbitration Study caseload equal to half of the AAA programs (as expressed in arbitration caseload (based on the fact that JAMS An industry commenter criticized the agreements) suggested by this was named as an administrator about 50 Study’s review of arbitration processes commenter was not feasible and, in any percent as often as AAA), that would for its failure to assess whether the AAA event, would not have impacted the still suggest that there are fewer than due process protocol was effective in central finding, discussed below, that an 900 consumer financial services cases ensuring arbitrator neutrality. The extremely small number of consumers per year as between the two largest commenter suggested that the Bureau avail themselves of any arbitration administrators. could have reviewed decisions of process under any scheme. individual arbitrators to see if they had As to the commenter that criticized As for the commenter that contended a pattern of favoring the companies over the Bureau for not evaluating whether that the decisions reached on the merits consumers. This commenter further arbitrators deciding AAA consumer are not representative of the whole, the criticized the Bureau for making no cases were biased, the Bureau notes Bureau notes that it does not contend effort to evaluate whether arbitrators’ that, for those cases that were resolved otherwise. It noted in the Study that a decisions were properly decided. with a written opinion, the Study merits-decision occurred less frequently Similarly, a Congressional commenter reported whether the decision favored than other forms of resolution, such as 264 expressed concern that the Study failed the consumer or the financial institution settlement. to thoroughly analyze and compare and the amount of the award, if any. 5. Consumer Financial Litigation: arbitration programs and program The Study also explored whether Frequency and Outcomes (Section 6 of features. The commenter suggested that arbitrators favored parties that were Study) the Bureau should have reviewed repeat players before them.261 As the whether certain features of arbitration Study noted, commentators have long The Study’s review of consumer programs produce better consumer raised concerns that such a repeat financial litigation in court represented, outcomes and enhance the consumer player bias may occur given incentives the Bureau believes, the only analysis of experience as compared to others, but some arbitrators may have to curry favor the frequency and outcomes of did not identify specifically which while seeking future appointments.262 consumer finance cases to date. While features warranted additional analysis. The Bureau could not evaluate there is a large body of research An industry commenter took issue outcomes in cases that settled or cases regarding cases filed in court generally, with the Bureau’s assertion that the that were resolved in a manner preexisting studies of consumer finance disputes it reviewed involving AAA consistent with a settlement. The cases either assessed only the number of represent substantially all consumer Bureau also did not evaluate whether filings—not typologies and outcomes, as finance arbitration disputes that were arbitrators’ decisions were ‘‘properly the Study did—or focused on the filed during the Study period, noting decided’’ as the Bureau does not believe frequency of cases filed under that JAMS was named as the it would have a basis for making such individual statutes.265 The Study administrator at least 50 percent as often a determination. As discussed in Part VI performed this analysis for individual as AAA in the agreements reviewed by below, this rulemaking does not rely on court litigation concerning five of the the Bureau. a finding that arbitration proceedings same six product markets as those Another industry commenter are fair (or not) but rather that covered by its analysis of consumer suggested that the Study’s data consumers do not use arbitration to financial arbitration: Credit cards, regarding disputes reached on the resolve disputes in any meaningful checking accounts and debit cards; merits were not representative of the volume. payday loans; GPR prepaid cards; and sample because only 32 percent of cases With respect to the industry private student loans.266 In addition, the had a judgment on the merits, while the commenter that suggested the Study Study analyzed class cases filed in these rest remained dormant or settled on undercounted individual arbitration five markets and also with respect to unknown terms. because it studied only those filed with automobile loans. This analysis focused the AAA and not JAMS, the Bureau Response to Comments on Section 5 of on cases filed from 2010 to 2012, as an noted in the Study and the proposal that the Study analogue to the years for which JAMS appears to handle a relatively electronic AAA records were available, With respect to the commenter that small number of consumer finance criticized the Bureau for not evaluating arbitrations per year. For example, it 264 Study, supra note 3, section 5 at 11–12. whether certain arbitration programs reported to the Bureau that it handled 265 See, e.g., Thomas E. Willging et al., ‘‘Empirical (such as those that limit consumer costs, 115 consumer finance arbitrations in Study of Class Actions in Four Federal District allow for ‘‘bonus’’ awards,260 or other 2015 (an unknown number of which Courts: Final Report to the Advisory Committee on benefits) provide better consumer Civil Rules,’’ (Fed. Jud. Ctr., 1996), available at were filed by consumers as opposed to http://www.uscourts.gov/file/document/empirical- providers),263 significantly fewer than study-class-actions-four-federal-district-courts- 258 Id. section 5 at 69–70. the approximately 600 per year the final-report-advisory; ACA International, ‘‘FDCPA 259 Id. section 5 at 70–71. Bureau found filed with the AAA in the Lawsuits Decline While FCRA and TCPA Filings 260 An example ‘‘bonus’’ provision in an Increase,’’ (reporting on January 2014 case filings arbitration agreement would require a company to under FDCPA as reported by WebRecon), cited in pay a consumer double or triple the company’s 261 Id. section 5 at 56–68. Study, supra note 3, section 6 at 19 n.19. highest settlement offer if the consumer wins on his 262 Id. 266 Due to resource constraints, the Bureau did or her arbitration claim in an amount that exceeds 263 See 81 FR 32830, 32856 (May 24, 2016); not examine individual automobile purchase loans. that settlement offer. Study, supra note 3, section 5 at 9. See Study, supra note 3, section 6 at 11 n.22.

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and captured outcomes reflected on Federal court class cases, the most court often could not be reduced to a dockets through February 28, 2014. common claims were under the FDCPA single result because plaintiffs in those The Bureau’s class action litigation and State statutes prohibiting unfair and cases may have alleged multiple claims analysis extended to all Federal district deceptive acts and practices.273 In State against multiple defendants, and one courts. To conduct this analysis, the court class cases, State law claims case can have multiple outcomes across Bureau collected complaints concerning predominated.274 All Federal and State the different claims and parties. For this these six products using an electronic class cases sought monetary relief. reason, the Study reported on several database of pleadings in Federal district Unlike the AAA arbitration rules, court types of outcomes, more than one of 267 courts. The Bureau also reviewed rules of procedure generally do not which may have occurred in any single Federal multi-district litigation (MDL) require plaintiffs to identify specific case.280 In addition, while the Bureau proceedings to identify additional claim amounts in their pleadings. believed that its data set of State court consumer financial complaints filed in Accordingly, the Bureau had limited complaints is the most robust available, Federal court. After the Bureau ability to ascertain the number of the Bureau noted the dataset’s identified its set of Federal class ‘‘small’’ claims asserted in class action limitations. For example, the three complaints concerning the six products litigation for purposes of comparison to States and seven additional counties and individual complaints concerning the 25 arbitration disputes each year in from which the Bureau collected the five products, it collected the docket the markets analyzed in the AAA case sheet from the Federal district court in complaints filed in State court may not set that included consumer affirmative be representative of the consumer which the complaint was filed in order 275 claims of $1,000 or less. The Bureau financial litigation filed in State courts to analyze relevant case events. The was able to determine, however, that nationwide.281 Bureau also collected State court class more than one-third of the 562 class action complaints from three States cases sought statutory damages only In addition to the limitations on (Utah, Oklahoma, and New York) and under Federal statutes that cap damages comparing case outcomes, the Study seven large counties that had a public available in class proceedings also noted that even comparing electronic database in which complaints (sometimes accompanied by claims for frequency or process across litigation were regularly available.268 The Bureau actual damages). Only about 10 percent and arbitration proceedings was of determined that it was feasible to collect of the 562 class cases sought statutory limited utility.282 The Study noted that class action complaints from the State damages under Federal statutes that do differences in data may result from and county databases, but not not cap damages available in class decisions consumers and companies complaints in individual cases from proceedings.276 make pertaining to arbitration and those databases.269 Collectively, this As with the Study’s analysis of the litigation, including but not limited to State court sample accounted for 18.1 arbitration proceedings noted above, the whether a relationship would be percent of the U.S. population as of Study set out a number of explicit and governed by a pre-dispute arbitration 2010.270 inherent limitations to its analysis of agreement; whether a case is filed and The Study’s analysis of putative class litigation outcomes.277 While the if so on a class or individual basis; and action filings identified 562 cases filed available data indicated that most court whether to seek arbitration of cases filed by consumers from 2010 through 2012 cases were resolved by settlement or in in court.283 With those caveats noted, in Federal courts and selected State a manner consistent with a settlement, the Study indicated that class filings courts concerning the six products, or the terms of any settlement were result in myriad outcomes. Of the 562 about 187 per year.271 Of these 562 typically unavailable from the court class cases the Study identified, 12.3 putative class cases, 470 were filed in record unless the settlement was on a percent (69 cases) had final class Federal court, and the remaining 92 class basis. The bulk of cases, therefore, settlements approved by February 28, were filed in the State courts in the including individual cases and cases 2014.284 As of April 2016, 18.1 percent Bureau’s State court sample set.272 In filed as a class action but that settled on of the filings (102 cases) featured final

267 an individual basis only, resulted in class settlements or class settlement LexisNexis, ‘‘Courtlink,’’ http://www. 278 lexisnexis.com/en-us/products/courtlink-for- unknown substantive outcomes. agreements pending approval. Other limitations, however, were unique corporate-or-professionals.page (last visited Feb. 10, An additional 24.4 percent of the 2017). to the review of litigation filings. For 268 class cases (137 cases) involved a non- To determine what counties to include in the instance, the lack of specific class settlement and 36.7 percent (206 data set, the Bureau started with the Census information about claim amounts in Bureau’s list of the 10 most populous U.S. counties. cases) involved a potential non-class court filings meant that the Study was The Bureau then excluded the two counties on that settlement.285 In 10 percent of the class list that were already included in the State court unable to offer a meaningful analysis of cases (56 cases), the action against at sample (two in New York City) and one additional recovery rates.279 Further, some cases in county that did not have a public electronic least one company defendant was database in which complaints were regularly dismissed as the result of a dispositive available. The remaining seven counties were the 273 Id. section 6 at 6. counties in the Bureau’s data set. 274 Id. 269 Study, supra note 3, appendix L at 71. 275 Id. section 5 at 10. 280 Id. section 6 at 3–4. 270 Id. section 6 at 15; see generally id. appendix 276 Id. section 6 at 22–26. The ‘‘capped’’ claims 281 Id. section 6 at 15 n.34. See also id. appendix L. arose from five statutory schemes: the Expedited L. 271 Id. section 6 at 6. Due to limitations of the Funds Availability Act, the EFTA, the FDCPA, the 282 Id. section 6 at 4. electronic database coverage and searchability of TILA (including the Consumer Leasing Act and the 283 Id. State court pleadings, the Bureau does not believe Fair Credit Billing Act), and the ECOA (which 284 Id. section 6 at 7. the electronic search of U.S. District Court provides for punitive and actual damages but not 285 Id. The Bureau deemed cases to be potential pleadings identified a meaningful set of complaints statutory damages). Id. section 6 at 23 n.45 non-class settlements where a named plaintiff filed in State court and subsequently removed to (describing damages limitations). In over half of the withdrew claims or the court dismissed claims for Federal court. Id. section 6 at 13. cases in which Federal statutory damages were failure to serve or failure to prosecute, which could 272 Id. section 6 at 6. Because the Bureau’s State sought, the consumers also sought actual damages. have occurred due to a non-class settlement; but the sample accounted for about one-fifth of the U.S. Id. section 6 at 25 n.48. record did not disclose that such a settlement population, the actual number of State class filings 277 Id. section 6 at 2–5. occurred. Litigants generally do not have an would have been higher, but the Bureau cannot say 278 Id. section 6 at 3. obligation to disclose non-class settlements. In by how much. Id. section 6 at 14–15. 279 Id. addition, they have certain incentives not to do so.

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motion unrelated to arbitration.286 In 8 days for cases filed in 2011.292 Aside and whether they asserted substantive percent of the 562 class cases (45 cases), from a handful of individual cases claims or instead alleged what the all claims against a company were transferred to MDL proceedings, commenter considered technical stayed or dismissed based on a company individual Federal cases closed in a violations, such as improperly worded filing an arbitration motion.287 median of approximately 127 days.293 disclosures. This commenter similarly The Study also identified 3,462 Notwithstanding the inherent suggested that the Bureau should have individual cases filed in Federal court limitations noted above, the Bureau’s evaluated whether class action claims concerning the five product markets large set of individual and class action were meritorious or whether plaintiffs studied during the period, or 1,154 per litigations allowed the Study to explore made frivolous claims to attract year.288 As with putative class filings, whether motions seeking to compel nuisance value settlements. individual pleadings provide minimal arbitration were more likely to be An industry commenter took issue information about the overall claim asserted in individual filings or in with the fact that the Bureau studied amounts sought by plaintiffs. Less than putative class action filings. Across its 1,800 arbitrations but only a sample of 6 percent of the overall individual entire set of court filings, the Study the individual litigation cases and litigation disputes were filed without found that motions seeking to compel asserted that extrapolating from the counsel.289 arbitration were much more likely to be latter but not the former provided an The Bureau reviewed outcomes in all asserted in cases filed as class actions. inaccurate picture of the individual of the individual cases from four of the For most of the cases analyzed in the litigation landscape. The commenter five markets studied and a random Study, it was not apparent whether the similarly opined that the State court sample of the cases filed in the fifth defendants in the proceedings had the class actions studied by the Bureau market, resulting in an analysis of 1,205 option of moving to seek arbitration cannot be relied upon to be cases.290 In 48.2 percent of those 1,205 proceedings (i.e., the Bureau was unable representative of such litigation cases (581 cases), the record reflected to determine definitively whether the nationwide because the Bureau, in the that a settlement had occurred, though contracts between the consumers and Study, acknowledged that they may not the record only rarely (in around 5 defendants contained arbitration be representative of the entire country. percent of those 581 cases) reflected the agreements). The Bureau, however, was An industry commenter took issue monetary or other relief afforded by the able to limit its focus to complaints with the small number of instances settlement. In 41.8 percent of the 1,205 against companies that it knew to use documented in the Study (12) where a cases (504 cases), the record reflected a arbitration agreements in their dismissed class claim was re-filed in withdrawal by at least one consumer or consumer contracts in the year in which arbitration, contending that the Bureau another outcome potentially consistent the cases were filed by limiting its did not research whether claims were with settlement, such as a dismissal for sample set to disputes regarding credit filed in any arbitration forum other than the AAA. failure to prosecute or failure to serve cards. In the 40 class cases where the Relatedly, an industry commenter (but where the plaintiff also might have Study was able to ascertain that the case was subject to an arbitration agreement, expressed concern that the number of withdrawn with no relief). In 6.8 individual Federal court lawsuits percent of the cases (82 cases), a motions seeking arbitration were filed 294 reported in the Study was too low. consumer obtained a judgment against a 65 percent of the time. In a comparable set of 140 individual Specifically, the commenter cited company party through a summary records of the Transactional Records judgment motion, a default judgment disputes, motions seeking arbitration were filed one-tenth as often, in only 5.7 Access Clearinghouse (TRAC), which is (most common), or, in two cases, a trial. percent of proceedings.295 Overall, the a data gathering and research In 3.7 percent of cases (44 cases), the Study identified nearly 100 Federal and organization at Syracuse University. The action against at least one company was State class action filings that were commenter asserted, based on the TRAC dismissed via a dispositive motion dismissed or stayed because companies data, that there were 890 consumer unrelated to arbitration.291 invoked arbitration agreements by filing credit lawsuits filed in Federal district Individual cases generally resolved a motion to compel and citing an court in May 2012 and 723 such suits more quickly than class cases. Aside arbitration agreement in support.296 filed in September 2012.297 The from cases that were transferred to commenter also referenced data from a MDLs, Federal class cases closed in a Comments Received on Section 6 of the commercial litigation monitoring Web median of approximately 218 days for Study site called WebRecon that similarly cases filed in 2010 and 211 days for One industry lawyer commenter stated that more than 1,000 consumers cases filed in 2011. Class cases in MDLs criticized the Bureau’s review of class per month filed suits in Federal courts were markedly slower, closing in a action filings for failing to evaluate the in the years 2010, 2011, and 2012 for median of approximately 758 days for underlying merits of the class actions violations of the TCPA, FCRA, or the cases filed in 2010 and 538 days for FDCPA.298 Taken together, the cases filed in 2011. State class cases 292 Id. section 6 at 9. commenter asserted these figures as a closed in a median of approximately 293 Id. 294 407 days for cases filed in 2010 and 255 Id. section 6 at 60–61. The court granted 297 TRAC Reports Inc., ‘‘Consumer Credit Civil motions seeking arbitration in 61.5 percent of these Findings For May 2012,’’ (July 12, 2012), available disputes. 286 Id. at http://trac.syr.edu/tracreports/civil/285/; TRAC 295 Id. section 6 at 61. The court granted motions 287 Id. Reports Inc., ‘‘Consumer Credit Card Civil Lawsuits seeking arbitration in five of the eight individual Starting to Fall,’’ (Nov. 6, 2012), available at http:// 288 Id. section 6 at 27–28. As noted above, the disputes in which motions seeking arbitration were trac.syr.edu/tracreports/civil/298/. According to Study did not include data on individual cases in filed (62.5 percent). TRAC, there were 890 new ‘‘consumer credit’’ State courts, and the Study evaluated Federal cases 296 Id. section 6 at 58 (noting that companies lawsuits filed during May 2012, most of which in five product markets. moved to compel arbitration in 94 of the 562 class asserted claims under FDCPA or FCRA. 289 Id. section 6 at 7. action cases in the Bureau’s dataset, and that the 298 WebRecon LLC, ‘‘Out Like a Lion. . .Debt 290 Because the 3,462 cases the Study identified motion was granted in full or in part in 46 cases); Collection Litigation and CFPB Complaint contained a high proportion of credit card cases, the id. section 6 at 58–59 (noting that the Bureau Statistics, Dec. 2015 and Year in Review,’’ available Bureau reviewed outcomes in a 13.3 percent sample confirmed that motions to compel arbitration were at https://webrecon.com/out-like-a-lion- of the credit card cases. Id. section 6 at 27–28. granted in at least 50 additional class cases using debtcollection-litigation-cfpb-complaint-statistics- 291 Id. section 6 at 48. a methodology described in Appendix P). dec-2015-year-in-review/.

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basis to question the accuracy of the overbroad text search in the Courtlink used in studies like the Bureau’s and is Bureau’s data. database and then manually sorting typically only inappropriate if there is a through that data for cases that fit the reason that the data collected is unique. Response to Comments Received on relevant parameters. The Bureau filtered The Bureau does not believe such a Section 6 this data so that it could analyze reason exists regarding its Federal Regarding the industry lawyer individual claims filed in Federal court individual court records, nor did the commenter that criticized the Study’s with respect to five consumer financial commenter identify one.302 As for the failure to explore whether class actions products (credit cards, GPR prepaid State court class action data, which was assert substantive or technical claims, cards, checking accounts/debit cards, drawn from courts representing 18.1 the Bureau notes that the Study did payday loans, and private student loans) percent of the population, the Bureau report on the types of claims asserted in and found approximately 1,200 per stated in the Study that the data from Federal class actions by statute.299 The year. The TRAC and WebRecon sources the State courts analyzed may not be Bureau does not believe that it would be referenced by the commenter did not, as representative of the consumer financial appropriate for it to classify claims the Bureau did, analyze each case to see litigation filed in State courts alleging violations of Federal or State whether it fell into one of the five nationwide.303 Despite the cautious law as ‘‘technical’’ or not ‘‘substantive.’’ product categories analyzed in that part language in the Study, the Bureau is not Nor does the Bureau believe that it of Section 6. Both databases appear to aware of any reason why this data are would be feasible, given notice pleading be based on initial case designations not representative of parts of the requirements, or appropriate for the made upon filing by a plaintiff. Thus, country not studied. Below, in Part VI, Bureau to assess the merits of the claims many cases designated as ‘‘consumer the Bureau discusses the extent to asserted in these complaints. The credit’’ fall outside both the parameters which it relies on this data. Bureau notes that the Federal Rules of of Section 6 and the Bureau’s proposed 6. Small Claims Court (Section 7 of Civil Procedure provide means of rulemaking. For example, not every case Study) securing dismissal of complaints which, filed under the FCRA or the FDCPA and on their face, fail to state a valid cause reported by TRAC as a consumer credit As described above, Section 2 of the of action and of obtaining summary case concerns a consumer financial Study found that most arbitration judgments for cases in which there are product or service, and thus TRAC agreements in the six markets the no genuine issues of material fact and overstates the number of Federal Bureau studied contained a small claims the defendant is entitled to judgment as individual claims concerning such court ‘‘carve-out’’ that typically afforded a matter of law. As discussed below in products. Similarly and as the Bureau either the consumer or both parties the connection with Section 8 of the Study, noted in the proposal, an unknown right to file suit in small claims court as the Bureau reported statistics on such number of the cases reported by an alternative to arbitration. dispositive motions in the context of WebRecon also would not be covered by Commenters on the RFI urged the Federal class action settlements. The the Study or by the proposal rule Bureau to study the use of small claims Bureau discusses further judicial because that database similarly includes courts with respect to consumer safeguards on such cases in Part VI all claims under FDCPA, FCRA and financial disputes. The Bureau Findings below, including by noting TCPA and have not been analyzed undertook this analysis, published the legislative and judicial safeguards that further. As evidence of the overbroad results of this inquiry in the Preliminary limit frivolous litigation. The Bureau nature of these results, a separate study Results, and also included these results also disagrees with the commenter that explained that more than 3,000 TCPA in Section 7 of the Study. said the Study only looked for claims re- claims were filed in 2015 but many of The Bureau believes that the Study’s filed in arbitration in its AAA data. As these concerned marketing review of small claims court filings is is explained in Section 6 of the Study, communications unrelated to consumer the only study of the incidence and the Bureau located nine of the 12 re- finance, such as those against a typology of consumer financial disputes filings in its review of court filings.300 merchant or a company with whom the in small claims court to date. Prior Four of these cases were filed with consumer has no relationship research suggests that companies make JAMS and five with AAA. The (contractual or otherwise). greater use of small claims court than remaining three cases that the Bureau As for the commenter concerned consumers and that most company-filed identified came from its review of AAA about the Bureau having extrapolating suits in small claims court are debt data.301 304 data on individual litigation, the Bureau collection cases. The Study, however, As for the assertions that the Bureau’s notes that the Study did not purport to analysis undercounted the number of analyze all claims about consumer 302 The Bureau collected State court data from individual cases filed in Federal court, financial products filed in Federal court. parts of New York, California, Florida, Utah, the Bureau does not believe that the Oregon, and Oklahoma. See Study, supra note 3, Thus it agrees that the number of figures cited by the commenters provide section 6 at 14–15. individual Federal lawsuits about all of 303 a basis on which to question the Study, supra note 3, section 6 at 15 n.34. the consumer financial products that 304 As described in the Study, for example, a 1990 accuracy of the Bureau’s data. As is would be covered by this rule is analysis of the Iowa small claims court system explained in detail in Appendix L of the necessarily higher than 1,200. The found that many more businesses sued individuals Study, the Bureau completed its than individuals sued businesses. Suzanne E. Bureau knows of no reason to view the analysis by first crafting a deliberately Elwell & Christopher D. Carlson, ‘‘The Iowa Small studied markets as materially different Claims Court: An Empirical Analysis,’’ 75 Iowa L. than other financial services markets, Rev. 433 (1990). In 2007, a working group of 299 Study, supra note 3, section 6 at 20 fig. 1 Massachusetts trial court judges and administrators (which shows the various legal claims, including however, with regard to the level of ‘‘recognized that a significant portion of small Federal statutory, State common law, and State Federal litigation overall, nor does the claims cases involve the collection of commercial statutory claims, asserted in 562 class cases filed in commenter suggest otherwise. As for debts from defendants who are not represented by Federal and State Court); id. section 6 at 21 fig. 2 extrapolating from Federal individual counsel.’’ Commonwealth of Mass., Dist. Ct. Dep’t (which shows the legal claims asserted in the 470 of the Trial Ct., ‘‘Report of the Small Claims Federal class cases). lawsuits, the Bureau disagrees that Working Group,’’ at 3 (Aug. 1, 2007), available at 300 Id. section 6 at 59. extrapolating data is inappropriate. http://www.mass.gov/courts/docs/lawlib/docs/ 301 Id. Extrapolation is standard technique smallclaimreport.pdf.

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was the first that the Bureau has been underlying case documents on a industry commenter expressed concern able to identify to assess the frequency systematic basis for only two about the Bureau’s limited analysis of of small claims court filings concerning jurisdictions: Alameda County and small claims court cases, emphasizing consumer financial disputes across Philadelphia County. The Bureau’s that the Bureau was able to review case multiple jurisdictions. analysis of all cases filed by consumers documents in only two jurisdictions out The Bureau obtained the data for this against the credit card issuers in its of the thousands of counties in the analysis from online small claims court sample found 39 such cases in Alameda United States. However, unlike the prior databases operated by States and County and four such cases in commenter, this commenter was counties. No centralized repository of Philadelphia County. When the Bureau concerned that the data reflected by the small claims court filings exists.305 The reviewed the actual pleadings, however, Bureau’s methodology may overstate the Bureau identified 12 State databases only four of the 39 Alameda cases were number of small claims cases filed by that purport to provide Statewide data clearly individuals filing credit card consumers against credit card issuers. and that can be searched by year and claims against one of the 10 issuers, and party name, plus a comparable database none of the four Philadelphia cases were Response to Comments on Section 7 of for the District of Columbia and a situations where individuals were filing the Study database for New York State that did not credit card claims against one of the 10 The Bureau disagrees that its Study of include New York City. This ‘‘State- issuers. This additional analysis shows small claims court was limited to an level sample’’ covered approximately 52 that the Bureau’s broad methodology analysis of whether arbitration million people. The Bureau also likely significantly overstated the actual agreements contain class action carve- identified 17 counties with small claims number of small claims court cases filed outs. As is discussed in detail above, the court databases that met the same by consumers against credit card Bureau conducted the most fulsome criteria (purporting to provide issuers.311 analysis it could practicably conduct of countywide data and being searchable The Study also found that in small consumers’ use of small claims court to by year and party name), including claims court credit card issuers were resolve disputes with their providers.314 small claims courts for three of five more likely to sue consumers than As stated above, the Bureau believes counties in New York City. This consumers were to sue issuers. The that this is the only Study with such a ‘‘county-level sample’’ covered Study estimated that, in these same broad scope of jurisdictional coverage approximately 35 million people and jurisdictions, issuers in the Bureau’s that analyzes the incidence and largely avoided overlap with the State- sample filed over 41,000 cases against typology of consumer financial disputes level sample.306 The Bureau searched individuals.312 Based on the available in small claims court to date. This was each of these 31 jurisdictions’ databases data, it is likely that nearly all these in addition to—and distinct from— for cases involving a set of 10 large cases were debt collection claims.313 Section 2’s analysis of companies’ use of credit card issuers that the Bureau Comments Received on Section 7 of the small-claims court carve-outs in their estimated to cover approximately 80 Study arbitration agreements. percent of credit card balances The Bureau disagrees with the outstanding nationwide.307 The Bureau One industry commenter asserted that commenter that asserted that the size of cross-referenced the issuers’ advertising the Bureau had only evaluated whether the sample and the nature of its review patterns to confirm that the issuers arbitration agreements contained small of small claims court data undermine offered credit on a widespread basis to claims court carve-outs and requested the Bureau’s conclusion that consumers consumers in the jurisdictions the that the Bureau re-conduct its Study to, rarely proceed in this venue. The Bureau studied.308 among other things, critically analyze commenter did not explain why, given The Study estimated that, in the the use of small claims court as that the Bureau analyzed small claims jurisdictions the Bureau studied—with a compared to arbitration or class action courts in jurisdictions with a combined combined population of approximately litigation. The commenter did not population of approximately 87 million 87 million people—consumers filed no specifically address the Bureau’s people and found only 870 suits in 2012 more than 870 disputes in 2012 against analysis in Section 7 of the Study or against these 10 largest credit card these 10 institutions 309 (including the otherwise specify what further type of issuers, it should be expected to find a three largest retail banks in the United critical analysis would have been substantially higher incidence of suits States).310 This figure included all cases appropriate. in the other portions of the country or in which an individual sued an issuer Another industry commenter asserted against other providers. As is explained or a party with a name that a consumer that the sample size used by the Bureau in the Study’s Appendix Q,315 no one might use to mean the issuer, without in its analysis of small claims court was had previously conducted a sample as regard to whether the claim was too small and that this demonstrates a large as the Bureau’s, and the 10 credit consumer financial in nature. weakness of the Study that undermines card issuers studied accounted for 84 As the Study noted, the number of the credibility of any assertion that percent of credit card outstandings in claims brought by consumers that were consumers rarely proceed individually the Bureau’s credit card contract consumer financial in nature was likely to obtain relief from legal violations. much lower. Out of the 31 jurisdictions This commenter focused on the fact that 314 See id. section 7 at 5–7. Specifically, the studied, the Bureau was able to obtain the Bureau’s review was limited to what Bureau analyzed the small claims court cases it considered a small number of involving credit card issuers with a number of different contractual provisions; some issuers 305 Study, supra note 3, section 7 at 5. jurisdictions and only looked at claims analyzed had no arbitration clauses, some had 306 Id. section 7 at 6. against 10 large credit card issuers in arbitration clauses with mutual small claims carve- 307 Id. 2012, asserting that the Bureau thus outs (meaning that both the consumer and company 308 Preliminary Results, supra note 150, at 155 understated the total number of small had the right to maintain a case in small claims and 156 tbl. 10. claims cases. Relatedly, another court), some had arbitration clauses with a non- 309 Study, supra note 3, section 7 at 9. Due to a mutual small claims carve-out (meaning that only typographical error in the Study, the combined the consumer had the right to maintain an action population of these jurisdictions was incorrectly 311 Id. section 7 at 8–9. in small claims court), and one had arbitration reported as 85 million. 312 Id. section 1 at 16. provisions with no small claims carve-outs. Id. 310 Id. appendix Q at 120–21. 313 Id. 315 Id. appendix Q at 117–18.

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sample.316 Given the modest number of set differed from many other sections in number of class members who had consumer-filed claims found, the the Study, in that it was not restricted received relief and the amount of that Bureau does not believe that it is likely to a discrete number of consumer relief; and the extent to which relief that a large number of cases were filed financial products and services.319 went to attorneys. While several in regular State courts or small claims Rather, the Bureau reviewed these previous studies of class action courts against providers of consumer dockets and identified settlements settlements have been published, the financial products or services.317 where either: (1) The complaint alleged Study was the first to comprehensively With regard to the other commenter’s a violation of one of the enumerated catalogue and analyze class action concern that the Bureau has overstated consumer protection statutes under title settlements specific to consumer the number of small claims court cases X of the Dodd-Frank Act; or (2) the financial markets.322 in the jurisdictions it studied, the plaintiffs were primarily consumers and As the Study noted, there were Bureau pointed out that the 870 cases the defendants were institutions selling limitations to the Bureau’s analysis. The identified in Section 7 constituted a consumer financial products or engaged Study understated the number of class likely upper limit to the number of in providing consumer financial action settlements finalized, and the consumer-filed small claims court cases services (other than consumer amount of relief provided, during the against the identified credit card investment products and services), period under study because the Bureau issuers.318 Indeed, as the Bureau notes regardless of the basis of the claim. To could not identify class settlements in in Part VI Findings below, the the extent that the case involved any State court class action litigation. (The commenter expressed concern at the such consumer financial product or Bureau determined it was not feasible to potential over-counting of consumer service—not only the six main product do so in a systematic way.323) Further, claims tends to support the Bureau’s areas identified in the AAA and the claims data on the settlements the belief that the number of small claims litigation sets—it was included in the Bureau identified is incomplete, as court cases involving credit cards data set.320 dockets are often closed when the final indicates that these claims may go The set of consumer financial class approved settlement order is issued unaddressed but for class actions. action settlements overlapped with the even if claims numbers are not yet data set used for the analysis of the final.324 In addition, not every 7. Class Action Settlements (Section 8 of frequency and outcomes of consumer settlement document contained Study) financial litigation (Section 6 of the information on every data point or Section 8 of the Study contained the Study) insofar as cases filed in 2010 metric that the Bureau sought to results of the Bureau’s quantitative through 2012 had settled by the end of analyze; the Study accounted for this by assessment of consumer financial class 2012. The analysis of class action referencing, for every metric reported action settlements. As described above, settlements was larger because it on, the number of settlements that Section 6 of the Study, which analyzed encompassed a wider time period provided the relevant number or consumer financial litigation, included (settlements finalized from 2008 estimate.325 findings about the frequency with through 2012), which, among other The Bureau identified 422 Federal which consumer financial class actions benefits, decreased the variance across consumer financial class settlements are filed and the types of outcomes years that could be created by unusually that were approved between 2008 and reached in such cases. The dataset used large settlements and allowed the 2012, resulting in an average of for that analysis consisted of cases filed Bureau to account for the impact of such approximately 85 approved settlements between 2010 and 2012 and outcomes of events as the April 2011 Supreme Court per year.326 The bulk of these those cases through February 28, 2014. decision in Concepcion, which is settlements (89 percent) concerned debt To better understand the results of discussed above.321 The Bureau used collection, credit cards, checking consumer financial class actions that this data set to perform a more detailed accounts, or credit reporting.327 Of these result in settlements, for Section 8, the analysis of class settlement outcomes, 422 settlements, the Bureau was able to Bureau conducted a search of class including issues such as the number of analyze 419.328 The Bureau identified action settlements through an online class members eligible for relief in these the class size or a class size estimate in database for Federal district court settlements; the amount and types of 78.5 percent of these settlements (329 dockets. The Bureau searched this relief available to class members; the settlements). There were 350 million database using terms designed to total class members in these settlements. identify final settlement orders finalized 319 Because Section 8 of the Study focused on Excluding one large settlement with 190 from 2008 to 2012 in consumer financial settled class action disputes, the Bureau could begin its search with a relatively limited set of million class members (In re cases. The selection criteria for this data documents: all Federal class action settlements TransUnion Privacy Litigation),329 these available on the Westlaw docket database, resulting settlements included 160 million class 316 See id. section 3 and section 7 at 6 n.19. in over 4,400 disputes settled between January 1, members.330 317 For example, in collecting data for Section 6 2008 and December 31, 2012. Id.at appendix R. In These 419 settlements included cash of the Study concerning litigation in court, the contrast, in exploring filings in Federal and State Bureau’s preliminary research suggested that the court in Section 6 of the Study, described above, relief, in-kind relief, and other expenses number of consumer-filed consumer finance cases the volume of court filings required the Bureau to in State court would not be high. Id. appendix L rely on word searches that helped limit the set of 322 See Study, supra note 3, section 8 at 8–9. at 70–71 (explaining that the Bureau considered documents that the Bureau manually reviewed to 323 Id. section 8 at 10. the six product groups mentioned previously. Id. at searching for State cases using a contract ‘‘nature 324 Id. section 8 at 11. of suit’’ but ultimately determined that the total appendix L. 325 Id. section 8 at 10. number of cases in this category would be high 320 Id. section 8 at 8–11. The Study did, however, 326 while the number of consumer-filed cases exclude disputes involving residential mortgage Id. section 8 at 9. concerning the products we covered would not be). lenders, where arbitration provisions are not 327 Id. section 8 at 11. 318 Id. section 7 at 9 (noting that the detailed prevalent, and another subset of disputes involving 328 Id. section 8 at 3 n.4. For the purposes of analysis of consumer-filed cases in two claims against defendants that are not ‘‘covered uniformity in analyzing data, the Bureau excluded jurisdictions led the Bureau to the conclusion that persons’’ regulated by the Bureau, such as claims three cases for which it was unable to find data on ‘‘our broad methodology may well overstate the against merchants under the Fair and Accurate attorney’s fees. These three cases would not have actual number of small claims court cases filed by Credit Transaction Act. Id. section 8 at 9 n.25 and affected the results materially. Id. credit card consumers against our sample of appendix S. 329 Id. section 8 at 3. issuers.’’). 321 Concepcion, 563 U.S. at 344. 330 Id.

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that companies paid. The total amount settlements that offered cash relief, the Overdraft MDL)—a multi-district of gross relief in these 419 settlements— Bureau determined that 36.6 percent proceeding involving class actions that is, aggregate amounts promised to included automatic cash distribution against a number of banks—to shed be made available to or for the benefit that did not require individual further light on the impact of arbitration of damages classes as a whole, consumers to submit a claim form or agreements on the resolution of calculated before any fees or other costs claim request.336 individual and class claims. As of the were deducted—was about $2.7 The Study also sought to calculate the Study’s publication, 23 cases had been billion.331 This estimate included cash rate at which consumers claimed relief resolved in the Overdraft MDL. In 11 relief of about $2.05 billion and in-kind when such a process was required to cases, the banks’ deposit agreements did relief of about $644 million.332 These obtain relief. The Bureau was able to not include arbitration provisions; in figures represent a floor, as the Bureau calculate the claims rate in 25.1 percent those cases, 6.5 million consumers did not include the value, or cost to the of the 419 settlements that contained obtained $377 million in relief. In three defendant, of making agreed behavioral enough data for the Bureau to calculate cases, the defendants’ deposit changes to business practices.333 The the value of cash relief that had been or agreements had arbitration provisions, Study showed that there were 53 was scheduled to be paid to class but the defendants did not seek settlements covering 106 million class members (105 cases). In these cases, the arbitration; in those cases, 13.7 million members that mandated behavioral average claims rate was 21 percent and consumers obtained $458 million in relief that required changes in the the median claims rate was 8 percent.337 relief.340 Another four defendants settling companies’ business practices Rates for these cases should be viewed moved to seek arbitration, but beyond simply to comply with the law. as a floor, given that the claims numbers ultimately settled; in those cases 8.8 Sixty percent of the 419 settlements used to calculate these rates may not million consumers obtained $180.5 (251 settlements) contained enough data have been final for many of these million in relief.341 Five companies, in for the Bureau to calculate the value of settlements as of the date of the last contrast, successfully invoked cash relief that, as of the last document document in the docket and available arbitration agreements, resulting in the in the case files, either had been or was for review by the Bureau. The weighted dismissal of the cases against them.342 scheduled to be paid to class members. average claims rate, excluding the cases The Overdraft MDL cases also Based on these cases alone, the value of providing for automatic relief, was 4 provided useful insight into the extent cash payments to class members was percent including the large TransUnion to which consumers were able to obtain $1.1 billion. Again, this excludes settlement, and 11 percent excluding relief via informal dispute resolution— 338 payment of in-kind relief and any that settlement. such as telephone calls to customer valuation of behavioral relief.334 The Study also examined attorney’s service representatives. As the Study For 56 percent of the 419 settlements fee awards. Across all settlements that noted, in 17 of the 18 Overdraft MDL (236 settlements), the docket contained reported both fees and gross cash and settlements, the amount of the enough data for the Bureau to estimate, in-kind relief, fee rates were 21 percent settlement relief was finalized, and the as of the date of the last filing in the of cash relief and 16 percent of cash and number of class members determined, case, the number of class members who in-kind relief. Here, too, the Study did after specific calculations by an expert were guaranteed cash payment because not include any valuation for behavioral witness who took into account the either they had submitted a claim or relief, even when courts relied on such number and amount of fees that had they were part of a class to which valuations to support fee awards. The already been reversed based on informal payments were to be made Bureau was able to compare fees to cash consumer complaints to customer automatically. In these settlements, 34 payments in 251 cases (or 60 percent of service. The expert witness used data million class members were guaranteed the data set). In these cases, of the total provided by the banks to calculate the recovery as of the time of the last amount paid out in cash by defendants amount of consumer harm on a per- document available for review, having (both to class members and in attorney’s consumer basis; the data showed, and 339 made claims or participated in an fees), 24 percent was paid in fees. the calculations reflected, informal In addition, the Study included a case automatic distribution.335 Of 382 reversals of overdraft charges. Even after study of In re Checking Account controlling for these informal reversals, 331 Id. section 8 at 4. The Study defined gross Overdraft Litigation, MDL No. 2036 (the nearly $1 billion in relief was made relief as the total amount the defendants offered to available to more than 28 million class provide in cash relief (including debt forbearance) set of 236 settlements for which the Bureau had members in these MDL cases.343 or in-kind relief and offered to pay in fees and other payment information. However, the Bureau believes expenses. Id. that this $32-per-class-member recovery figure is a 340 Id. section 8 at 44 tbl. 20. One of these three 332 reasonable estimate. Id. defendants, Bank of America, had an arbitration 336 333 Id. Accordingly, where cases did provide This set of 382 settlements represents the 410 agreement in the applicable checking account values for behavioral relief, such values were not settlements in which some form of cash relief was contract, but, in 2009, began to issue checking included in the Study’s calculations regarding available, excluding 28 cases in which cash relief account agreements without an arbitration attorney’s fees as a proportion of consumer consisted solely of a cy pres payment or reward agreement. Prior to the transfer of the litigation to recovery. Id. section 8 at 5 n.10. payment to the lead plaintiff(s) because for class the MDL, Bank of America moved to seek 334 Id. section 8 at 28. members, these cases involve neither automatic nor individual arbitration of the dispute; but once the 335 Id. section 8 at 27. The value of cash payments claims-made distributions. Study, supra note 3, litigation was transferred, Bank of America did not to class members in the 251 settlements described section 8 at 19. renew its motion seeking arbitration, instead listing above ($1.1 billion), divided by the number of class 337 Id. section 8 at 30. arbitration as an affirmative defense. See, e.g., id. members in the 236 settlements described above (34 338 Id. Compared with the ‘‘average claims rate,’’ section 8 at 41 n.59. million), yields an average recovery figure of which is merely the average of the claims rates in 341 Id. section 8 at 45 tbl. 21. approximately $32 per class member. Since the the relevant class actions, the ‘‘weighted average 342 Id. section 8 at 42 tbl. 18. publication of the Study, some stakeholders have claims rate’’ factors in the relative size of the 343 Id. section 8 at 39–46. The case record did not reported on this $32 figure. See, e.g., Todd Zywicki classes. reveal how many consumers received informal & Jason Johnston, ‘‘A Ban that Will Only Help Class 339 Id. section 8 at 36 tbl. 13. These percentages relief of some form. It is likely that many other class Action Lawyers,’’ Mercatus Ctr., Geo. Mason U. likely represent ceilings on attorney’s fee awards as action settlements account for similar set-offs for (Dec. 9, 2015). The Bureau notes that this figure a percentage of class payments, as they will fall as consumers that received relief in informal dispute represents an approximation, because the set of 251 class members may have filed additional claims in resolution, as settling defendants would have settlements for which the Bureau had payee the settlements after the Bureau’s Study period economic incentives to avoid double-compensating information was not completely congruent with the ended. such plaintiffs.

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Comments Received on Section 8 of the merit of consumer class actions that the ‘‘net cost’’ of class actions in the Study result in settlements and one of these Study. The commenters argued that the Several commenters, including industry commenters criticized the Study accordingly substantially industry commenters and a nonprofit Bureau for not also analyzing the merits underestimated costs incurred by commenter, criticized the Bureau’s of all class actions, not just those that companies in connection with class analysis of class action settlements. settled. The nonprofit commenter noted actions. The research center commenter These commenters cited a working that the Study did not present data further asserted that the Bureau either paper by one research center that regarding which companies were more systematically excluded or overstated critiqued use of what it called likely to settle nor did the Bureau offer the benefit of many claims-made 345 ‘‘aggregate averages’’ to evaluate the details on what the commenter settlements. effectiveness of class action cases.344 identified as key measures of class Finally, an industry commenter The result, according to the nonprofit action performance. Without this suggested that the Bureau’s method for commenter, was that the Study tended information, contended the commenter, calculating attorney’s fees artificially to overweight data from a handful of readers are unable to know if allowing deflated the average amount of very large settlements in a way that more class actions would actually attorney’s fees reported per case. overstates the importance of class resolve a societal problem or instead Response to Comments Received on actions. Relatedly, an industry would be used to extort settlements Section 8 from companies for minor violations commenter contended that the Study In response to the commenters that gave undue weight to a few large class that do not harm anyone. One industry commenter focused on the fact that the were concerned with the Bureau’s use of action settlements. This commenter, aggregate averages, the Bureau notes several industry commenters, and a Bureau did not calculate any actual injury to consumers belonging to a class that it did present Section 8’s analyses research center commenter also took of class action settlements in a number issue with the Bureau’s decision to and instead assumed that settlements reflect redress for legal violations even of different segments. This allows the exclude certain settlements from the public to avoid any confusion that could Study because the settlements did not though most settlements do not include a finding of wrongdoing and some may be caused by aggregating the entire set, involve contractual relationships and and commenters to focus on whatever thus could not be blocked by invoking be settlements to resolve nuisance suits. This commenter further expressed segments they believe to be most an arbitration agreement (e.g., cases relevant. The Study also directly involving out-of-network ATM notices) concern for, in its view, the Bureau’s failure to determine if class action addressed potential confusion on while including debt collection class aggregate averages by providing data on actions which, according to the claims were meritless or frivolous. Relatedly, one of the industry the number of settlements within commenters, also do not typically various ranges of gross relief.346 Further, involve a contractual relationship commenters said that the Bureau should have evaluated whether class actions the Study included tables that provided between the debt collector and the specific information for, among other consumer. Along similar lines, an were brought to address consumer harm as opposed to being motivated by variables: Year and type of relief (table industry trade association commenter 7) and 11 different product types (table took issue with the Bureau’s use and attorneys’ desire to earn fees (and thus 8). Regarding the comment that analysis of the Overdraft MDL case benefits to consumers were secondary). suggested that the Study overweights study. According to the commenter, the An industry commenter suggested large settlements such as the Overdraft overdraft cases were atypical because, that Section 8 exceeded the Bureau’s MDL, the Bureau believes that rather among other things, they settled, they authority, noting that section 1028(a) than indicating a problem with the involved automatic payouts to class required the Bureau to study pre- Study, this simply reflects the fact that members rather than requiring the dispute arbitration agreements and did the distribution of class action submission of claims, and they resulted not expressly require the Bureau to settlement amounts is right-skewed. in abnormally large settlements. The study class actions and the use of Commenters suggest no reason why this commenter stated that the Bureau arbitration agreements to block class should therefore have excluded the actions. distribution is unusual. As is noted Another industry commenter noted cases from its analysis. Furthermore, the below in Part VI.B.3, there continue to that the data set considered in this commenter asserted that the Bureau be large class action settlements in section was for a five-year period and failed to address critical questions about consumer finance. not three years as was used in some of As for the related concern about the the overdraft cases, including the time the other sections and asserted that this Bureau’s inclusion of certain class spent in litigation before settlement, the distorted the relative importance of actions that commenters thought should net present value to consumers of the class actions. The commenter further have been excluded, the Bureau settlements, and the plaintiff’s attorney noted that the data was not restricted to fees. Finally, the research center specific consumer financial products 345 Relatedly, an industry commenter argued that commenter also contended that the and services. The commenter also stated the Bureau’s methodology for calculating the Bureau’s approach biased the Study by that it was difficult to analyze unequal percentage of settlement payments going to skewing data on attorney’s fees. attorney’s fees artificially deflated the average A nonprofit commenter, a research or dissimilar data sets and come to an amount of attorney’s fees by lumping large center commenter and several industry accurate portrait of how they compare. settlements with smaller ones. Insofar as the A research center commenter and an commenter was primarily disputing the Bureau’s commenters also criticized the Study for industry trade association both characterization of this data in its analysis, this not attempting to assess the underlying argument is addressed in Part VI.B.3 below. expressed concern that the analysis in 346 Study, supra note 3, section 8 at 26 fig. 4 344 By aggregate averages, the academic paper this section of the Study excluded the (noting that 7 settlements provided over $100 suggests that the Bureau had computed these sums that companies paid attorneys to million in gross relief; 23 settlements provided averages by counting the number of class members defend class action claims and class between $10 million and $100 million in gross paid, and the total amount paid in attorney’s fees, actions that did not report payments to relief; 58 settlements provided between $1 million and dividing those numbers by, respectively, the and $10 million in gross relief; 127 settlements total number of class members and the class class members; in other words, they provided between $100,000 and $1 million; and 204 payment. asserted that the Bureau did not present settlements provided less than $100,000 in relief).

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similarly provided data in different the data the commenter sought for the periods practicable for the various forms to allow interested persons to overdraft cases are within the normal individual components of the Study tally the figures and omit cases as they range of values set out in the Study.351 consistent with electronic data see fit.347 In other words, if an As for the commenters that asserted availability and other Bureau resource interested person was concerned about that the Bureau did not review the limitations. As it explained in the Study the Bureau’s inclusion of a particular merits of all class actions or just those and the proposal, the fact that it was category, such as the overdraft or debt that resulted in settlements, as noted practicable to study a broader time collection cases, the data were above in connection with Section 6 of range for Section 8 of the Study had a presented in a way that allowed that the Study, the Bureau notes that the number of advantages, including the person to consider the data without Study analyzed the closest proxies for ability to account for significant those cases. Also, as suggested in Part merit possible—the filing and background shocks such as the financial VI.B.3, below, the Bureau believes that disposition of summary judgment crisis and the Supreme Court’s decision even if these categories of class action motions and motions to dismiss in Concepcion in 2011, as well as for the settlements were excluded from the preceding final class action fact that the results of settlements may data, the Bureau’s conclusion as to the settlements.352 The commenters were not be reported to courts for some efficacy of class settlements generally correct to the extent that the Bureau did time.354 Also, a longer time period would not change. In any event, the not attempt to evaluate the merits of decreased the variance across years that Bureau chose to include debt collection claims resolved in class action could be created by unusually large cases because a debt collector normally settlements. The Bureau did not believe settlements. Further, the Study set forth seeks to collect a debt based on a it possessed any greater ability to do so data by year and by claim in numerous contract and may be able to invoke an than the parties that had agreed to tables and figures, so that outside arbitration clause if one is contained in settlements or the courts that reviewed parties could analyze specific data sets, the original credit agreement.348 By them. In any event, as with all litigation particularly if they wanted to focus on contrast, the cases involving ATM settlements, parties made their own or exclude specific financial products disclosures involved no contract judgments about the case in assessing and services.355 between the merchant and consumer, and agreeing to a settlement. The With regard to concerns raised by the and thus no arbitration agreement could relationship between merit and research center commenter, as discussed be used to block cases filed by settlements is discussed further in Part further below in Part III.E, the Bureau customers. VI, below. notes that data about defense attorney In response to the commenter that With respect to the industry costs is not publicly available. The took issue with the Bureau’s use and commenter concerned that the Bureau’s Bureau further determined that it would analysis of the Overdraft MDL case Study was too expansive and exceeded be too difficult or impossible to gather its section 1028(a) authority—by study, the Bureau believes that overdraft additional information on any uniform studying class actions in addition to cases were not atypical in offering basis about defense costs, given that at 349 arbitration—the Bureau believes that its automatic payouts to class members. least some of this information may be analysis is relevant to performance of its Nor were the overdraft settlements considered subject to attorney-client charge under section 1028(a) and notes abnormally large—just two of the seven privilege. The Bureau made clear that it that a number of responses by industry largest settlements identified in the was seeking to study ‘‘transaction costs 350 and consumer commenters alike to the Study were Overdraft MDL cases. in consumer class actions,’’ and firms Bureau’s initial request for information The Bureau also believes that the that had been involved in defending strongly urged the Bureau to study class commenter did not explain why its class actions could have produced data litany of other questions on the action litigation.353 One of the commenters that responded to the on their transaction costs during the overdraft cases warranted these cases’ Bureau’s Study process but did not. Nor exclusion from the Study. In any event, original request for information, a coalition of industry trade associations, has any such data been provided to the 347 Bureau in response to the notice of For example, if this commenter wanted to specifically requested that the Bureau 356 analyze consumers’ recovery without including study whether class actions provided proposed rulemaking. As for not debt collection cases, the Study makes that meaningful benefit to individual studying class actions for which data possible. See Study, supra note 3, section 8 at 25 consumers as compared with individual was unavailable, this limitation was tbl. 8 (noting that debt collection cases resulted in noted in the Study; the Bureau was only $96.82 million in total relief). Doing so would arbitration. The Bureau agreed with this reduce the total payout to consumers by $97 million commenter because, in its view, the able to study cases for which data could 357 to $2.6 billion. Id. only way to assess whether arbitration be located. For cases the Bureau 348 See id., section 6 at 56 n.96; SBREFA Report, agreements adequately protect could find, the data gathered, at infra note 419, at 17 n.23 (noting that debt collector minimum, establishes a floor for the small entity representatives informed the Bureau consumers is to evaluate others means that, in certain cases, if the underlying credit of consumer protection. This includes amount of money recovered by agreement contains an arbitration clause, a debt class actions, the blocking of which is consumers in class actions. collector may be able to compel arbitration). a motivator for and key result of Finally, with regard to the concern 349 Study, supra note 3, section 8 at 20 companies’ use of arbitration related to the method used to report (identifying 140 settlements that provided attorney’s fees, the Bureau notes that the automatic relief, or 37 percent of settlements); id. agreements. section 8 at 22 (noting that nearly 24 million class Regarding the Bureau’s selection of a members received automatic relief); id. section 8 at five-year period review of class actions, 354 See Study, supra note 3, section 8 at 37 tbl. 14 (reporting that average time to final settlement 28 n.46 (noting that $709 million was paid out to the Bureau studied the longest time class members in automatic cash distribution after initial filing was 690 days and median time cases). was 560 days). 350 Id. section 8 at 28 n.47 (citing Order of Final 351 Id. section 8 at 36–37 (measuring days elapsed 355 See, e.g., id. section 8 at 12 tbl. 1 (setting forth Approval of Settlement, Tornes v. Bank of America from complaint to final settlement); Id. section 8 at settlement incidence by product and by year). NA (In re Checking Account Overdraft Litig.), No. 32–35 (providing a range of attorneys fee 356 The Bureau’s Section 1022(b)(2) Analysis 08–23323 (S.D. Fla. Nov. 22, 2011) and Order of percentages by settlement relief size and product attempts to address this issue, below. See also Final Approval of Settlement, Lopez v. JP Morgan type). Study, supra note 3, section 8 at 24 tbl. 7. Chase NA (In re Checking Account Overdraft Litig.), 352 See id. section 8 at 38 tbls. 15 and 16. 357 Study, supra note 3, section 8 at 10–11; see No. 09–23127 (S.D. Fla. Dec. 19, 2012). 353 See supra Part III.A. generally id. appendices R and S.

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Study reported data regarding attorney’s this sample because it wanted to capture identified, the Bureau did not find an fees in a number of different ways— enforcement activity by both large and overlapping public enforcement action. including by comparing them to cash small States and because it wanted to For class action settlements of less than relief, to gross relief, and by product capture enforcement activity by city $10 million, the Bureau did not identify type. To the extent that the commenter attorneys in light of the increasing work an overlapping public enforcement suggested that the Bureau is drawing the by city attorneys in this regard. The action 82 percent of the time.363 wrong conclusion from this data, the Bureau then searched an online Finally, the Study found that, when Bureau addresses that argument below database to identify overlapping private public enforcement actions and class in Part VI. cases (including cases filed before 2008 actions overlapped, private class actions and after 2012) and searched the tended to precede public enforcement 8. Consumer Financial Class Actions pleadings in those cases.360 actions instead of the reverse. When the and Public Enforcement (Section 9 of Second, the Bureau essentially Study began with government Study) performed a similar search over the enforcement activity and identified Section 9 of the Study explored the same period, but in reverse: The Bureau overlapping private class actions, public relationship between private consumer assembled a sample of private class enforcement activity was preceded by financial class actions and public actions and then searched for private activity 71 percent of the time. (governmental) enforcement actions. As overlapping public enforcement actions. Likewise, when the Bureau began with Section 9 noted, some industry trade This sample of private class actions was private class actions and identified association commenters (commenting derived from a sample of the class overlapping public enforcement on the RFI) urged the Bureau to study settlements used for Section 8 and a activity, private class action complaints whether class actions are an efficient review of the Web sites of leading were preceded by public enforcement and cost-effective mechanism to ensure plaintiff’s class action law firms. To find activity 36 percent of the time.364 compliance with the law given the overlapping public enforcement actions Comments Received on Section 9 of the authority of public enforcement (typically posted on government Study agencies. Specifically, these agencies’ Web sites), the Bureau commenters suggested that the Bureau searched online using keywords specific Several industry commenters stated explore the percentage of class actions to the underlying private action.361 that, in their view, the Study was flawed that are follow-on proceedings to The Study found that, where the because the Bureau did not properly government enforcement actions. Other government brings an enforcement consider the impacts its own stakeholders have argued that private action, there is rarely an overlapping enforcement activities have on class actions are needed to supplement private class action. For 88 percent of providers. For example, one of these public enforcement, given the limited the public enforcement actions the commenters stated that the Bureau only resources of government agencies, and Bureau identified, the Bureau did not reviewed AAA arbitrations resolved that private class actions may precede find an overlapping private class during what it termed the Bureau’s public enforcement and, in some cases, action.362 The Study similarly found ‘‘formative stage’’ and asserted that the spur the government to action. To better that, where private parties brought a Study was therefore skewed because it understand the relationship between class action, an overlapping government did not take into account the Bureau’s private class actions and public enforcement action existed in only a enforcement actions in later years. enforcement, Section 9 analyzed the minority of cases, and rarely existed Another commenter criticized the extent to which private class actions when the class action settlement is Bureau for failing to account for the overlapped with government relatively small. For 68 percent of the impact that other Bureau activities— enforcement activity and, when they did private class actions the Bureau interim final and other finalized overlap, which types of actions came rulemakings, amicus briefs, etc.—would first. the Office of the Comptroller of the Currency, the have on providers, and asserted that The Bureau obtained data for this former Office of Thrift Supervision, the Federal further study of these impacts is analysis in two steps. First, it assembled Deposit Insurance Corporation, the Federal Reserve Board of Governors, the National Credit Union warranted. a sample of public enforcement actions Administration. It also included review of An industry commenter took issue and searched for ‘‘overlapping’’ private proceedings brought by State banking regulators, to with what it believed to be an overly class actions, meaning that the cases the extent that they had independent enforcement narrow focus in this Section 9 of the sought relief against the same authority, from Alaska, California, the District of Columbia, Florida, Georgia, Michigan, New York, Study that overlooked several key defendants for the same conduct, Ohio, Pennsylvania, Rhode Island, Texas, and points. For example, this commenter regardless of the legal theory employed Vermont. And the review included State attorney said that the Bureau should have in the complaint at issue.358 The Bureau general actions brought by California, Texas, New evaluated how many class actions are a did this by reviewing Web sites for all York, Florida, Illinois, Pennsylvania, Ohio, Georgia, Michigan, North Carolina, New Hampshire, Rhode result of other disclosures of Federal regulatory agencies with Island, Montana, Delaware, South Dakota, Alaska, wrongdoing (e.g., news reports) and jurisdiction over consumer finance North Dakota, the District of Columbia, Vermont, thus the filing of a class action did not matters, for the State regulatory and and Wyoming. Finally, the analysis included function as a disclosure mechanism enforcement agencies in the 10 largest consumer enforcement activity from city attorneys from Los Angeles, San Francisco, San Diego, and informing the company of its potential and 10 smallest States, and for four Santa Clara County. Study, supra note 3, appendix wrongdoing. In addition, the commenter county agencies in those States to U at 141–142. See supra note 156 (noting that 41 said the Bureau should have evaluated identify reports on public enforcement FDIC enforcement actions were inadvertently how many class actions followed omitted from the results published in Section 9 of activity over a period of five years from the Study; that the corrected total number of government investigations or other 359 2008 through 2012. The Bureau used enforcement actions reviewed in Section 9 was disclosures of claimed wrongdoing, 1,191; and that other figures, including the rather than focusing only on how many 358 Id. section 9 at 5 and appendix U at 141. identification of public enforcement cases with overlapping private actions, were not affected by class actions overlapped with public 359 The analysis included review of enforcement enforcement actions. The commenter activity conducted by the Bureau, the Federal Trade this omission). Commission, the Department of Justice (specifically 360 Study, supra note 3, section 9 at 7. the Civil Division and the Civil Rights Division), the 361 Id. section 9 at 8–10. 363 Id. Department of Housing and Urban Development, 362 Id. section 9 at 4. 364 Id.

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noted that in some instances 9. Arbitration Agreements and Pricing in a manner that was different from that government enforcement agencies (Section 10 of Study) of comparable companies that did not declined to bring an action even where Section 10 of the Study contained the remove their agreements. The Bureau they identified wrongdoing. results of a quantitative analysis which was unable to identify any such explored whether arbitration agreements evidence from the data.372 Response to Comments on Section 9 of The Bureau performed a similar the Study affected the price and availability of credit to consumers. Commenters on the inquiry into whether the affected As to the comments that criticized the Bureau’s RFI suggested that the Bureau companies altered the amount of credit scope of the Bureau’s analysis of its own explore whether arbitration agreements they offered consumers, all else being enforcement actions, noting that the lower the prices of financial services to equal, in a manner that was statistically Bureau increased its enforcement consumers. In academic literature, some different from that of comparable companies. The Study noted that this activity after 2012, such comments hypothesize that arbitration agreements inquiry was subject to limitations not assume that the purpose of the analysis reduce companies’ dispute resolution applicable to the price inquiry, such as was to assess the overall level of public costs and that companies ‘‘pass the lack of a single metric to define enforcement and compare it to the through’’ at least some cost savings to credit availability.373 Using two volume of class action activity. To the consumers in the form of lower prices, 367 measures of credit offered, the Study extent that there has been, and will while others reject this notion. did not find any statistically significant continue to be, an increase in Bureau However, as the Study noted, there is evidence that companies that eliminated enforcement actions relative to the little empirical evidence to support 368 arbitration provisions reduced the credit Study period, the Bureau knows of no either position. they offered.374 reason to believe that the relationship To address this gap in scholarship, between public and private enforcement the Study explored the effects of Comments Received on Section 10 of will change, nor did any commenter arbitration agreements on the price and the Study availability of credit in the credit card suggest a basis for so believing.365 As is marketplace following a series of An industry commenter and a trade discussed in greater detail in Part VI settlements in Ross v. Bank of America, association dismissed the Bureau’s below, Section 9 demonstrated that an antitrust case in which, among other findings in Section 10, asserting that the there was generally little overlap things, several credit card issuers were Ross case did not provide an between these two spheres, and to the alleged to have colluded to introduce appropriate case study because changes extent there is, private activity generally arbitration agreements into their credit in bank pricing are slow to occur and precedes public activity. As was card contracts.369 In these Ross because credit cards issuers would not discussed in that section, the Bureau settlements, which were negotiated be expected to shift their pricing in believes that these data indicated—as separately from settlements in the case response to a temporary ban on supported by the comments from a pertaining to the non-disclosure of arbitration agreements in any event. The group of State attorneys general and the currency conversion fees, certain credit trade association commenter contended Bureau’s experience and expertise—that card issuers agreed to remove arbitration that the Bureau understated the private class actions are a useful agreements from their consumer credit problems with its difference-in- complement to public enforcement card contracts for at least three and a difference analysis of pricing changes. actions, especially given the resource half years.370 Using data from the For example, the commenter questioned limitations faced by regulators or that Bureau’s Credit Card Database,371 the the Bureau’s selection of a control group may be faced by regulators in the future. Bureau examined whether it could find due to its admission that it did not With respect to whether the Bureau statistically significant evidence, at a know if all members of the control considered other of its undertakings, the standard confidence level (95 percent), group used arbitration agreements. Also, Bureau does not believe that there is an that companies that removed their citing two academics, the commenter adequate means to do so and, more arbitration agreements raised their stated that the lack of evidence of a importantly, that such an undertaking prices as measured by total cost of credit price change was unsurprising given the would not be relevant to this temporary nature of the moratorium 366 rulemaking. 367 Compare, e.g., Amy J. Schmitz, ‘‘Building and, as noted above, that large Bridges to Remedies for Consumers in International institutions like the Ross settlers 365 The Bureau notes that it did not in fact limit eConflicts,’’ 34 U. Ark. L. Rev. 779, at 779 (2012) typically change prices slowly. A (‘‘[C]ompanies often include arbitration clauses in its data to public enforcement cases announced or research center commenter expressed a filed prior to December 31, 2012. As the their contracts to cut dispute resolution costs and methodology to the Study set out, the public produce savings that they may pass on to similar concern. enforcement data started with two different sets of consumers through lower prices.’’) with Jeffrey W. A nonprofit commenter, citing to an cases as a starting point to analyze overlap. The Stempel, ‘‘Arbitration, Unconscionablility, and academic working paper, contended Bureau analyzed a set of public enforcement cases Equilibrium, The Return of Unconscionability Analysis as a Counterweight to Arbitration,’’ 19 that the Study failed to indicate whether between 2008 and 2012 for overlapping private the Bureau checked to ensure the cases that may have occurred before or after 2012. Ohio St. J. on Disp. Resol. 757, at 851 (2004) The Bureau also analyzed a set of private class (‘‘[T]here is nothing to suggest that vendors validity of the econometric technique it actions from 2008 through 2012 for overlapping imposing arbitration clauses actually lower their used in evaluating price changes. This public enforcement cases that may have been filed prices in conjunction with using arbitration clauses commenter also criticized the Bureau’s or announced before 2008 or after 2012. As such, in their contracts.’’). 368 method as valid only if prices had been in this second set, any public enforcement cases Study, supra note 3, section 10 at 5. filed or announced after December 31, 2012 would 369 See First Amended Class Action Complaint, In have been included in the data. See Study supra re Currency Conversion Antitrust Litig., No. 1409 372 See id. section 10 at 5–6. In the Study, the note 3, appendix U at 145–146. (S.D.N.Y. June 4, 2009). Bureau described several limitations of its model. 366 To the extent the commenter asserted that the 370 Study, supra note 3, section 10 at 6. For example, it is theoretically possible that the Bureau should have looked at the magnitude of its 371 The Bureau’s Credit Card Database provides Ross settlers had characteristics that would make enforcement efforts in later years after the Bureau loan-level information, stripped of direct personal their pricing different after removal of the was more established as opposed to earlier years in identifiers, regarding consumer and small business arbitration agreement, as compared to non-settlers. support of an argument that class actions are credit card portfolios for a sample of large issuers, See id. section 10 at 15–16. superfluous given the Bureau’s activities, that representing 85 to 90 percent of credit card industry 373 Id. section 10 at 17. argument is addressed below in Part VI. balances. Id. section 10 at 7–8. 374 Id. section 10 at 6.

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changing at the same rate prior to the market interest rates. This commenter control for effects that could have settlement in Ross. also suggested that firms in the impacted pricing if the credit card An individual commenter criticized consumer services sector adjust prices companies had changed their prices for the conclusions that the Bureau drew much more slowly in response to cost any number of external factors.375 This from its analysis, and asserted that changes than do firms in the is because the analysis did not just footnote 34 in Section 10 of the Study manufacturing sector, and large firms evaluate whether there was a change in demonstrated that the Ross settlement adjust prices more slowly than do small pricing, but rather looked instead to see did in fact prompt differential pricing firms. if the change in pricing of the Ross responses from the banks involved and Another industry commenter stated settlers sample differed from the change that such a result comports with that, in its view, there was not in pricing of the other banks that were economic expectation. The commenter statistically significant empirical subject to the same external background further asserted that the Bureau support to generalize the findings in this factors. The Bureau’s analysis also improperly dismissed this result as section beyond the specific Ross case. looked at multiple time periods statistical noise that disappeared once This commenter accused the Bureau of spanning 2008 through 2011, in part to costs were collapsed into a single total using what it labeled as a bizarre account for the possibility that any price cost of credit (TCC) variable. In reality, methodology and of inappropriately adjustments by the Ross settlers may the commenter asserted, the Bureau’s extrapolating results from the behavior have taken place over a relatively long analysis implied that the banks of an arbitrary and small group of period of time.376 The Bureau increased other costs charged to providers. The commenter concluded acknowledged in both the Study and the consumers as evidenced by the separate that the results in Section 10 were proposal that the Ross settlement was regression analyses with respect to APR overly handicapped by caveats and time limited and that it is possible that and fees. This commenter also suggested other uncertainties that did not extend the banks who were subjected to the that a number of other events that across all providers in all markets. settlement might have taken that fact happened around the same time as the Relatedly, an industry commenter into account in deciding their pricing Ross settlement—e.g., the enactment of suggested that the conclusions of this strategy going forward.377 This is an the CARD Act and the Dodd-Frank Act, section ignored case study evidence that inherent limitation in the data. Supreme Court litigation regarding the shows consumers would choose a lower As to the commenter that expressed applicability of the FAA, and other priced product that includes an concern that the Bureau had never ongoing class action lawsuits—may arbitration clause as opposed to a higher ensured the validity of its econometric have also had varying effects on priced one that lacked an arbitration technique, the Bureau believes that the companies’ use of arbitration clause. commenter misunderstood the nature of agreements and pricing decisions. The Response to Comments on Section 10 of the difference-in-difference analysis commenter asserted that consumers the Study used. In the analysis, the control group who did not trigger the currency The purpose of Section 10 was to was neither companies with arbitration conversion fees that were specifically at clauses nor was it companies that did issue in Ross suffered as a result of these explore the suggestion by some that companies’ use of arbitration not have arbitration clauses. Rather, the differential changes, and that such control group was companies that did consumers were more likely to be low- agreements lowers prices for consumers. The analysis then conducted found no not change their use of arbitration income, unmarried, and members of provisions, either because they used racial and ethnic minorities. evidence to support that claim. As the arbitration provisions through the entire Accordingly, the commenter asserted Bureau explained in the Study, period or they did not use arbitration that the Bureau’s analysis in fact analyzing whether pre-dispute provisions through the entire period. suggested that dropping the arbitration arbitration agreements lower the price of The treatment group was the Ross agreements led to more expensive credit consumer financial products or services settlers who did change their use of for certain groups of consumers. is extremely difficult. The Bureau An industry commenter noted that the continues to believe that it made sense arbitration provisions. The Bureau Bureau’s analysis in this section focused to analyze the Ross case as a potential believes that this comparison was only on large banks and did not account natural experiment, although it could effective because it was not comparing for small institutions’ practices, which not provide a complete answer to the the absolute pricing of the different the commenter suggested may be underlying question. The Bureau issuers but instead was comparing the different. The commenter noted that the continues to believe that it used an rate at which they changed their pricing Study more generally found that larger appropriate methodology in analyzing during the time period. The Bureau institutions were more likely to use those results and concluding that it did further notes that nothing indicated that arbitration agreements and asserted that not demonstrate statistically significant the treatment group—the issuers that there may be a relationship between evidence that the issuers increased changed their use of arbitration using arbitration and providing credit to prices or reduced access to credit. provisions—changed their pricing in a many more consumers, especially those Nevertheless, the Bureau notes that statistically significant way vis-a-vis the with poor credit (as large institutions Section 10 does not form the basis for control group.378 Consequently, the may be more likely to do). The any of the Bureau’s significant findings, Study did not find evidence that the commenter concluded that this might which are discussed in greater detail in 375 mean that the class proposal could harm Part VI below. Instead, the Bureau finds See id. section 10 at 12. 376 Id. section 10 at 14 (setting forth the time credit access for poorer consumers. A that there is some amount (although the frames used in the analysis). The Bureau does not research center made a similar point, specific amount is unknown) of costs necessarily agree, however, that credit card pricing stating that empirical evidence shows from the class rule that will be passed is slow moving; to the contrary, in the Bureau’s that consumer finance companies do on to consumers. See also Section experience the pricing offered in credit card solicitations is quite dynamic and at least some pass on changes in their costs but that 1022(b)(2) Analysis, below. large card issuers make frequent adjustments of banks are unlikely to adjust their With regard to criticism of the their fees to the extent permitted by law. deposit and loan rates quickly or fully methodology, the Bureau notes that its 377 See id. section 10 at 15–16. to reflect only temporary changes in regression analysis was designed to 378 See id. section 10 at 15.

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companies that had to stop using continues to believe that TCC was the evidence, the Bureau explains below in arbitration provisions changed their appropriate metric because it represents Part VI the relevance of this part of the pricing in any meaningful way as everything that consumers pay to keep Study to its overall findings in this compared to people that did not have to and use their credit cards.382 Finally, as rulemaking. do so. to the individual commenter concerned E. Additional Comments Received As to the nonprofit commenter’s point that the Study did not account for Regarding the Study and Responses that the Bureau’s technique in this higher interest rates that Regarding the Study analysis was valid only if prices had disproportionately impact, among been changing at the same rate prior to others, low-income households, the The Bureau notes that it received the settlement in Ross, the Bureau notes Bureau notes that its analysis in Section numerous comments from members of that the technique used does assume 10 controlled for credit score and Congress, consumers, consumer that the two groups of companies refreshed credit score (both square and advocates, academics, nonprofits, changed pricing at the same rate before log terms for each) as well as for consumer lawyers and law firms, the imposition of the moratorium borrower income but did not find public-interest consumer lawyers, State (controlling for a number of statistically significant results for TCC legislators, State attorneys general, and variables).379 Thus, the Bureau’s overall.383 Similarly, when the Bureau others that expressed confidence in the analysis assumed that banks changed studied whether there were limitations Study and the Bureau’s methods. Many pricing at the same rate notwithstanding on credit issuance, it used two of these commenters noted the Study’s the items controlled for. measures—initial credit line and comprehensiveness; a few noted that it As to the individual commenter that subprime account issuance—and still appeared to be the most comprehensive expressed concern about other impacts did not find any statistically significant study of dispute resolution in on pricing and arbitration agreements changes.384 connection with consumer financial beyond the Ross settlement, the The Bureau agrees, as an industry services completed to date. Bureau’s analysis attempted to control commenter noted, that its analysis in One nonprofit commenter challenged for a number of variables. Specifically, this section was limited to very large the Bureau’s Study for its alleged failure the benefit of conducting a difference- banks. The Bureau addresses cost to comply with the requirements of the in-differences analysis is that it should concerns specific to small entities Information Quality Act 385 and a account for background effects like the below. Regarding the commenter’s related OMB bulletin,386 asserting that CARD Act, the Dodd-Frank Act, the theory regarding access to credit for the Study should have undergone a development of law over time, and those with poor credit, the Bureau rigorous, transparent peer review pending litigation. The Bureau notes reiterates, as is noted above, that it had process to ensure the quality of the that it did not state that the analysis was a number of controls for consumer disseminated information. Similarly this ‘‘problematic,’’ but simply set out credit that would have detected a commenter and a trade association limitations of the analysis, as it did with particular effect on subprime representing credit unions, expressed regard to each section of the Study.380 consumers. The Bureau also concern about the Bureau’s lack of a In response to this commenter’s acknowledges that there are a number of peer review process and about the fact assertion that the Bureau did find a factors, as one commenter identified, that no entity other than the Bureau difference and buried it in footnote 34, that impact when and how banks decide attempted to replicate the Study. The the Bureau believes that the commenter to adjust pricing mechanisms. trade association commenter also was really disagreeing with the use of The Bureau disagrees with the expressed concern that the Bureau had TCC as the appropriate metric.381 As the contention that its definition of the not conducted a study of general Bureau explained, pricing involves control group was invalid. As was consumer satisfaction with consumer numerous components that work explained in the Study, the control financial products and services. together to represent total cost. For group contained entities that had no Several other industry commenters example, a provider can raise interest change in their use of arbitration criticized the Bureau for not soliciting rates but lower fees and still have the agreements; whether they did or did not public comments during the course of same TCC. All that footnote 34 stated use such an agreement was not relevant. the Study process. In the view of one was that given the number of This group was then compared to those commenter, such a process could have regressions run, it was likely that at entities required to withdraw arbitration enabled the Bureau to address defects least one of the trials would produce agreements as a result of the Ross and other problems with the Study statistically significant coefficients on settlement in order to diagnose whether before its conclusion. The industry the various dependent variables simply this required change resulted in a price commenters stated that the Bureau had by chance. Nevertheless, the Bureau shock. The Bureau disagrees with the never informed the public of the topics industry commenter regarding it had decided to study, never sought 379 See list of factors set out in Appendix V of the extrapolation from the results of Section public comment on them, and never Study at page 148. 10; the Bureau did not engage in such convened a public roundtable 380 Id. section 10 at 18–19. The latter analysis extrapolation. In any event, the Bureau discussion on key issues. These accounts for the possibility that initial changes in acknowledges the caveats it made in the credit output would begin with subprime accounts. 381 As was stated in the Study, the TCC ‘‘metric Study and, notwithstanding those 385 Information Quality Act, Public Law 106–554, incorporates all fees and interest charges the caveats, stands by the results. § 515, 114 Stat. 2763, 2763A–153–154 (2000); see consumer pays to the issuer. It excludes revenue Finally, regarding the commenter that Office of Mgmt. & Budget, ‘‘Information generated through separate agreements between said that the conclusion of this section Management: Information Quality Guidelines,’’ other businesses and the issuer, such as interchange was at odds with other available available at https://www.opm.gov/information- fees paid by merchants and marketing fees or management/information-quality-guidelines/. commissions paid by companies offering add-on 386 Memorandum from Joshua B. Bolten, Dir., products to an issuer’s customer base. This TCC 382 See Study, supra note 3, section 10 at 9. Office of Mgmt. & Budget, to Heads of Departments metric thus capture all of the component costs that 383 See generally id. at appendix V. The Bureau and Agencies concerning Issuance of OMB’s ‘‘Final consumers pay.’’ Id. section 10 at 9 (quoting ‘‘CARD did find some differences for subcomponents of Information Quality Bulletin for Peer Review,’’ Act Report,’’ (2013)), available at http:// TCC, but none were found to contradict the overall OMB Bulletin No. M–05–03 (Dec. 16, 2004), files.consumerfinance.gov/f/201309_cfpb_card-act- price effect. See id. section 10 at 15 n.34. available at https://obamawhitehouse.archives.gov/ report.pdf. 384 Id. section 10 at 18–19. omb/memoranda_fy2005_m05-03/.

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commenters concluded that having not Other comments expressed similar a less formal and more accessible forum undertaken these steps, the Study was concerns. For example, one industry to consumers; in the speedy resolution flawed and does not support the lawyer commenter suggested that the of claims; in actual monetary awards to proposal. Study should have evaluated arbitration claimants; and in aggregate cost to Several industry commenters stated as a dispute resolution mechanism as participants and related cost-savings; that the Bureau should have studied compared to litigation for individual resolution of arbitrations without the consumer satisfaction with the claims that are inappropriate for class involvement of counsel; and in arbitration process through, for action treatment. This commenter noted consumer satisfaction. This commenter example, interviews of consumers who that the Bureau did not appear to further criticized the Bureau for not have arbitrated claims and who had consider the FTC’s 2010 Study entitled making similar inquiries regarding class been involved in class actions. One of ‘‘Repairing a Broken System: Protecting actions. these commenters also stated that the Consumers in Debt Collection Litigation Several commenters, including an Bureau should have evaluated consumer and Arbitration.’’ 389 The FTC’s 2010 industry lawyer, a nonprofit, a group of experience with arbitration in other Study, suggested the commenter, State attorneys general, and two areas, such as employment, where it has criticized litigation as a dispute industry trade associations, criticized existed longer.387 Several industry resolution mechanism and suggested the Study (and the proposal) for commenters asserted that the Bureau’s that the Bureau consider this criticism drawing comparisons between intentional refusal to study consumers’ in any regulatory effort that results in an settlements of class actions and experience with arbitration was increase in litigation. This same decisions in arbitrations. These perplexing because both logic and commenter also suggested that the commenters all suggested that the common sense dictated that Bureau should have examined a number Bureau could have drawn a more understanding consumer satisfaction of other items. Specifically, this accurate comparison by comparing with arbitration is essential to a commenter (along with another industry arbitration settlements with class action complete understanding of whether commenter) suggested that the Bureau settlements. One of these commenters, a mandating consumer arbitration was in should have studied whether there is group of State attorneys general, noted the public interest. In support of this any difference in the level of that the Bureau had acknowledged that viewpoint, one commenter cited a 2005 compliance between financial services 57.4 percent of arbitrations were known Harris Interactive online poll that found companies with and without provisions or likely to have settled and asserted that consumers found arbitration to be in their contracts that can block class that it was reasonable to assume that the faster, simpler and cheaper than actions. The industry commenter cases that settled were stronger claims. proceeding in court and that they would suggested that the Bureau should have Some of these commenters also use arbitration again. studied the effectiveness of its suggested that the Bureau should have One industry commenter suggested complaint process as a means of evaluated class arbitration. The group of that the Bureau should have also resolving consumers’ issues. The State attorneys general also noted that studied the impact on consumers and industry lawyer commenter suggested the Bureau’s data on arbitration society if companies abandon that data to evaluate this might be outcomes and class actions settlements arbitration as well as the costs to reflected in the number or type of was incomplete because the Bureau consumers and society of the additional complaints received by the Bureau only had data for 20.3 percent of arbitrations and 60 percent of 6,042 class actions that the proposal’s regarding each type of company. settlements. Relatedly, an industry Section 1022(b)(2) Analysis projected Similarly, the commenter also suggested commenter criticized the Bureau for would be filed every five years. This that the Bureau should have studied focusing only on filed and adjudicated commenter further noted that the whether class actions are the most arbitrations, rather than those that Bureau did not study whether class efficient method of enforcing the law as settled or that were never filed in the actions are necessary as a deterrent compared to enforcement actions, first instance because a consumer given the impact of modern social although the commenter did not address achieved relief as a result of informal media, explaining that in modern how the Bureau should have gone dispute resolution. A Congressional society providers have enormous farther than it did in Section 9. commenter also asked why the Bureau incentive to ensure that their customers Another industry commenter stated had not considered arbitration are satisfied and any disputes resolved that, in its view, the Study could have settlements in its Study. fairly because dissatisfaction can be been more comprehensive. This Several industry commenters amplified on social media. commenter listed a number of criticized the Study for comparing data Another industry commenter additional items that it contended the regarding arbitration awards for a two- challenged the Bureau’s failure to Bureau should have studied, including year period (2010 through 2011) to class survey market participants regarding the evaluation of what it said were the action settlements over a five-year their views on the deterrent effect of advantages of arbitration in handling the period (2008 through 2012). One class action litigation. most typical types of consumer commenter noted that the Bureau A letter from some members of complaints (which the commenter compared the fact that 34 million Congress urged the Bureau to gather asserted were overcharges, duplicative consumer class members received $1.1 more data on consumer outcomes.388 charges, and other errors); in providing billion in compensation over those five years to only 32 arbitration awards to 387 Relatedly, an industry commenter expressed in the authors’ view, the Bureau did not study consumers (that the Bureau could concern that the Bureau did not explain in the transaction costs associated with pursuing a claim proposal why contracts for consumer financial in Federal court as compared to arbitration or the verify) for a total of only $172,433. This products and services differed from other markets ability of a consumer to pursue a claim in Federal comparison is misleading, suggested the where arbitration would still be permitted to block court or arbitration without an attorney. commenter, because it omitted class actions. The Bureau expresses no opinion on 389 Fed. Trade Comm’n, ‘‘Repairing a Broken arbitrations that resulted in a the role of arbitration agreements in markets beyond System: Protection Consumers in Debt Collection the scope of its authority. Litigation,’’ (July 2010), available at https:// confidential settlement. This commenter 388 In explaining this request, the authors of this www.ftc.gov/reports/repairing-broken-system- further asserted that the Study was letter referred to a June 2015 letter that stated that, protecting-consumers-debt-collection-litigation. misleading because it reported the

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percentage recovery received by automotive financing, and that what Response to General Comments on consumers who succeeded in arbitration little evidence there was suggested that Study (57 cents for every dollar), but did not the Bureau did not understand the In response to concerns about the report similar figures for payouts to automotive finance industry. The Bureau’s compliance with the consumers in class actions. commenter concluded that the Study’s Information Quality Act, the Bureau did The Bureau received comments from findings as to the automotive finance comply with the IQA’s standards for several specific industry groups that market were, at best, ‘‘murky.’’ quality, utility, and integrity under the variously asserted that the Study had IQA Guidelines.391 omitted a fulsome analysis of their An industry commenter suggested Moreover, the Study particular market or provider type. For that the Bureau should have, but did did not fall within the requirements of example, a trade association commenter not, conduct an analysis of how the OMB’s bulletin on peer review, representing credit unions asserted that arbitration and class actions operate in contrary to what the commenter the Bureau studied only a small number the ‘‘real world’’ and what the relative suggested. The bulletin applies to of credit unions and criticized it for not trade-offs are for consumers between scientific information, not the engaging in more fulsome analyses of each dispute resolution mechanism. ‘‘financial’’ or ‘‘statistical’’ information 392 small entities more generally in its Relatedly, the commenter expressed contained in the Study. The Federal Study. A credit union commenter also concern that the Study failed to balance financial regulators, including the expressed concern that most of the adequately the actual benefits of the Bureau, have consistently stated that the Bureau’s analysis in Section 2 arbitration process against the costs of information they produce is not subject 393 (prevalence) did not adequately class-action lawsuits and the likely to the bulletin. represent products offered by credit impacts of the proposal. An industry Although the Bureau did not engage unions and that there was limited commenter criticized the Bureau for in formal peer review, it did include evidence that credit unions use failing to study the impact of the with its report detailed descriptions of arbitration agreements. Relatedly, a proposal on online dispute resolution its methodology for assembling the data trade association representing online services and other methods of informal sets and its methodology for analyzing lenders noted that its members were dispute resolution.390 This commenter and coding the data so that the Study excluded from Section 2, although it said that the Bureau overlooked what is could be replicated by outside parties. acknowledged that its members almost potentially a large universe of consumer The Bureau is not aware of any entity uniformly used arbitration agreements disputes that are addressed outside the that has attempted to replicate elements and several installment lenders noted courtroom, a universe far broader than of the Study; to the extent that the that both online and installment lenders what was addressed in the Study. Bureau’s analysis has been reviewed by were missing from Section 2. Relatedly, an industry commenter academics and stakeholders those A Tribal commenter asserted that the suggested that the Bureau should have individual critiques are addressed Bureau should have consulted with studied informal dispute resolution in above. The Bureau has monitored Tribal entities in order to understand addition to formal dispute resolution academic commentary in addition to the how the Tribal governments resolve and a research center suggested that the comments submitted and continues to disputes and that the Bureau should Bureau’s survey should have asked do so. have focused on Tribal businesses in questions about informal dispute With respect to the claim that the various sections of the Study. Relatedly, resolution. An industry commenter took Bureau did not provide notice of the a different Tribal commenter asserted issue with the Bureau’s failure to study scope of the Study, the Bureau notes that the Bureau did not examine Tribal defense costs incurred by companies in that, although not required to do so by dispute resolution and procedures or defending class actions. The commenter Dodd-Frank section 1028(a), the Bureau Tribal regulations that protect asserted that the Dodd-Frank Act did, in fact, issue a request for consumers. requires such an analysis. The information before commencing the Additionally, an industry trade commenter further asserted that the Study to solicit public input with association representing companies that Bureau’s assumptions in the Study respect to its scope and the sources of are consumer reporting agencies (CRAs) regarding defense costs—that they are data to which the Bureau should said that the Bureau should have more look.394 Moreover, the Bureau released about 75 percent of the amounts fulsomely included CRAs in the Study the Preliminary Results in late 2013, awarded to plaintiff’s attorneys in in general and credit monitoring cases and at that time the Bureau listed the settled class actions and 40 percent in against CRAs and litigation pursuant to remaining topics it intended to study, other cases—were ill-conceived. the Credit Repair Organizations Act thus providing clear public visibility (CROA) in particular. Although the An industry commenter asserted that into the Study’s eventual scope. commenter noted that the Bureau’s the Study did not adequately assess the Furthermore, the Bureau held periodic analyses of class actions (in Section 8) role of consumer choice—presumably meetings with stakeholders before, included CRAs, it focused on the for products with or without arbitration during, and after the Study (as Bureau’s failure to analyze individual agreements. This commenter also stated discussed further in Part IV below) and disputes involving CRAs. The that the Study should be re-conducted commenter further noted that credit to evaluate the economic impact on 391 See Bureau of Consumer Fin. Prot., ‘‘(Bureau) reporting constituted one of the four providers and consumers of regulations Information Quality Guidelines are Issued in largest product areas for class action that prohibit the use of class action Accordance with the Provisions of the Treasury and General Government Appropriations Act for Fiscal relief but the Bureau did not define the waivers. Year 2001, Public Law 106–554 (the ‘‘Act’’) and scope of credit reporting class actions, OMB Government-wide Guidance,’’ https://www. and the Bureau only mentioned credit 390 This commenter specifically referenced consumerfinance.gov/open-government/ monitoring twice in its Study. Modria. Modria is a company that offers online information-quality-guidelines/ (last visited May 19, 2017). An industry trade association customer response and dispute resolution services and purports to handle more than 60 million 392 See OMB Bulletin, supra note 386. representing automobile dealers, disputes a year. See Modria, ‘‘The Modria 393 See Bureau Information Quality Guidelines, asserted that the Bureau’s Study Platform,’’ http://modria.com/product/ (last visited supra note 385. contained virtually no information on March 13, 2017). 394 See Arbitration Study RFI, supra note 16.

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received ongoing input regarding the likely to express satisfaction with that representatives respond to the filing and appropriate Study scope. mechanism). In any event, as is settlement of class actions, as discussed As for the commenters concerned that discussed further below in Part VI, the further below in Part VI, is much more the Bureau did not conduct a study of Bureau does not believe that consumers’ probative than self-serving survey consumer satisfaction with their relative satisfaction with a dispute results. And, as set out below in Part consumer financial products and resolution mechanism that they use VI.B, the Bureau believes that social services, the Bureau believes that even quite infrequently should be afforded as media are insufficient to force if it were to find very high levels of much weight as the fact that the Study companies to change company satisfaction, that would not affect the showed, and many commenters agreed, practices—because, among other assessment of the various alternative that arbitration agreements can reasons, many consumers do not know dispute resolution mechanisms, preemptively limit consumers’ ability to that they have valid complaints or how especially given the potential for claims resolve disputes in class actions. Nor to raise their claims through social to go undiscovered by consumers. With does the Bureau believe that other media. Further, in at least one study, respect to the concern that the Bureau things that commenters suggested the did not evaluate consumer satisfaction Bureau should have studied were companies ignored nearly half of the with the arbitration process, the Bureau relevant or feasible (or both). As for social media complaints consumers notes that it did not do so for several studying the impacts on society of submitted, and when companies did reasons. First, given the small number of additional class actions and the respond, consumers were dissatisfied in consumers who participated in potential loss of arbitration as a means roughly 60 percent of the cases.397 arbitration proceedings, it would have of dispute resolution, these impacts are Regarding the commenter that been difficult and costly to construct a addressed in the Bureau’s Section suggested that the Bureau should have sample of such consumers and obtain 1022(b)(2) Analysis. evaluated whether there is a different statistically reliable results. Second, it As to those comments that criticized level of compliance for companies that would have been difficult to distinguish the Study for failing to compare dispute use arbitration versus those that can be consumer satisfaction with the process resolution outcomes, the Bureau sued in a class action and that such an from consumer satisfaction with the carefully explained why such a analysis can be conducted by review of outcome in particular cases. Thus, if a comparison was neither feasible the Bureau’s complaint database, the consumer received a poor or no (because of the large volume of Bureau disagrees with the premise of settlements or potential settlements settlement or award in an arbitration, he the comment; simple comparisons where the outcome could not be or she might view the process across companies that use arbitration unfavorably even if the underlying determined) nor meaningful (because of versus those that do not, cannot be claim was objectively poor and merited potential selection bias in the choice of made using complaint data. The Bureau little relief. The opposite would also be forum and in the cases that did not also notes that the largest volume of true.395 Third, given the finding that so settle.) few consumers brought individual In response to the industry lawyer complaints concerns debt collectors, claims in arbitration, the satisfaction of commenter’s criticism that the Bureau whose ability to invoke arbitration that small number of consumers who did not consider the FTC’s 2010 Study agreements is derivative of the clients ultimately did use the process of debt collectors’ use of arbitration and they serve; credit reporting companies, (assuming enough could be located to litigation, the Bureau did review the which may not have contracts or make a study of their satisfaction FTC’s 2010 Study in the course of arbitration agreements with consumers; reliable) would not answer the question analyzing materials for the 2015 and mortgage lenders and servicers, of whether all consumers should be Arbitration Study and, in any case, the who generally are not covered by limited to using arbitration to resolve Bureau believes the FTC’s 2010 Study to arbitration agreements. Additionally, disputes. be relevant to this rulemaking in the Study found that in certain With respect to the related argument offering background information on the markets—including GPR prepaid cards, that the Bureau should have conducted use of arbitration in debt collection payday loans, private student lending, a survey comparing consumers’ disputes brought against consumers.396 and mobile wireless third-party experiences in arbitration as compared The focus of the Bureau’s Study and billing—arbitration agreements are so to class actions, the Bureau believes that subsequent rulemaking, in contrast, is common that it would be all but it would have been exceedingly difficult on the ability of consumers to seek impossible to make the comparisons to find consumers who had experienced affirmative relief for claims relating to suggested. In response to the dual arbitration, and any comparison in consumer products and services—in suggestions that the Bureau’s consumer other words, claims brought by consumer experiences with arbitration complaints database could be used to consumers against their providers. and a class action would have suffered benchmark the compliance of providers from selection bias (i.e., consumers who With respect to the claim that the Bureau should have further studied the with consumer laws or that the Bureau’s prevailed using one of the dispute complaints mechanism itself could be resolution mechanisms would be more value or necessity of class actions in deterring misconduct, the Bureau does used as a form of dispute resolution instead of class actions, the Bureau 395 The Bureau also finds the Harris Interactive not believe that a survey of companies poll cited by this commenter to be irrelevant or their representatives on this issue observes that some industry because over 80 percent of respondents were would have produced reliable commenters had opposed the Bureau’s individuals who chose to arbitrate claims rather information. publication of consumer complaint than being compelled to litigate. See Study, supra The Bureau believes that the review it narratives on the grounds that the note 3, section 3 at 5 n.5. See Harris Interactive Mkt Res., ‘‘Arbitration: Simpler, Cheaper, and Faster undertook of how companies and their than Litigation, A Harris Interactive Survey,’’ (Apr. 397 Sabine A. Einwiller & Sarah Steilen, 2005) (conducted for U.S. Chamber Institute for 396 Fed. Trade Comm’n, ‘‘Repairing a Broken ‘‘Handling Complaints on Social Network Sites— Legal Reform), available at HarrisInteractiveSurvey System: Protection Consumers in Debt Collection An Analysis of Complaints and Complaint forUSChamberofCommerce.pdf. Nor did this survey Litigation,’’ (July 2010), available at https:// Responses on Facebook and Twitter Pages of Large ask respondents their opinions about being blocked www.ftc.gov/reports/repairing-broken-system- US Companies,’’ 41 Pub. Rel. Rev. 195, at 197–200 from filing or participating in a class action. protecting-consumers-debt-collection-litigation. (2015).

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Bureau’s consumer complaint database arbitration and class action outcomes, may not have been resolved in those contained unrepresentative data.398 the Bureau notes that it expressly years). As is explained in the Study, that As to whether class actions are acknowledged the limitations of these window was chosen because 2010 was superior methods of enforcing the law data in the Study.401 the first year that electronic records as compared to government The Bureau also disagrees that it were available from the AAA.405 As is enforcement, the Bureau does not overlooked the role of online dispute further explained, when the Bureau believe this is a necessary subject of resolution. The Bureau had no direct conducted an analysis of the arbitration study. The more relevant question is the way of studying the extent to which records (in 2013) complete records for relative overlap between the two consumers were able to resolve disputes many of the disputes that had been filed mechanisms and the extent to which informally, and the Study specifically in 2012 were unavailable because those class action cases pursue harms not acknowledged that this is a means by cases had not yet been resolved.406 otherwise addressed by government which consumers may seek relief.402 Regarding the commenter that said enforcement. Moreover, regardless of The Bureau did, however, use its case that the Bureau was misleading by the outcome of this rulemaking, study of the Overdraft MDL to evaluate reporting percentage recovery in government enforcement will continue. the extent to which informal dispute arbitration but not in class actions, the The Bureau believes it more appropriate resolution obviated the need for a class Bureau notes that it was only able to do to compare, as the Study did, action mechanism.403 As this case study the former because the AAA requires consumers’ ability to achieve relief showed, even after deductions were that the filing party specify the dollar individually and as part of a class made for previously-provided informal amount of his or her claim in an action. The question, analyzed in detail relief, there was still nearly $1 billion in arbitration.407 Similar disclosures are below, is whether government relief provided to more than 28 million typically not required by Federal or enforcement remedies all harms in the consumers in the class. This indicated State court rules and are rarely included relevant markets or if class actions that even if every consumer who sought in class action complaints.408 supplement government informal relief was successful, most Accordingly, the Bureau was unable to 399 enforcement. consumers were still without a remedy calculate recovery rates for court In response to comments that until they received a share of the class proceedings.409 criticized the Bureau for comparing action settlement. For further discussion Regarding the focus of the Bureau on outcomes in arbitration obtained of individualized resolution of providers in specific categories, such as through arbitral decisions (but not consumer disputes, see Part VI.B below. Tribal lenders, credit unions, online settlements) to class action settlements, As to the commenters that said that lenders, providers of automobile the Bureau notes that the Study the Bureau should not have compared financing, and CRAs (including credit specifically cautioned that the two types two years of arbitration data to five monitoring), the Bureau included in the of data were derived from different years of class action data, the Bureau Study those products and services sources and should not be compared as studied arbitration records for the offered by these providers to the extent apples to apples.400 The Bureau longest period practical given electronic that data was available and that these conducted a fulsome analysis of all data data limitations. Although the Bureau providers were relevant to each section that it could obtain but had no way to could have similarly confined its study of the Study. For example, to the extent measure settlements of arbitrations that of class actions, the Bureau believed a credit monitoring class action were not reported to the administrator. that studying settlements over a longer settlement occurred during the Study The Bureau notes that commenters did time period would provide more robust period, it is included in the analysis in not suggest any way to overcome this data to support firmer findings. The Section 8. With respect to the Study’s limitation in the underlying record. differences between the number of approach to credit unions, the Bureau Regarding the State attorneys general consumers involved in arbitration notes that its review of credit cards in that commented on the incomplete actions and individual actions of any Section 2 included agreements offered nature of the Bureau’s data on type as compared to the number of by credit unions to the extent that credit 398 Bureau of Consumer Fin. Prot., Disclosure of consumers that benefited from class unions are represented in the credit card Consumer Complaint Narrative Data, Final Policy actions and the damages awarded in agreement database mandated under the Statement, 80 FR 15572, 15576 (Mar. 24, 2015) each were so stark as to mitigate any CARD Act.410 The Bureau’s review of (‘‘Industry commenters, by contrast, asserted that concerns about the difference in the deposit account agreements included the publication of narratives in the Database would 404 mislead consumers because the data is, in the time periods studied. As a more agreements from the 50 largest credit commenters’ words, unverified and technical point, the Bureau also notes unions. As is discussed in the Section unrepresentative.’’). While the Bureau did not agree that the commenter was not correct that 1022(b)(2) Analysis below, the Bureau that such data was unverified, the Bureau in the Bureau looked at only two years of notes that to the extent that the response focused on the impact the Bureau’s complaints database would have on customer arbitration data. The Bureau studied commenter was correct in its assertion service and helping companies improve their three years of arbitration filings, from that credit unions do not offer many compliance mechanisms generally. See id. (‘‘In 2010 to 2012, and two years of available products with arbitration agreements, general, the Bureau believes that greater arbitration outcomes for cases that were the impact of this rule will be transparency of information does tend to improve customer service and identify patterns in the filed in 2010 and 2011 (i.e., the cases 405 treatment of consumers, leading to stronger Study, supra note 3, section 5 at 17 n.30. compliance mechanisms and customer 401 See, e.g., id. section 5 at 4–8. 406 Id. section 5 at 11 n.17. service.... In addition, disclosure of consumer 402 The online dispute resolution service 407 Id. section 5 at 20–28. narratives will provide companies with greater referenced by the commenter purports to offer 408 Id. section 6 at 3, 33–54. insight into issues and challenges occurring across services to ‘‘ecommerce’’ companies, i.e., 409 The Bureau did attempt to do this analysis. Of their markets, which can supplement their own merchants, which are excluded from the Bureau’s 78 Federal individual cases where there was a company-specific perspectives and lend more authority. See Modria.com, Inc., ‘‘About Us,’’ http:// result for the consumer, we could identify insight into appropriate practices.’’). modria.com/about-us/ (last visited March 10, 2017). information about a monetary award in 75 cases. Of 399 See Consumer Financial Class Actions and 403 See Study, supra note 3, section 8 at 39–46 those 75 cases, the complaint included an allegation Public Enforcement (Sections 8 and 9 of Study) 404 Doubling the number of consumers successful with a claim amount in only four cases. See id. discussion above. in AAA arbitrations filed in 2010 and 2011 would section 6 at 49. 400 See Study, supra note 3, section 5 at 6–7. raise the number of successful consumers 32 to 64. 410 Id. section 5 at 13.

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minimal.411 As for online lenders, while class actions,’’ but the Bureau received addressed below in Part VI. Regarding the Bureau agrees that it did not no such data from firms during the the commenter’s contention that the specifically analyze this category in Bureau’s Study process or in response to Bureau should have studied the Section 2, it notes that the trade the proposal. economic impact of its proposal, the association commenter acknowledged in The Bureau did attempt to project Bureau notes that Section 10 did its letter that its members have such costs based on the best data attempt to analyze the likelihood that arbitration agreements that can be used available to it, and discussed their class action costs would be passed on to to block class actions. To state this significance in the sections of the consumers. The Bureau also refers the another way, the Bureau did not proposal analyzing whether it was in commenter to the proposal’s and this specifically exclude any products or the public interest and for the protection rule’s Section 1022(b)(2) Analysis. services because of the entity that of consumers and the proposal’s IV. The Rulemaking Process offered it—whether Tribal, potential impacts on covered persons governmental or otherwise—although in and consumers under section 1022 of A. Stakeholder Outreach Following the some cases data were not specifically the Dodd-Frank Act. To the extent that Study the commenter’s primary objection was available for specific types of providers. As noted, the Bureau released the As for Tribal regulations concerning to the significance that the Bureau accorded defense costs in its analyses, Study in March 2015. After doing so, dispute resolution, the Bureau focused the Bureau held roundtables with key its description on AAA and JAMS those are discussed in Part VI.C below.412 stakeholders and invited them to standards as the two largest arbitration provide feedback on the Study and how administrators. As for the suggestion As to the commenter that urged the Bureau to study class arbitration, the the Bureau should interpret its that the Bureau should have studied 416 Bureau notes that the Study addressed results. Stakeholders also provided Tribal consumer protection laws, the feedback to the Bureau or published Bureau did not study any particular class arbitration in several ways. First, Section 2 addressed the percentage of their own articles commenting on and jurisdiction’s consumer protection laws responding to the Study. The Bureau and in any case, the commenter did not arbitration agreements that allowed for class arbitration in the six product has reviewed all of this correspondence suggest the specific ways in which such and many of these articles in preparing Tribal laws would be meaningfully markets studied (the vast majority 413 this final rule. different from laws in other prohibit it). Second, Section 4 jurisdictions. reviewed AAA’s and JAMS’ class B. Small Business Review Panel arbitration procedures.414 Third, Section Regarding the comment that the In October 2015, the Bureau convened Bureau should have conducted a ‘‘real 5 reviewed the few consumer finance class arbitrations that did occur.415 a Small Business Review Panel world’’ analysis of arbitration and class (SBREFA Panel) with the Chief Counsel actions and tradeoffs of each, the Bureau As for the commenters that suggested that the Bureau should have studied for Advocacy of the Small Business believes that the Study did attempt such Administration (SBA) and the an analysis. Specifically, it attempted to informal dispute resolution, the Bureau notes that the Study did address Administrator of the Office of catalogue the cost, benefits, and efficacy Information and Regulatory Affairs with (in terms of consumers involved) of informal dispute resolution in a number of contexts. For example, as noted above the Office of Management and Budget each mechanism. Further, as is 417 in the discussion of Section 8, the (OMB). As part of this process, the discussed in greater detail in the Section Bureau prepared an outline of proposals 1022(b)(2) Analysis below, the Bureau Bureau noted the impact of previously- resolved informal disputes on the under consideration and the alternatives has considered the impacts on considered (SBREFA Outline), which consumers and providers of the final overall amount paid out by the settling banks in the MDL overdraft litigation. the Bureau posted on its Web site for rule it is adopting. To the extent that the review by the small financial commenter was concerned that the The Bureau also considered the significance of the availability of institutions participating in the panel Study did not evaluate the relative process, as well as the general public.418 merits of each mechanism, the Bureau informal dispute resolution mechanisms in both the proposal’s Section 1028 believes that such an evaluation is better 416 As noted above, the Bureau similarly invited suited to the rulemaking process where proposed findings and Section feedback from stakeholders on the Preliminary it can consider the impacts of potential 1022(b)(2) Analysis, and in their Results published in December 2013. In early 2014, policy options. See Part VI Findings, counterparts for the final rule below. In the Bureau also held roundtables with stakeholders any event, the commenters did not to discuss the Preliminary Results. See supra Parts below. III.A–III.C (summarizing the Bureau’s outreach The Bureau does not agree, as one specify what about informal dispute efforts in connection with the Study). industry commenter suggested, that resolution the Bureau should have 417 The Small Business Regulatory Enforcement Dodd-Frank section 1028(a) required it studied. Fairness Act of 1996 (SBREFA), as amended by to study defense costs. In any event, as As for the commenter that asserted section 1100G(a) of the Dodd-Frank Act, requires that the Bureau should have studied the the Bureau to convene a Small Business Review set out above in Section III.D, above, the Panel before proposing a rule that may have a Bureau determined that it would be too role of consumer choice, the Bureau substantial economic impact on a significant difficult to gather additional notes that the Study’s consumer survey number of small entities. See 5 U.S.C. 609(d). information on any uniform basis about did address this question. Whether this 418 Bureau of Consumer Fin. Prot., ‘‘Small should impact the rulemaking is Business Advisory Review Panel for Potential defense costs, given that at least some of Rulemaking on Arbitration Agreements: Outline of this information may be considered Proposals Under Consideration and Alternatives 412 privileged by companies. Further, as set During the Study process, the Bureau sought Considered,’’ (Oct. 7, 2015), available at http:// comment on whether a study of defense costs could out above, the Bureau made clear that it files.consumerfinance.gov/f/201510_cfpb_small- be undertaken, but the Bureau received no useful business-review-panel-packet-explaining-the- sought ‘‘transaction costs in consumer comment on this point. Arbitration Study RFI, proposal-under-consideration.pdf; Press Release, supra note 16. Bureau of Consumer Fin. Prot., ‘‘CFPB Considers 411 The SBREFA Report further details the 413 See Study, supra note 3, section 2 at 46 tbl. Proposal to Ban Arbitration Clauses that Allow potential impact of this rule on small entities, 7. Companies to Avoid Accountability to Their including credit unions that are small. See SBREFA 414 See id. section 4 at 20. Customers,’’ (Oct. 7, 2015), available at http:// Report, infra note 419, at 23–32. 415 See id. section 5 at 86. Continued

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Working with stakeholders and the D. The Bureau’s Proposal have applied only to agreements entered agencies, the Bureau identified 18 Small In May 2016, in accordance with its into after the end of the 180-day period Entity Representatives (SERs) to provide authority u section 1028 and consistent beginning on the regulation’s effective input to the SBREFA Panel on the with its Study, the Bureau proposed date. The Bureau proposed an effective proposals under consideration. With regulations that would govern date of 30 days after a final rule is respect to some markets, the relevant agreements that provide for the published in the Federal Register. To industry trade associations reported arbitration of any future disputes facilitate implementation and ensure significant difficulty in identifying any between consumers and providers of compliance, the Bureau proposed small financial services companies that certain consumer financial products and language that providers would be would be impacted by the approach services. The comment period on the required to insert into such arbitration described in the Bureau’s SBREFA proposal ended on August 22, 2016. agreements to explain the effect of the Outline. The proposal would have imposed rule. The proposal would have also Prior to formally meeting with the two sets of limitations on the use of pre- permitted providers of general-purpose SERs, the Bureau held conference calls dispute arbitration agreements by reloadable prepaid cards to continue to introduce the SERs to the materials covered providers of consumer financial selling packages that contain non- and to answer their questions. The products and services. First, it would compliant arbitration agreements, if SBREFA Panel then conducted a full- have prohibited providers from using a they gave consumers a compliant day outreach meeting with the small pre-dispute arbitration agreement to agreement as soon as consumers register entity representatives in October 2015 block consumer class actions in court their cards and the providers complied in Washington, DC. The SBREFA Panel and would have required providers to with the proposal’s requirement not to gathered information from the SERs at insert language into their arbitration use arbitration agreements to block class the meeting. Following the meeting, agreements reflecting this limitation. actions. nine SERs submitted written comments This proposal was based on the E. Feedback Provided to the Bureau to the Bureau. The SBREFA Panel then Bureau’s preliminary findings—which made findings and recommendations the Bureau stated were consistent with The Bureau received over 110,000 regarding the potential compliance costs the Study—that pre-dispute arbitration comments on the proposal during the and other impacts of the proposal on agreements are being widely used to comment period. These commenters included consumer advocates; those entities. Those findings and prevent consumers from seeking relief consumer lawyers and law firms; recommendations are set forth in the from legal violations on a class basis, public-interest consumer lawyers; Small Business Review Panel Report that consumers rarely file individual national and regional industry trade (SBREFA Report), which is being made lawsuits or arbitration cases to obtain associations; industry members part of the administrative record in this such relief, and that as a result pre- including issuing banks and credit rulemaking.419 The Bureau has carefully dispute arbitration agreements lowered unions, and non-bank providers of considered these findings and incentives for financial service consumer financial products and recommendations in preparing this providers to assure that their conduct services; nonprofit research and proposal and addresses certain specific comported with legal requirements and advocacy organizations; members of issues that concerned the Panel below. interfered with the ability of consumers Congress and State legislatures; Federal, to obtain relief where violations of law C. Additional Stakeholder Outreach State, local, and Tribal government occurred. entities and agencies; Tribal At the same time that the Bureau Second, the proposal would have governments; academics; State attorneys conducted the SBREFA Panel, it met required providers that use pre-dispute general; and individual consumers. In with other stakeholders to discuss the arbitration agreements to submit certain addition to letters addressing particular SBREFA Outline and the impacts records relating to arbitral proceedings points raised by the Bureau in its analysis discussed in that outline. The to the Bureau. The Bureau stated that it preliminary findings, the Bureau Bureau convened several roundtable intended to use the information it received tens of thousands of form meetings with a variety of industry would have collected to continue letters and signatures on petitions from representatives—including national monitoring arbitral proceedings to individuals both supporting and trade associations for depository banks determine whether there are disapproving of the proposal. As is and non-bank providers—and consumer developments that raise consumer discussed in greater detail in Part VI advocates. Bureau staff also presented protection concerns that would warrant below, many thousands of consumers an overview of the SBREFA Outline at further Bureau action. The Bureau submitted comments generally a public meeting of the Bureau’s stated that it intended to publish these disapproving of the Bureau’s proposal Consumer Advisory Board (CAB) and materials on its Web site in some form, (many of these comments were form solicited feedback from the CAB on the with appropriate redactions or comments) while many consumers 420 proposals under consideration. aggregation as warranted, to provide submitted comments generally greater transparency into the arbitration approving of the Bureau’s proposal and, www.consumerfinance.gov/newsroom/cfpb- of consumer disputes. considers-proposal-to-ban-arbitration-clauses-that- in many instances, urging a broader rule The proposal would have applied to that prohibited arbitration agreements allow-companies-to-avoid-accountability-to-their- providers of certain consumer financial customers/. altogether in contracts for consumer 419 Bureau of Consumer Fin. Prot., U.S. Small products and services in the core financial products and services (many of Bus. Admin., & Office of Mgmt. & Budget, ‘‘Final consumer financial markets of lending these comments were form comments or Report of the Small Business Review Panel on money, storing money, and moving or petition signatures as well). CFPB’s Potential Rulemaking on Pre-Dispute exchanging money. Consistent with the Arbitration Agreements,’’ (2015), available at http:// Since the issuance of the proposal, the files.consumerfinance.gov/f/documents/CFPB_ Dodd-Frank Act, the proposal would Bureau has engaged in additional SBREFA_Panel_Report_on_Pre-Dispute_ outreach. The Bureau held a field Arbitration_Agreements_FINAL.pdf. (last visited May 17, 2017); see also Bureau of 420 See Bureau of Consumer Fin. Prot., ‘‘Advisory Consumer Fin. Prot., ‘‘Washington, DC: CAB hearing to discuss the proposal and its Groups,’’ http://www.consumerfinance.gov/ Meeting,’’ YouTube (Oct. 23, 2015), https:// potential impact on consumers and advisory-groups/advisory-groups-meeting-details/ www.youtube.com/watch?v=V11Xbp9z2KQ. providers in Albuquerque, New

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Mexico.421 The Bureau engaged in an any other provision of law, any 1022(c), as well as its authority under in-person consultation with Indian regulation prescribed by the Bureau Dodd-Frank section 1028(b). Tribes in Phoenix, Arizona in August under section 1028(b) shall apply, VI. The Bureau’s Findings That the 2016 pursuant to its Policy for consistent with the terms of the Final Rule Is in the Public Interest and Consultation with Tribal Governments regulation, to any agreement between a for the Protection of Consumers after the release of this notice of consumer and a covered person entered proposed rulemaking.422 In addition, into after the end of the 180-day period The Bureau notes that commenters on the Bureau received input on its beginning on the effective date of the the proposal made extensive comments proposal from its Consumer Advisory regulation, as established by the Bureau. on the Bureau’s preliminary findings Board and its Credit Union Advisory As is discussed below in Part VI, the related to Dodd-Frank Act Section Council. Finally, interested parties also Bureau finds that its rule relating to pre- 1028(b), including its factual findings, made ex parte presentations to Bureau dispute arbitration agreements fulfills its findings that the proposal would be staff, summaries of which can be found all these statutory requirements and is for the protection of consumers, and its 423 on the docket for this rulemaking. in the public interest, for the protection findings that the proposal would be for V. Legal Authority of consumers, and consistent with the the protection of consumers. The bulk of Bureau’s Study. these commenters did not identify As discussed more fully below, there whether their comments on particular are two components to this final rule: a B. Section 1022(b) and (c) topics were related to the preliminary rule prohibiting providers from the use factual findings (discussed below in Part Section 1022(b)(1) of the Dodd-Frank of arbitration agreements to block class VI.B), to the preliminary findings that Act authorizes the Bureau to prescribe actions (as set forth in § 1040.4(a)) and the proposed rule would be for the rules ‘‘as may be necessary or a rule requiring the submission to the protection of consumers (discussed Bureau of certain arbitral records and appropriate to enable the Bureau to below in Parts VI.C.1 and VI.D.1), or to arbitration-related court records (as set administer and carry out the purposes the preliminary findings that it would forth in § 1040.4(b)). The Bureau is and objectives of the Federal consumer be in the public interest (discussed issuing the first component of this rule financial laws, and to prevent evasions below in Parts VI.C.2 and VI.D.2). pursuant to its authority under section thereof.’’ Among other statutes, title X of Accordingly, for this final rule, the 1028(b) of the Dodd-Frank Act and is the Dodd-Frank Act is a Federal Bureau addresses each comment in the issuing the second component of this 424 consumer financial law. Accordingly, context of the finding it believes the rule pursuant to its authority both under in issuing this, the Bureau is exercising comment was most likely addressing. section 1028(b) and section 1022(b) and its authority under Dodd-Frank Act There is significant overlap between the (c). section 1022(b) to prescribe rules under topics addressed in the final factual A. Section 1028 title X that carry out the purposes and findings, the findings that the rule objectives and prevent evasion of those Section 1028(b) of the Dodd-Frank would be for the protection of laws. Section 1022(b)(2) of the Dodd- consumers, and the finding that the rule Act authorizes the Bureau to issue Frank Act prescribes certain standards regulations that would ‘‘prohibit or would be in the public interest. The for rulemaking that the Bureau must impose conditions or limitations on the Bureau therefore incorporates each of its follow in exercising its authority under use of an agreement between a covered findings into the others, to the extent section 1022(b)(1).425 person and a consumer for a consumer that commenters may have intended financial product or service providing Dodd-Frank section 1022(c)(1) their comments to respond to a different for arbitration of any future dispute provides that, to support its rulemaking preliminary finding or to more than one. between the parties,’’ if doing so is ‘‘in and other functions, the Bureau shall A. Relevant Legal Standard the public interest and for the protection monitor for risks to consumers in the of consumers.’’ Section 1028(b) also offering or provision of consumer As discussed above in Part V, Dodd- requires that ‘‘[t]he findings in such rule financial products or services, including Frank section 1028(b) authorizes the shall be consistent with the study.’’ developments in markets for such Bureau to ‘‘prohibit or impose Section 1028(c) further instructs that products or services. The Bureau may conditions or limitations on the use of’’ the Bureau’s authority under section make public such information obtained a pre-dispute arbitration agreement 1028(b) may not be construed to by the Bureau under this section as is between covered persons and prohibit or restrict a consumer from in the public interest.426 Moreover, consumers if the Bureau finds that entering into a voluntary arbitration section 1022(c)(4) of the Act provides doing so ‘‘is in the public interest and agreement with a covered person after a that, in conducting such monitoring or for the protection of consumers.’’ This dispute has arisen. Finally, section assessments, the Bureau shall have the Part sets forth the Bureau’s 1028(d) provides that, notwithstanding authority to gather information from interpretation of this standard including time to time regarding the organization, a summary of its proposed standard and 421 Bureau of Consumer Fin. Prot., ‘‘Field Hearing business conduct, markets, and a review of comments received on it. on Arbitration in Albuquerque, NM,’’ (May 5, 2016), (video, transcript, and remarks by Director activities of covered persons and service The Bureau’s Proposal Cordray), available at https:// providers. The Bureau finalizes www.consumerfinance.gov/about-us/events/ § 1040.4(b) pursuant to the Bureau’s As noted in the proposal, the Bureau archive-past-events/field-hearing-arbitration- authority under Dodd-Frank section can read this requirement as either a albuquerque-nm/. single integrated standard or as two 422 Bureau of Consumer Fin. Prot., ‘‘Policy for Consultation with Tribal Governments,’’ (Apr. 22, 424 See Dodd-Frank section 1002(14) (defining separate tests (that a rule be both ‘‘in the 2013), available at http:// ‘‘Federal consumer financial law’’ to include the public interest’’ and ‘‘for the protection files.consumerfinance.gov/f/201304_cfpb_ provisions of title X of the Dodd-Frank Act). of consumers’’), and in order to consultations.pdf. 425 See Section 1022(b)(2) Analysis, infra Part determine which reading best 423 Regulations.gov, ‘‘Arbitration Agreements,’’ VIII.B. (discussing the Bureau’s standards for No. CFPB–2016–0020, https://www.regulations.gov/ rulemaking under section 1022(b)(2) of the Dodd- effectuates the purposes of the statute, docket?D=CFPB-2016-0020 (last visited June 21, Frank Act). the Bureau exercises its expertise. The 2017) 426 Dodd-Frank section 1022(c)(3)(B). Bureau proposed to interpret the two

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phrases as related but conceptually by the Bureau’s particular expertise in to adopt this interpretation, giving the distinct. the protection of consumers. two phrases independent meaning.432 As discussed in the proposal, the But the proposal further explained The proposal also explained that the Dodd-Frank section 1028(b) statutory that the Bureau believed that treating Bureau’s proposed interpretations of standard parallels the standard set forth the two phrases as separate tests would each phrase standing alone were in Dodd-Frank section 921(b), which ensure a fuller consideration of relevant informed by several considerations. As authorizes the SEC to ‘‘prohibit or factors. This approach would also be noted above, for instance, the Bureau impose conditions or limitations on the consistent with canons of construction would look to the purposes and use of’’ a pre-dispute arbitration that counsel in favor of giving the two objectives of title X to inform the statutory phrases discrete meaning agreement between investment advisers ‘‘public interest’’ prong. The Bureau’s notwithstanding the fact that the two and their customers or clients if the SEC starting point in defining the public phrases in section 1028(b)—‘‘in the finds that doing so ‘‘is in the public interest therefore would be section public interest’’ and ‘‘for the protection interest and for the protection of 1021(a) of the Act, which describes the of consumers’’—are inherently investors.’’ That language in turn Bureau’s purpose as follows: ‘‘The interrelated for the reasons discussed parallels the Securities Act and the Bureau shall seek to implement and, Securities Exchange Act, which, for over above.429 Under this framework, the where applicable, enforce Federal 80 years have authorized the SEC to proposal explained, the Bureau would consumer financial law consistently for adopt certain regulations or take certain be required to exercise its expertise to the purpose of ensuring that all actions if doing so is ‘‘in the public outline a standard for each phrase consumers have access to markets for interest and for the protection of because both phrases are ambiguous. In consumer financial products and investors.’’ 427 The SEC has routinely doing so, and as described in more services and that markets for consumer applied this language without detail below, the Bureau would look to, financial products and services are fair, delineating separate tests or definitions using its expertise, the purposes and transparent, and competitive.’’ 433 for the two phrases.428 There is an objectives of title X to inform the Similarly, section 1022 of the Act underlying logic to such an approach ‘‘public interest’’ prong,430 and rely on authorizes the Bureau to prescribe rules since investors make up a substantial its expertise in consumer protection to to ‘‘carry out the purposes and portion of ‘‘the public’’ whose interests define the ‘‘consumer protection’’ objectives of the Federal consumer the SEC is charged with advancing. This prong. financial laws and to prevent evasions is even more the case for section 1028, The proposal explained that under thereof’’ and provides that in doing so since nearly every member of the public this approach the Bureau believed that the Bureau shall consider ‘‘the potential is a consumer of financial products and ‘‘for the protection of consumers’’ in the benefits and costs’’ of a rule both ‘‘to services under Dodd-Frank. context of section 1028 should be read consumers and covered persons, Furthermore, in exercising its roles and to focus specifically on the effects of a including the potential reduction of responsibilities as the Consumer regulation in promoting compliance access by consumers to consumer Financial Protection Bureau, the Bureau with laws applicable to consumer financial products or services.’’ Section ordinarily approaches consumer financial products and services and 1022 also directs the Bureau to consult protection holistically. In other words, avoiding or preventing harm to the with the appropriate Federal prudential the Bureau approaches consumer consumers who use or seek to use those regulators or other Federal agencies protection in accordance with the broad products. In contrast, the proposal ‘‘regarding consistency with prudential, range of factors it generally analyzes explained, under this approach the market, or systemic objectives under title X of Dodd-Frank, which Bureau would read section 1028(b)’s ‘‘in administered by such agencies,’’ and to include systemic impacts and other the public interest’’ prong, consistent respond in the course of rulemaking to public concerns as discussed further with the purposes and objectives of title any written objections filed by such below. Therefore, the proposal X, to require consideration of the entire explained that if the Bureau were to range of impacts on consumers and other relevant elements of the public. consistent with the FCC’s approach to a similar treat the standard as a single, unitary statutory requirement. See Verizon v. FCC, 770 F.3d test, the Bureau’s analysis would These interests encompass not just the 961, 964 (D.C. Cir. 2014). encompass the public interest, as elements of consumer protection 432 The proposal explained that the Bureau defined by the purposes and objectives described above, but also secondary believes that findings sufficient to meet the two of the Bureau, and would be informed impacts on consumers such as effects on tests explained in the proposal would also be sufficient to meet a unitary interpretation of the pricing, accessibility, and the phrase ‘‘in the public interest and for the protection 427 See, e.g., Securities Act of 1933, Public Law availability of innovative products. The of consumers,’’ because any set of findings that 73 22, section 3(b)(1) (1933) 15 U.S.C. 77c(b)(1); other relevant elements of the public meets each of two independent criteria would Securities Exchange Act of 1934, Public Law 73 interest include impacts on providers, necessarily meet a single test combining them. 291, section 12(k)(1) (1934) 15 U.S.C. 78(k)(1). markets, and the rule of law, in the form 433 Section 1021(b) goes on to authorize the 428 See, e.g., Bravo Enterprises Ltd., Securities Bureau to exercise its authorities for the purposes Exchange Act Release No. 75775, Admin. Proc. No. of accountability and transparent of ensuring that, with respect to consumer financial 3–16292 at 6 (Aug. 27, 2015) (applying ‘‘the ‘public application of the law to providers, as products and services: (1) Consumers are provided interest’ and ‘protection of investors’ standards’’ in well as other related general systemic with timely and understandable information to light ‘‘of their breadth [and] supported by the considerations.431 The Bureau proposed make responsible decisions about financial structure of the Exchange Act and Section 12(k)(1)’s transactions; (2) consumers are protected from legislative history’’). See also Notice of Commission unfair, deceptive, or abusive acts and practices and Conclusions and Rule-Making Proposals, Securities 429 See Hibbs v. Winn, 542 U.S. 88, 101 (2004); from discrimination; (3) outdated, unnecessary, or Act Release No. 5627 [1975–1976 Transfer Binder] Bailey v. United States, 516 U.S. 137, 146 (1995). unduly burdensome regulations are regularly Fed. Sec. L. Rep. (CCH) at 7 (Oct. 14, 1975) 430 This approach is also consistent with identified and addressed in order to reduce (‘‘Whether particular disclosure requirements are precedent holding that the statutory criterion of unwarranted regulatory burdens; (4) Federal necessary to permit the Commission to discharge its ‘‘public interest’’ should be interpreted in light of consumer financial law is enforced consistently, obligations under the Securities Act and the the purposes of the statute in which the standard without regard to the status of a person as a Securities Exchange Act or are necessary or is embedded. See Nat’l Ass’n for Advancement of depository institution, in order to promote fair appropriate in the public interest or for the Colored People v. FPC, 425 U.S. 662, 669 (1976). competition; and (5) markets for consumer financial protection of investors involves a balancing of 431 Treating consumer protection and public products and services operate transparently and competing factors.’’). interest as two separate but overlapping criteria is efficiently to facilitate access and innovation.

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agencies.434 In light of these purposes compliance with relevant laws, proposed tests would have significant and requirements, as set forth in the including deterring violations of those overlap. proposal, the Bureau understands its laws, and on consumers’ ability to One nonprofit commenter responsibilities with respect to the obtain redress or relief. For instance, a acknowledged that the phrase ‘‘public administration of Federal consumer regulation would be ‘‘for the protection interest’’ is susceptible to multiple financial laws to be integrated with the of consumers’’ if it adopted direct interpretations, but also stated that the advancement of a range of other public requirements or augmented the impact Bureau’s proposed interpretation of the goals such as fair competition, of existing requirements to ensure that legal standard includes factors that innovation, financial stability, and the consumers receive ‘‘timely and should not be considered. This rule of law. understandable information’’ in the commenter explained that, in its view, Accordingly, the Bureau proposed to course of financial decision making, or the Bureau should interpret the phrase interpret the phrase ‘‘in the public to guard them from ‘‘unfair, deceptive, in the context of the FAA and the interest’’ to condition any regulation on or abusive acts and practices and from longstanding Federal policy that a finding that such regulation serves the discrimination.’’ 436 Under this encourages use of arbitration as an public good based on an inquiry into the proposed interpretation, the Bureau efficient means of resolving disputes. regulation’s implications for the would not consider more general or The commenter further suggested that Bureau’s purposes and objectives. This systemic concerns with respect to the section 1028 requires the Bureau to find inquiry would require the Bureau to functioning of the markets for consumer that a regulation is in the public interest consider benefits and costs to financial products or services or the for reasons uniquely applicable to consumers and firms, including the broader economy as part of section consumer financial products or services more direct consumer protection factors 1028’s requirement that the rule be ‘‘for rather than for reasons that could apply noted above, and general or systemic the protection of consumers.’’ 437 Rather, to other types of products or services. concerns with respect to the functioning the Bureau would consider these factors Furthermore, this commenter contended of markets for consumer financial under the public interest prong. that in enacting section 1028, Congress products or services, as well as the The proposal stated that the Bureau was not concerned with under- impact of any change in those markets provisionally believed that giving enforcement of laws because there is no on the broader economy, and the separate meaning and consideration to specific reference to such considerations promotion of the rule of law.435 the two prongs would best ensure in that section of the statute or its brief With respect to ‘‘the protection of effectuation of the purpose of the legislative history. The commenter consumers,’’ as explained above and in statute. This proposed interpretation therefore asserted that the Bureau the proposal, the Bureau ordinarily would prevent the Bureau from acting should not consider increased considers its roles and responsibilities solely based on more diffuse public deterrence or enforcement in as the Consumer Financial Protection interest benefits, absent a meaningful determining whether a regulation is ‘‘in Bureau to encompass attention to the direct impact on consumer protection as the public interest and for the protection full range of considerations relevant described above. Likewise, the proposed of consumers.’’ Several commenters identified under title X without separately interpretation would prevent the Bureau additional specific factors that, in their delineating some as ‘‘in the public from issuing arbitration regulations that view, the Bureau should consider in its interest’’ and others as ‘‘for the would undermine the public interest as determination of whether the rule is in protection of consumers.’’ However, defined by the full range of factors the public interest and for the protection given that section 1028(b) pairs ‘‘the discussed above, despite some of consumers. A group of State attorneys protection of consumers’’ with the advancement of the protection of general and an industry commenter ‘‘public interest,’’ the latter of which the consumers.438 Bureau proposed to interpret to include suggested that the legal standard should the full range of considerations Comments Received include the public’s interest in the freedom of contract. The industry encompassed in title X, the proposal Several commenters—a nonprofit, an commenter also stated that the public explained that the Bureau believed, industry trade association, two industry interest standard should consider based on its expertise, that ‘‘for the commenters, and an individual— individuals’ ability to choose whether to protection of consumers’’ should not be supported the Bureau’s proposal to participate in class action litigation or to interpreted in the broad manner in interpret the legal standard as including be bound by class action judgments. A which it is ordinarily understood in the two separate but related tests. A trade group of State legislators argued that the Bureau’s work. association of consumer lawyers argued The Bureau instead proposed to Bureau should consider States’ rights as for treating the legal standard as a single a factor in its determination of whether interpret the phrase ‘‘for the protection test given that other similar standards of consumers’’ as used in section the rule is in the public interest. The have traditionally been treated as group stated that class waivers in 1028(b) to condition any regulation on unitary and that the Bureau’s two a finding that such regulation would arbitration clauses undermine States’ ability to pass laws that will be privately serve to deter and redress violations of 436 Dodd-Frank section 1021(b)(1) and (2). enforced, measure the efficacy of those the rights of consumers who are using 437 See Whitman v. Am. Trucking Ass’ns, Inc., laws, or observe their development, and or seek to use a consumer financial 531 U.S. 457, 465 (2001). 438 that the legal standard should account product or service. The focus under this As noted above, the proposal explained that if the Bureau were to treat the standard as a single, for such effects. prong of the test, as the Bureau unitary test, the test would involve the same A group of State attorneys general proposed to interpret it, would be considerations as described above, while allowing argued that the proposed ‘‘protection of exclusively on the impacts of a for a more flexible balancing of the various consumers’’ standard is incomplete proposed regulation on the level of considerations. The Bureau accordingly believed that findings sufficient to meet the two tests because it is limited to providers’ explained in the proposal would also be sufficient compliance with the law and 434 Dodd-Frank section 1022(b)(2)(B) and (C). to meet a unitary test, because any set of findings 435 The Bureau uses its expertise to balance that met each of two independent criteria would consumers’ ability to obtain relief. The competing interests, including how much weight to necessarily meet a more flexible single test commenters maintained that the Bureau assign each policy factor or outcome. combining them. should also consider consumers’

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interest in a ‘‘vibrant and flourishing products and services. In any event, the in consumer protection, the Bureau financial market’’ as part of the Bureau’s findings are specific to believes that deterring illegal behavior standard. consumer financial products and and enforcing the law are core aspects services and are based on an empirical of the ‘‘protection of consumers.’’ The Response to Comments study required by Congress that is absence of a specific mention of The Bureau is not persuaded by the specific to consumer financial products deterrence or enforcement in section nonprofit commenter that the standard and services.441 1028 or its legislative history does should be treated as a single test on the Further, as noted above, the Bureau nothing to undercut these conclusions. ground that other similar standards have looks to the purposes and objectives of In fact, the Bureau believes that while been treated as unitary and the Bureau’s title X to inform the section 1028 the phrase ‘‘in the public interest and two proposed tests will have significant standard, and the FAA is not referenced for the protection of consumers’’ is overlap. As explained in the proposal, in those purposes and objectives. To the ambiguous it would be unreasonable not the statutory standard is ambiguous, and extent that Federal law encourages to consider deterrence as part of the while it is useful and relevant for the arbitration through the FAA, the Bureau standard. Bureau to consider how other similar notes that, as Congress has limited pre- A variety of commenters identified standards have been applied, there are dispute arbitration agreements in other additional factors that they thought persuasive reasons, as set forth in the contexts, Congress, through Section should be considered in the legal proposal, for the Bureau to adopt a 1028, has granted the Bureau express standard. The Bureau notes that the different interpretation here in the authority to prohibit or otherwise limit standard already encompasses the types context of section 1028.439 The Bureau the use of such agreements.442 Thus, of considerations suggested by these recognizes that the two tests will have rather than incorporate the FAA per se commenters, and thus, disagrees that it significant overlap, but that in and of into its public interest analysis, the should specifically list these factors as itself is not a reason to adopt a unitary Bureau conducted a robust analysis of a part of the legal standard. As the test. Instead, the Bureau continues to the advantages and disadvantages of Bureau explained in the proposal, it believe that treating the two phrases as pre-dispute arbitration agreements as interprets the public interest standard to separate tests is more consistent with currently enforced (under the FAA) in include consideration of ‘‘benefits and canons of statutory construction and markets for consumer financial products costs to consumers and firms.’’ The may ensure a fuller consideration of and services. This included whether standard thus accounts for impacts that relevant factors.440 consumers are able to meaningfully a rule may have on consumers’ The Bureau also disagrees with the pursue their rights and obtain redress or ‘‘freedom of contract’’ and their ability nonprofit commenter that stated that the relief in light of pre-dispute arbitration to determine whether or not to proposed interpretation includes factors agreements with class waivers participate in class actions. Likewise, that should not be considered. With enforceable under the FAA, as both the public interest standard and regard to the commenter’s contention discussed in Section VI.B. the protection of consumers standard that section 1028 requires the Bureau to The Bureau also disagrees with the account for the extent to which laws are find that a regulation is in the public commenter’s contention that increased actually enforced. This includes the interest for reasons uniquely applicable deterrence or enforcement should not be extent to which State laws that States to consumer financial products or considered because section 1028 and its intend to be privately enforced are 443 services rather than for reasons that brief legislative history do not actually enforced in this manner. could apply to other types of products specifically mention deterrence. As Finally, the Bureau also disagrees or services, the Bureau notes that explained above, the Bureau looks to the with the State attorneys general that section 1028 contains no such purposes and objectives of title X to suggested that the ‘‘protection of limitation. As explained above, the inform the ‘‘public interest’’ inquiry, consumers’’ specifically (as opposed to proposed interpretation of the legal and these statutory purposes and the section 1028 standard generally or standard is guided by the Bureau’s objectives evince a goal of enforcing the ‘‘the public interest’’ prong) should purposes and objectives as laid out in law and deterring illegal behavior as include consideration of a rule’s impact title X of the Dodd-Frank Act. The well as a mandate for the Bureau to do on the general flourishing of the commenter did not identify a basis in so.444 Similarly, based on its expertise economy. As explained in the proposal, the text of title X or the statute’s the Bureau generally views consumer underlying purposes for excluding 441 The Bureau notes that its Study and this protection holistically in its approach to rulemaking focused almost exclusively on the use factors derived from title X simply of arbitration agreements on contracts for consumer fulfilling its mandate in accordance because they could apply to other financial products and services. Whether the with the broad range of factors it findings of this rulemaking may apply in other considers under title X of Dodd-Frank. 439 Note that similar standards have not been markets is not relevant and beyond the scope of this But in the context of section 1028, process. exclusively applied as unitary. See Verizon v. FCC, which pairs ‘‘the protection of 770 F.3d 961, 964 (D.C. Cir. 2014) (‘‘protection of 442 See CompuCredit Corp. v. Greenwood, 565 consumers’’ and ‘‘public interest’’ separate U.S. 95, 103–04 (2012) (listing statutes where consumers’’ with ‘‘the public interest,’’ ‘‘conjunctive’’ factors). And while other agencies Congress has ‘‘restricted the use of arbitration’’ as the Bureau continues to believe that have applied similar, but not identical language, as well as section 1028); see also Dodd-Frank section systemic impacts should be considered a unitary standard in some contexts, they have for 1414(a) (‘‘No residential mortgage loan . . . may under the public interest standard rather the most part done so without discussion as to their include terms which require arbitration . . . as the reasons for doing so. method for resolving any controversy or settling any than the protection of consumers 440 Furthermore, the Bureau continues to believe claims arising out of the transaction.’’). standard. As such, the Bureau considers that if it were to treat the standard as a single, 443 See S. Rept. 111–176, at 171 (2010). a variety of factors related to unitary test, the test would involve the same 444 See, e.g., Dodd-Frank sections 1021(a) (‘‘The competition and the flourishing of the considerations, while allowing for a more flexible Bureau shall seek to implement and, where balancing of the various considerations. Therefore applicable, enforce Federal consumer financial law economy under the public interest findings sufficient to meet the two tests would also consistently for the purpose of ensuring that all be sufficient to meet a unitary test, because any set consumers have access to markets for consumer consumers are protected from unfair, deceptive, or of findings that met each of two independent financial products and services and that markets for abuse acts and practices and from discrimination’’); criteria would necessarily meet a more flexible consumer financial products and services are fair, 1021(b)(3) (‘‘. . . Federal consumer financial law is single test combining them. transparent, and competitive.’’); 1021(b)(2) (‘‘. . . enforced consistently... .’’).

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standard rather than the protection of Bureau considers these factors under the The Bureau also received many consumers standard. Such systemic public interest prong. comments from consumers, consumer impacts implicate benefits to advocates, nonprofits, public-interest B. The Bureau’s Factual Findings consumers, including consumers’ consumer lawyers, consumer lawyers Consistent With the Study and Further interests in ‘‘access to a vibrant and and law firms, academics, members of Analysis flourishing financial market’’ as noted Congress, State attorneys general, State by the commenter, and the Bureau The Study provides a factual legislators, local government considers those benefits in its public predicate for assessing whether representatives, and others that interest analysis. particular proposals would be in the expressed broad support for the class public interest and for the protection of proposal. The specifics of these letters The Final Legal Standard consumers. This part sets forth the are also discussed in relevant part For these reasons and those stated in factual findings that the Bureau has below. These commenters explained the proposal, the Bureau is adopting the drawn from the Study and from the that, in their view, the proposal is in the interpretation of the section 1028 Bureau’s additional analysis of public interest, for the protection of standard largely as proposed, with arbitration agreements and their role in consumers and, if finalized, would be minor wording changes for clarification, the resolution of disputes involving consistent with the Study. Many of as restated below. consumer financial products and these letters recited facts derived from The phrase ‘‘in the public interest and services. The Bureau finds that all of the the Study and cited by the Bureau in the for the protection of consumers’’ in factual findings in this Part VI.B are proposal that support these findings. section 1028 is ambiguous. The Bureau consistent with the Study. For example, many emphasized the interprets it as comprising two separate As noted in Part IV.E, above, the need for class actions by comparing the but related standards. Bureau received many comments on the benefits provided to consumers in class proposal. In addition to letters individual arbitration and litigation The Bureau interprets the phrase ‘‘in with those provided in class actions. the public interest’’ to condition any addressing particular points raised by the Bureau in its preliminary findings, These letters also stated that forcing regulation under section 1028 on a arbitration on consumers by means of finding that such regulation serves the the Bureau received tens of thousands of letters and signatures on petitions from form contracts is not in the public public good based on an inquiry into the interest. Many asserted that consumers regulation’s implications for the individuals both supporting and disapproving of the class proposal.446 should never have to give up Bureau’s purposes and objectives. This constitutional protections, such as the inquiry requires the Bureau to consider The Bureau received letters from industry, including banks, credit right to bring a case in court. A petition the benefits and costs to consumers and signed by many thousands of consumers firms, including the more direct factors unions, non-bank providers of consumer financial product and services, trade asked the Bureau to restore consumers’ considered under the protection of right to join together to take companies consumers standard, and general or associations, academics, members of Congress, nonprofits, consumers, and to court. Other commenters urged the systemic concerns with respect to the Bureau to adopt the class proposal others expressing disapproval of the functioning of markets for consumer because it would generally enhance Bureau’s class proposal. The specifics of financial products or services, as well as consumer rights vis-a`-vis financial these letters are discussed in relevant the impact of any changes in those institutions. markets on the broader economy and part below. The majority of the letters the promotion of the rule of law, in the criticizing the proposal expressed 1. A Comparison of the Relative form of accountability and transparent general disapproval rather than specific Fairness and Efficiency of Individual application of the law to providers.445 concerns with provisions of the Arbitration and Individual Litigation Is The Bureau interprets the phrase ‘‘for proposed regulation. Many of these Inconclusive the protection of consumers’’ as used in letters recited facts derived from the As explained in the proposal, the section 1028 to condition any regulation Study, such as the amount of payments benefits and drawbacks of arbitration as on a finding that such regulation will received per consumer in class action a means of resolving consumer disputes serve to deter and redress violations of settlements, the amount of relief have long been contested. The Bureau the rights of consumers who are using received by consumers who obtained stated there that it did not believe that, or seek to use a consumer financial arbitral awards in their favor, the based on the evidence currently product or service. The focus under this amount of fees paid to plaintiff’s available to the Bureau as of the time of prong of the test is exclusively on the attorneys in class actions, and the the proposal, it could determine impacts of a regulation on the level of proportion of class cases that do not whether the mechanisms for the compliance with relevant laws, result in classwide relief. Many of these arbitration of individual disputes including deterring violations of those comments expressed concerns that the between consumers and providers of laws, and on consumers’ ability to proposal would raise the cost to consumer financial products and obtain redress or relief. Under the consumers of financial services and that services that existed during the Study Bureau’s interpretation, the Bureau does only plaintiff’s attorneys would benefit period are more or less fair or efficient not consider more general or systemic from the class proposal because of the in resolving these disputes than leaving concerns with respect to the functioning large fees that plaintiff’s attorneys often these disputes to the courts.447 of the markets for consumer financial receive when class action cases are Accordingly, the Bureau preliminarily products or services or the broader settled. These urged the Bureau not to found that a comparison of the relative economy as part of section 1028’s adopt the proposal. fairness and efficiency of individual requirement that the rule be ‘‘for the protection of consumers.’’ Rather, the 446 The Bureau received a number of letters that 447 See Study, supra note 3, section 6 at 4 did not appear to address the proposal at all and (explaining why ‘‘[c]omparing frequency, processes, instead expressed general favor or displeasure with or outcomes across litigation and arbitration is 445 The Bureau uses its expertise to balance the Bureau or the Federal government. The Bureau especially treacherous’’). The Bureau did not study competing interests, including how much weight to views these comments as beyond the scope of the and is not evaluating post-dispute agreements to assign each policy factor or outcome. proposed rule. arbitrate between consumers and companies.

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arbitration and individual litigation was should have protected individual individual awards—the average inconclusive and thus that a total ban consumers by banning outright the use recovery by the 32 consumers who won on the use of pre-dispute arbitration of pre-dispute arbitration agreements. judgments on their affirmative claims agreements in consumer finance For example, several consumer advocate was nearly $5,400.449 contracts was not warranted at that commenters and many individual At the same time, the Study showed time. commenters (including thousands of that a large percentage of the relatively individuals who had signed petitions) small number of AAA individual Comments Received argued that any arbitration proceeding arbitration cases were initiated by the Numerous industry, research center, that occurs pursuant to a pre-dispute consumer financial product or service and State attorneys general commenters arbitration agreement is ‘‘forced’’ and companies or jointly by companies and disagreed with the Bureau’s preliminary therefore unfair, and that arbitration consumers in an effort to resolve debt assessment that a comparison of the agreements are contracts of adhesion disputes. The Study also showed that relative fairness and efficiency of that should not be permitted in any companies prevailed more frequently on individual arbitration and individual context. Other commenters argued that their claims than consumers 450 and that litigation is inconclusive. Instead, many consumer arbitration cannot be neutral companies were almost always of these commenters stated their belief because it naturally favors repeat represented by attorneys (90 percent of that arbitration is a superior form of players—the providers who repeatedly the claims analyzed) while consumers dispute resolution than individual hire arbitrators and select were represented significantly less (60 litigation for consumers because it is administrators—over consumers, who percent).451 Finally, the Study showed less expensive, faster, and does not may only be involved in an arbitration that companies were awarded payment require the consumer to retain an once. One public-interest consumer of their attorney’s fees by consumers in attorney. For example, commenters lawyer commenter argued that only a 14.1 percent of 341 disputes resolved by stated that the informal nature of complete ban on pre-dispute arbitration arbitrators in companies favor’ and arbitration allows for a more agreements would help consumers consumers were awarded payment of streamlined process; that overburdened because consumers cannot find legal their attorney’s fees in 14.6 percent of courts slow resolution of individual representation for arbitrations and few the 341 disputes in which consumers litigation; that arbitration hearings can consumers file arbitrations in any case. prevailed and were represented by an be held via telephone or other Academic commenters stated that attorney.452 convenient means, and that the lack of consumers should never be deprived of In light of these results and in procedural complexity in arbitration the right to go to court. A Congressional consideration of the comments received, minimizes the need for a consumer to commenter noted that arbitral filing fees the Bureau continues to believe that the have an attorney.448 These commenters can be tens of thousands of dollars and results of the Study were inconclusive further stated that the class rule would thus are unaffordable to many as to the benefits to consumers of cause providers to remove arbitration consumers, particularly when compared individual arbitration versus individual agreements from their consumer to filing fees in court which vary but in litigation during the Study period. contracts altogether, thereby depriving some courts are as low as a few hundred Nevertheless, because arbitration consumers of arbitration as a forum for dollars. Finally, another public-interest procedures are privately determined, hearing their individual disputes and consumer lawyer commenter observed the Bureau finds that they can under forcing them to proceed in court; the that many resources exist to help certain circumstances pose risks to Bureau’s response to these comments is individual litigants use the court consumers. For example, as discussed addressed below in Part VI.C.1, because system—such as volunteer attorneys, above in Part II.C and in the proposal, they relate to whether the class rule offices that offer legal advice, until it was effectively shut down by the Minnesota Attorney General, the protects consumers and not these publications, standardized pro se forms, National Arbitration Forum (NAF) was factual findings regarding a comparison videos, etc.—but that comparable the predominant administrator for of the relative fairness and efficiency of resources do not exist to help certain types of arbitrations. NAF individual arbitration and individual individuals navigate arbitration stopped conducting consumer litigation. proceedings. arbitrations in response to allegations A group of State attorneys general Response to Comments and Findings that its ownership structure gave rise to commenters, a nonprofit commenter, As noted in the proposal and an institutional conflict of interest. The many individual commenters, and explained in the Study, the Bureau Congressional, consumer advocate, believes that the predominant 449 See Study, supra note 3, section 5 at 13. academic, and consumer law firm administrator of consumer arbitration 450 Id. section 5 at 13–14 (finding that consumers commenters also disagreed with the agreements is the AAA, which has prevailed on 25 of 92 claims in which a consumer asserted affirmative claims only and an arbitrator Bureau’s preliminary findings about the adopted standards of conduct that relative fairness of individual arbitration reached a decision on the merits in seven of 69 govern the handling of disputes claims in which a consumer brought an affirmative and individual litigation, but for reasons involving consumer financial products claim and also disputed debts they were alleged to opposite those described above. Instead, and services. Commenters did not owe (finding that companies prevailed in 227 out of 250 cases in which companies asserted these commenters stated that individual disagree with this preliminary finding. arbitration was so unfair relative to counterclaims against consumers). The Study did The Study showed that AAA not explain why companies prevailed more often individual litigation that the Bureau arbitrations proceeded relatively than consumers. While some stakeholders have expeditiously relative to litigation, that suggested that arbitrators are biased—citing, for 448 Among commenters that favored arbitration in example, that companies were repeat players or consumer contracts were a number of automobile companies often advance consumer often the party effectively chose the arbitrator— dealers and their advocates. In response, a filing fees in arbitration, which does not other stakeholders and research suggested that consumer lawyer commenter noted that the occur in litigation, and that at least companies prevailed more often than consumers automobile dealers’ opinion might be hypocritical some consumers proceeded without an because of a difference in the relative merits of such insofar as they advocate for including arbitration cases. agreements in their contracts with consumers while attorney. The Study also showed that 451 Id. section 5 at 29. advocating for their removal in dealers’ contracts those consumers who did prevail in 452 Id. section 5 at 12. Note that the number of with manufacturers. arbitration obtained substantial attorney’s fee requests was not recorded.

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Study also showed isolated instances of consumer financial services where pre- 2. Individual Dispute Resolution Is arbitration agreements containing dispute arbitration agreements are Insufficient in Enforcing Laws provisions that, on their face, raised nearly ubiquitous; consumers in those Applicable to Consumer Financial significant concerns about fairness to markets have little choice.455 Thus, the Products and Services and Contracts consumers similar to those raised by Bureau generally agrees that consumers Whatever the relative merits of NAF, such as an agreement that rarely affirmatively and knowingly elect individual proceedings pursuant to an designated a Tribal administrator that to enter into pre-dispute arbitration arbitration agreement compared to does not appear to exist and agreements agreements. individual litigation, the Bureau that specified NAF as a provider even Nonetheless, the Bureau does not preliminarily concluded in the though NAF no longer handled proposal, based upon the results of the consumer finance arbitration, making it agree that the fact that consumers are largely unaware of these agreements Study, that individual dispute difficult for consumers to resolve their resolution mechanisms are an claims.453 means that the resulting arbitration proceedings are inherently unfair. As is insufficient means of ensuring that As first stated in the proposal, the consumer financial protection laws and discussed above, the Bureau finds that Bureau remains concerned about the consumer financial product or service the Study did not provide any basis for potential for consumer harm in the use contracts are enforced. of arbitration agreements in the evaluating whether individual The Study showed that consumers resolution of individual disputes. arbitration proceedings resulted in rarely pursued individual claims against Among these concerns is that demonstrably worse outcomes than companies they dealt with based on its arbitrations could be administered by individual litigation proceedings in a survey of the frequency of consumer biased administrators (as was alleged in manner that warrants a more substantial claims, collectively across venues, in the case of NAF), that harmful intervention. The Bureau also disagrees Federal courts, small claims courts, and arbitration provisions could be with the comment that the Study arbitration. First, the Study showed that enforced, or that individual arbitrations identified a clear-cut repeat-player effect consumer-filed Federal court lawsuits could otherwise be conducted in an favoring of industry participants over are quite rare compared to the total unfair manner. The Bureau is therefore, consumer participants. As noted above, number of consumers of financial as set out below at length in Part VI.D the Study showed that arbitration cases products and services. As noted above, and the section-by-section analysis of proceeded relatively expeditiously from 2010 to 2012, the Study showed section 1040.4(b), adopting a system relative to individual litigation because that only 3,462 individual cases were that will allow it and the public, to companies often advance filing fees, the filed in Federal court concerning the review certain arbitration materials in cost to consumers of arbitral filing fees five product markets studied during the order to monitor the fairness of such was modest relative to individual period, or 1,154 per year.457 Second, the proceedings over time. litigation and at least some consumers Study showed that relatively few However, the Bureau disagrees with proceeded without an attorney. The consumers filed claims against the consumer advocate and individual Study also showed that those 32 companies in small claims courts even commenters that any arbitration consumers who did prevail in though most arbitration agreements proceeding pursuant to a pre-dispute arbitration obtained substantial contained carve-outs permitting such court claims. In particular, as noted arbitration agreement is necessarily individual awards.456 For all of these above, the Study estimated that, in the ‘‘forced’’ and unfair, and that arbitration reasons, the Bureau disagrees, at this is not neutral. The Bureau recognizes jurisdictions that the Bureau studied, time, with those commenters that which cover approximately 87 million that, with rare exception, contracts for recommended that it should completely consumer financial services are people, there were only 870 small ban the use of pre-dispute arbitration contracts of adhesion offered on a take- claims disputes in 2012 filed by an agreements. it-or-leave-it basis. In some markets, individual against any of the 10 largest consumers may, in theory, be able to The Bureau acknowledges that an credit card issuers, several of which are choose a provider that does not require arbitration agreement, by definition, also among the largest banks in the pre-dispute arbitration but the Study deprives consumers of the right to bring United States.458 Extrapolating those found that credit card consumers disputes to court since an arbitration results to the population of the United generally do not understand the agreement permits a company to force States suggests that, at most, a few consequences of entering into a pre- any dispute it does not wish to litigate thousand cases are filed per year in dispute agreement or shop on that basis in court to an arbitral forum. On the small claims court by consumers and the Bureau has no reason to believe other hand, an arbitration agreement concerning consumer financial products that consumers in other markets are any gives consumers a new right—the right or services.459 different.454 Furthermore, the Study to force a company to resolve a dispute found that there are markets for certain in arbitration. Absent such an 457 Id. section 6 at 28 tbl. 6. 458 The figure of 870 claims included all cases in agreement, consumers could proceed to which an individual sued a credit card issuer, 453 Id. section 2 at 37 tbl. 4. On the issue of NAF, arbitration only if the company is without regard to whether the claim itself was see Wert v. ManorCare of Carlisle PA, LLC, 124 A.2d willing to arbitrate a particular dispute. consumer financial in nature. As the Study noted, 1248, 1250 (Pa. 2015) (affirming denial of motion the number of claims brought by consumers that to compel arbitration after finding arbitration Given the inconclusive nature of the were consumer financial in nature was likely much agreement provision that named NAF as evidence concerning the relative lower. Additionally, the Study cross-referenced its administrator as ‘‘integral and non-severable’’); but fairness or efficacy of individual sample of small claims court filings with estimated see Wright v. GGNSC Holdings LLC, 808 N.W.2d litigation and arbitration in resolving annual volume for credit card direct mail using data 114, 123 (S.D. 2011) (designation of NAF as from a commercial provider. The volume numbers administrator was ancillary and arbitration could consumer disputes, the Bureau is not showed that issuers collectively had a significant proceed before a substitute). On the issue of Tribal prepared at this time to ban arbitration presence in each jurisdiction, at least from a administrators, see Jackson v. Payday Financial, agreements. marketing perspective. See id. appendix Q at 113– LLC, 764 F.3d 765 (7th Cir. 2014) (refusing to 114. compel arbitration because Tribal arbitration 459 As explained in the Study and above at Part procedure was ‘‘illusory’’). 455 See generally id. section 2. III.D.5, other than its sample of filings in small 454 See generally Study, supra note 3, section 3. 456 Id. section 5 at 13–15. Continued

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As discussed in the proposal’s assistance of an attorney who significant incentives to pursue them on preliminary findings, a similarly small understands the relevant laws and an individual basis. As one prominent number of consumers filed consumer whether to pursue facts unknown to the jurist has noted, ‘‘Only a lunatic or a financial claims in arbitration. The consumer that may support a claim. For fanatic sues for $30.’’ 465 In other words, Study showed that from the beginning example, some harms, by their nature, it is impractical for the typical of 2010 to the end of 2012, consumers such as discrimination or non- consumer to incur the time and expense filed 1,234 individual arbitrations with disclosure of fees, can only be of bringing a formal claim over a the AAA, or about 400 per year across discovered and proved by reference to relatively small amount of money, even the six markets studied.460 Given that how a company treats many individuals without an attorney. Congress and the the AAA was the predominant or by reference to information possessed Federal courts developed procedures for administrator identified in the only by the company, not the class litigation in part because ‘‘the arbitration agreements studied, the consumer.463 Individual dispute amounts at stake for individuals may be Bureau believes that this represents resolution therefore generally requires a so small that separate suits would be most consumer finance arbitration consumer to recognize his or her own impracticable.’’ 466 Indeed, the Supreme disputes that were filed during the right to seek redress for any harm the Court has explained that: Study period. Indeed, as noted in the consumer has suffered or otherwise to [t]he policy at the very core of the class proposal, JAMS (the second largest seek a dispensation from the company. action mechanism is to overcome the provider of consumer finance The Bureau also preliminarily problem that small recoveries do not provide arbitration) reported to Bureau staff that concluded that the relatively low the incentive for any individual to bring a it handled about 115 consumer finance number of formally filed individual solo action prosecuting his or her own rights. arbitrations in 2015.461 claims may be explained by the low A class action solves this problem by Collectively, as set out in the Study, aggregating the relatively paltry potential monetary value of the claims that are recoveries into something worth someone’s the number of all individual claims filed 464 often at issue. Claims involving (usually an attorney’s) labor.467 by consumers in individual arbitration, products and services that would be The Study’s survey of consumers in the individual litigation in Federal court, or covered by the proposed rule often credit card market reflected this small claims court was relatively low in involve small amounts. When claims are dynamic. Very few consumers said they the markets analyzed in the Study for small amounts, there may not be compared to the hundreds of millions of would pursue a legal claim if they could not get what they believed were consumers of various types of financial 463 For example, proving a claim of lending products and services.462 As stated in discrimination in violation of ECOA typically unjustified or unexplained fees reversed the proposal’s preliminary findings, the requires a showing of disparate treatment or by contacting a company’s customer Bureau believes that the relatively low disparate impact, which require comparative proof service department.468 that members of a protected group were treated or As stated in the proposal, even when numbers of formal individual claims impacted worse than members of another group. (either in judicial or arbitral fora) may U.S. Dep’t of Housing & Urban Dev., Policy consumers are inclined to pursue be explained, at least in part, by the fact Statement on Discrimination in Lending, 59 FR individual claims, finding attorneys to that legal harms are often difficult for 18266, 18268 (Apr. 15, 1994). Evidence of overt represent them can be challenging. discrimination can also prove a claim of Attorney’s fees for an individual claim consumers to detect without the discrimination under ECOA but such proof is very rare and thus such claims are typically proven can easily exceed expected individual 469 claims court, the Bureau did not collect individual through showing disparate treatment or impact. See recovery. A consumer must pay his claims filed in State courts of general jurisdiction Cherry v. Amoco Oil Co., 490 F. Supp. 1026, 1030 or her attorney in advance or as the because doing so was infeasible. Id. appendix L at (N.D. Ga. 1980). Systemic overcharges may also be work is performed unless the attorney is 71. difficult to resolve on an individual basis. See, e.g., willing to take a case on contingency— 460 See id. appendix Q at 113–114 and section 5 Stipulation and Agreement of Settlement at 30, In at 19–20. Of the 1,234 consumer-initiated re Currency Conversion Fee Multidistrict Litigation, arbitrations, 565 involved affirmative claims only MDL 1409 (S.D.N.Y. July 20, 2006) (noting that the 465 Carnegie v. Household Int’l, Inc., 376 F.3d by the consumer with no dispute of alleged debt; plaintiffs’ class allegations that the network and 656, 661 (7th Cir. 2004). another 539 consumer filings involved a bank defendants ‘‘inter alia . . . have conspired, 466 28 U.S.C. App. 161 (1966). combination of an affirmative consumer claim and have market power, and/or have engaged in 467 Amchem Prod., 521 U.S. at 617 (citing Mace disputed debt. Id. section 5 at 31 tbl. 6. This equates Embedding, otherwise concealed and/or not v. Van Ru Credit Corp., 109 F.3d 338, 344 (7th Cir. to 1,104 filings (out of 1,234), or 368 per year, in adequately disclosed the pricing and nature of their 1997)). which the consumer asserted an affirmative claim Foreign Transaction procedures; and, as a result, 468 Just 2.1 percent of respondents said that they at all. Id. section 5 at 21–22 tbl. 2. In 737 claims holders of Credit Cards and Debit Cards have been would have sought legal advice or would have sued filed by either party (or just 124 consumer filings), overcharged and are threatened with future harm.’’). with or without an attorney for unrecognized fees the only action taken by the consumer was to 464 One indicator of the relative size of consumer on a credit card statement. Study, supra note 3, dispute the alleged debt. Id. section 5 at 31 n.64. injuries in consumer finance cases is the amount of section 3 at 18. Similarly, many financial services Another 175 were mutually filed by consumers and relief provided by financial institutions in companies opt not to pursue small claims against companies. Id. section 5 at 19. connection with complaints submitted through the consumers; for example, these providers do not 461 Id. section 4 at 2; 81 FR 32830, 32836 n.97 Bureau’s complaint process. In 2015, approximately actively collect on small debts because it was not (May 24, 2016). 6 percent of company responses to complaints for worth their time and expense given the small 462 For instance, at the end of 2015, there were which the company reported providing monetary amounts at issue and their low likelihood of 600 million consumer credit card accounts, based relief (approximately 9,730 complaints) were closed recovery. on the total number of loans outstanding from ‘‘with monetary relief’’ for a median amount of $134 469 For instance, in the Study’s analysis of Experian & Oliver Wyman Market Intelligence provided per consumer complaint. See Bureau of individual arbitrations, the average and median Reports. Experian & Oliver Wyman, ‘‘2015 Q4 Consumer Fin. Prot., ‘‘Consumer Response Annual recoveries by consumers who won awards on their Experian—Oliver Wyman Market Intelligence Report,’’ (2016), http://files.consumerfinance.gov/f/ affirmative claims were $5,505 and $2,578, Report: Bank Cards Report,’’ at 1–2 (2015) and 201604_cfpb_consumer-response-annual-report- respectively. Id. section 5 at 39. By way of Experian & Oliver Wyman, ‘‘2015 Q4 Experian— 2015.pdf. The Bureau’s complaint process and comparison (attorney’s fees data limited to Oliver Wyman Market Intelligence Report: Retail informal dispute resolution mechanisms at other successful affirmative consumer claims was not Lines,’’ at 1–2 (2015). In the market for consumer agencies do not adjudicate claims; instead, they reported in the Study), the average and median deposits, one of the top checking account issuers provide an avenue through which a consumer can consumer attorney’s fee awards were $8,148 and serviced 30 million customer accounts (JPMorgan complain to a provider. Complaints submitted to $4,800, respectively, across cases involving Chase Co., Inc., 2010 Annual Report, at 36) and in the Bureau benefit the public and the financial judgments favoring consumers involving affirmative the Overdraft MDL settlements, 29 million marketplace by informing the Bureau’s work; relief or disputed debt relief. Id. section 5 at 79. consumers with checking accounts were eligible for however, the Bureau’s complaint system is not a Note that the Study did not address the number of relief. Study, supra note 3, section 8 at 40 and 41– substitute for consumers’ rights to bring formal cases in which attorney’s fees were requested by the 42 tbl. 17. disputes, and relief is not guaranteed. consumer. Id.

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a fee arrangement where an attorney is recognize problematic behavior and therefore, the Bureau has no basis for paid as a percentage of recovery, if decide to complain to their providers finding that consumers rarely file any—or rely on an award of defendant- informally, companies exercise their individual lawsuits. paid attorney’s fees, which are available discretion about whether they provide Explanations for low number of under many consumer financial relief to particular consumers. The individual claims. Few industry statutes. Attorneys for consumers often Bureau pointed out, for example, that a commenters addressed the Bureau’s are unwilling to rely on either company could decide whether to preliminary finding that consumers contingency-based fees or statutory provide relief to a consumer based on often are not aware that they are injured attorney’s fees because in each instance the customer’s profitability, rather than or do not fully understand their the attorney’s fee is only available if the based on the merit of the complaint. potential claims without legal advice. consumer prevails on his or her claim And in the Bureau’s experience, even if However, many industry, State (which always is at least somewhat companies resolve some disputes in attorneys general, and research center uncertain). Consumers may receive free favor of customers who complain, commenters disputed the relevance of or reduced-fee legal services from legal companies do not generally volunteer to the Study’s consumer survey, which services organizations, but these provide relief to other affected found that only 2 percent of organizations frequently are unable to customers who do not themselves respondents were likely to seek an provide assistance to many consumers complain. attorney or file formal claims if they because of the high demand for their found an unexplained fee on their credit Comments Received services and limited resources.470 card bill. For all of these reasons, the Bureau Number of individual claims. On the other hand, numerous preliminarily found that the relatively Numerous industry, research center, consumer advocate, public-interest small number of arbitration, small and State attorneys general commenters consumer lawyer, and consumer lawyer claims, and individual Federal court challenged the Bureau’s preliminary and law firm commenters validated the cases reflects the insufficiency of finding that consumers rarely pursued Bureau’s preliminary finding in this individual dispute resolution individual claims against their regard. Among the reasons given, one mechanisms alone to enforce effectively providers of consumer financial consumer advocate explained that the relevant laws, including the Federal products or services. To the extent these consumers often do not know they are consumer financial laws and consumer comments relate primarily to the injured in the first place given the finance contracts, for all consumers of a Study’s data regarding this preliminary complexity of consumer finance particular provider. finding, they are summarized above in products and the Federal and State laws As discussed in the proposal, some Part III.D. Various consumer advocate, and regulations governing those stakeholders claimed that the low total public-interest consumer lawyers, products. Similarly, a consumer law volume of individual claims found by nonprofit, and consumer lawyer firm explained that their clients were the Study in litigation or arbitration was commenters agreed with the Bureau’s often unaware of claims that they might attributable not to inherent deficiencies preliminary finding that consumers be able to bring. Even when they are in the individual formal dispute rarely pursued individual claims against harmed, the commenter stated that resolution systems but rather to the providers of consumer financial consumers may not know that they may success of informal dispute resolution products or services with whom they be entitled to a remedy, particularly mechanisms in resolving consumers’ dealt. These commenters generally cited when statutory damages are available. complaints. Under this theory, the cases to the Bureau’s Study and how it For example, a consumer may be that actually are litigated or arbitrated confirmed their own experiences frustrated by telephone calls from a debt are outliers—consumer disputes in concerning the relative rarity of collector but not know that the calls which the consumer either bypassed the individual cases across both arbitration violate the Telephone Consumer informal dispute resolution system or and litigation. For example, a consumer Protection Act and that he or she is the system somehow failed to produce advocate commenter highlighted data entitled to statutory damages. On the a resolution. The Bureau preliminarily from the Study that indicated that other hand, some industry commenters explained why it did not find this borrowers of payday loans are suggested that there are few individual argument persuasive. As stated in the particularly unlikely to pursue consumer finance claims because public proposal, the Bureau preliminarily individual claims despite what the enforcement sufficiently remedies all found that informal dispute resolution commenter asserted was evidence of violations of consumer finance laws.472 was not sufficient because—as with broad misconduct by payday lenders. A With respect to the Bureau’s pursuing claims through more formal law professor noted that there are also preliminary findings that consumers mechanisms—consumers may not know low numbers of consumer arbitrations may not pursue individual claims that their provider is acting in a way in the cellular telephone industry, because they are small, at least one that harms them or that violates the law. noting that one large company averaged industry commenter and one research Moreover, even when consumers less than 30 arbitrations a year despite center commenter agreed with the having over 85 million customers.471 An Bureau that consumer finance claims 470 There is a large unmet need for legal services industry commenter asserted that the are often for small amounts and that it for low-income individuals who want legal help in Bureau has no data on individual consumer cases. By one estimate, roughly 130,000 would not be rational for a consumer to consumers (for all goods, not just financial products lawsuits filed in State court and, pursue a very small claim, such as one or services) were turned away because the legal aid for less than $200. Consumer advocates service providers serving low-income individuals 471 A recent media report similarly found, and other nonprofits commenters did not have enough staff or capacity to help. See regarding a different cellular telephone company, Legal Services Corp., ‘‘Documenting the Justice Gap ‘‘that—out of nearly 150 million customers—only similarly agreed. However, other in America,’’ at 7 (2007), available at http:// 18 went through arbitration for small claims in the industry and research center www.lsc.gov/sites/default/files/LSC/images/ past two years.’’ CBS Evening News, ‘‘AT&T and commenters disagreed, asserting that justicegap.pdf. See also Helynn Stephens, ‘‘Price of DirecTV Face Thousands of Complaints Linked to consumer finance claims under laws Pro Bono Representations: Examining Lawyers’ Overcharging Promotions,’’ (May 16, 2017), Duties and Responsibilities,’’ 71 Def. Counsel J. 71 available at http://www.cbsnews.com/news/ (2004) (‘‘Legal services programs are able to assist complaints-att-directv-bundled-services-directv- 472 For example, commenters cited enforcement less than a fifth of those in need.’’). customers-promotions-overcharging/. activities by the Bureau and State attorneys general.

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that provide for statutory damages individual consumers are often unaware small number of claims documented by (sometimes as much as $1,000 or $1,500 of the claim in any event. the Bureau in the Study as evidence of per violation) or double or treble actual The same group of academic these dynamics. A law professor damages are not small. In one industry commenters further cited to a study commenter stated that, in her opinion, commenter’s view, when consumers can looking at a broader array of consumer consumers rarely use arbitration receive statutory damages or double or arbitration claims that found less than 4 because of the minimal oversight of treble damages, these damages create percent of the claims were brought for arbitration’s fairness and lawfulness, the sufficient incentives for consumers to $1,000 or less, which in their view failure to require a comprehensive bring such claims. The commenter also confirms that consumers rarely bring system of fee waivers, and the limited 473 suggested there may be some particular small claims in arbitration. A access accorded third parties. barrier to bringing small consumer consumer lawyer noted that One public-interest consumer law finance claims in arbitration as circumstances in consumers’ lives can firm commenter explained that, in its compared to other types of small claims, make bringing a claim difficult. This experience, it is hard to bring claims of commenter explained that, in his view, fraud, unfair, or deceptive practices in because other types of small claims are consumers are busy working and individual consumer financial services more commonly filed in arbitration providing for their families. Even cases because the value of such claims based on publicly available data. This assuming that arbitration is a is small. A consumer law firm commenter noted that claims under streamlined process as compared to commenter stated that, in its experience, $1,000 amounted to approximately 2 litigation in court, it can still involve individual actions are inefficient percent of the consumer finance time in drafting and filing a claim, because damages can be low or hard to arbitrations in the Study, but that small researching and gathering documents, quantify and that these challenges claims generally amounted to 3.5 and other activities. In this commenter’s impact consumers’ and attorneys’ risk- percent of all AAA consumer opinion, lower-income people are less reward calculus. Another consumer arbitrations (not limited to consumer likely to make such an investment of lawyer commented that the laws finance) between 2009 and 2014. time and resources. underlying consumer finance are Another industry commenter asserted An organization of public-interest complicated and often impenetrable to that consumers are particularly lawyers also commented that in its laypersons. As an example, this incentivized in California to pursue experience, low-income consumers commenter cited to complicated judicial individual remedies because of the often have claims of no more than a few interpretations of New York’s usury law availability of rescission, restitution, hundred dollars. While that money may that are based on precedents over one injunctive relief, actual damages and be critical for low-income consumers, hundred years old.475 A consumer attorney’s fees under many California they are unable to invest the time and advocate commenter explained that, in consumer protection statutes. money necessary to pursue an uncertain its opinion, consumers will take lower Numerous consumer advocate, recovery (e.g., taking time off of work, settlements when they do not have an individual consumer, consumer finding child care, etc.). A public- attorney or if they fear not getting a fair protection clinic law professors, interest consumer lawyer relatedly decision from an arbitrator due to the academic, nonprofit, public-interest commented that arbitration rules (citing arbitrator’s potential bias. consumer lawyer, and consumer lawyer AAA’s 44-page consumer rules A nonprofit commenter provided the and law firm commenters agreed with document) are incomprehensible to the Bureau with data from its own survey of the Bureau’s preliminary finding that average consumer. Similarly, a consumers that found that most consumers do not pursue individual nonprofit commenter representing consumers know it is not practical to servicemembers commented that claims for many reasons, including their take legal action when the harm against servicemembers and their families 476 relative size and the difficulties inherent them is relatively small. A different might find it particularly difficult to in bringing such claims on an nonprofit commenter suggested that the pursue individual claims against individual basis. In support of the providers due to deployment, frequent Bureau’s findings in this regard, many is harder for pro se litigants. It asserted that moves, and other logistical challenges. arbitration rules are complex for pro se litigants, consumer lawyers, individual One consumer advocate commenter that courts are more accustomed to working with consumers, and public-interest noted that the threat of extensive those who proceed pro se and that more resources consumer lawyer commenters cited to are available for these litigants in court. litigation prior to receiving a hearing on 475 specific examples from their own See, e.g., Ford Motor Credit Co. LLC v. Black, the merits of a claim discourages 910 N.Y.S.2d 404 (N.Y. Civ. Ct. Apr. 14, 2010) experiences with clients who were legitimate claims. This same commenter (noting the long, complex history of New York’s unable to pursue claims against also noted that filing fees could usury law). The commenter noted that the Third Circuit made a similar observation. Homa v. providers of consumer financial discourage some claims. Relatedly, a products and services because of lack of American Express Co., 494 Fed Appx 191 (3d Cir. consumer law firm commenter stated 2012) (‘‘Furthermore, in view of the complexity of time relative to the potential size of the that, in its view, most consumers find the issues pertaining to the merits of [the plaintiff’s] claim. Similarly, a group of academic the prospect of litigating (in small claim, it would be very difficult for him to prosecute the case without the aid of an attorney commenters concluded, based on their claims court or arbitration) pro se experience and expertise, that whether in a judicial proceeding or in arbitration.’’). against a well-represented corporate 476 Pew Charitable Trusts, ‘‘Consumers Want the individual arbitrations are not and entity to be far too intimidating and Right to Resolve Bank Disputes in Court: An Update realistically never will be a sufficient risky to be considered a legitimate to the Arbitration Findings in 2015 Checks and substitute for consumer class actions avenue.474 This commenter cited the Balances,’’ (Aug. 17, 2016), available at http:// because individual claims are worth www.pewtrusts.org/en/research-and-analysis/issue- briefs/2016/08/consumers-want-the-right-to-resolve- small amounts of money and it is not 473 See David Horton & Andrea Cann bank-disputes-in-court. An industry commenter worth consumers’ time (or an attorney’s Chandrasekher, ‘‘After the Revolution: An noted that the Bureau should not conclude that this time) to pursue them. In these Empirical Study of Consumer Arbitration,’’ 104 survey supports a finding that consumers prefer commenters’ view, even when Geo. L. J. 57, at 117 (2015). court to arbitration because survey participants 474 An industry commenter made a similar point, were not asked about arbitration. This commenter consumers are motivated to do so it is but limited it to pro se representation in court. A also noted that only 23 percent of respondents hard to find legal representation, and consumer law firm commenter disagreed that court would take legal action.

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reason the Bureau’s Study showed that TILA 478), commenters asserted that the that has discouraged consumers from most individual claims that reach a uncertainty behind any legal claim and pursuing it. judgment in arbitration were of the ability to actually recover fees made Informal dispute resolution. Many relatively high value was that these both consumers and attorneys industry and research center were the only cases most consumers unwilling, in most cases, to bear that commenters and a group of State wanted to pursue. A consumer advocate risk. A consumer lawyer discussed a attorneys general commenters suggested commenter agreed that individuals are particular case that the court sent to that there were relatively few individual likely to pursue only relatively high- arbitration on an individual basis after claims because consumer harms were dollar claims. On the other hand, a it had been originally filed as a class sufficiently remedied through informal comment letter from a group of action. The lawyer explained that it dispute resolution. In so doing, these academics noted that while consumers quickly became apparent that the client commenters disagreed with the Bureau’s may be discouraged from pursuing would not recover a fraction of the preliminary finding that informal claims on an individual basis, amount necessary to cover the time the dispute resolution is not sufficient to consumers are motivated to pursue lawyer had invested in the case by enforce the relevant laws, pointing to actions that can protect other consumers proceeding individually in arbitration, evidence in some court cases that large from being similarly injured; put and the case was thus abandoned. numbers of consumer complaints are another way, they are emboldened to Another public-interest consumer resolved by informal dispute resolution. pursue actions that will force providers lawyer commenter suggested that, based Some credit union commenters stated to change their conduct. on its experience, there are not enough that there were particularly strong legal services programs or private informal dispute resolution procedures With respect to the Bureau’s in that market. One such commenter preliminary finding that it is difficult for attorneys to pursue individually the claims of all victims. contended that the Study was flawed in consumers to find attorneys to file small failing to analyze informal resolution of claims, few commenters disagreed. Consumer attitudes regarding disputes between companies and However, an industry commenter and a arbitration. Industry, research center, consumers. This commenter stated that research center commenter stated their and government commenters suggested the evidentiary record in AT&T v. belief that consumers should be able to alternative reasons for why the Bureau Concepcion established that AT&T had find attorneys for small claims asserting found relatively few individual awarded more than $1.3 billion to violations of statutes that provide for arbitration claims. Instead of the consumers in informal relief during a recovery of attorney’s fees. On the other Bureau’s explanations, these 12-month period. The same industry hand, several industry, consumer commenters stated that consumers are commenter noted that the Bureau’s advocate, public-interest consumer either unaware of arbitration or do not consumer complaint process facilitates lawyer, and consumer lawyer and law understand it which discourages them informal resolution of consumer claims; firm commenters agreed with the from bringing individual claims, and the commenter emphasized in particular Bureau’s preliminary findings that it is that such factors could be mitigated that over four years of the existence of difficult for consumers to find attorneys either by the Bureau or by the market. the process, consumers had submitted for small individual claims. One For example, one industry commenter more than 500,000 complaints and industry commenter cited a study that suggested that consumers would file consumers had not disputed the showed that attorneys are unlikely to more claims in arbitration if they were company’s response in more than two- accept contingency fee cases for claims more educated about the benefits of thirds of the cases in which companies below $60,000.477 The consumer lawyer arbitration or if arbitration agreements filed such a response.480 One research and law firm commenters stated that were required to include consumer- center commenter asserted that in the only in rare cases did they find it friendly provisions, such as no-cost Overdraft MDL case at least $15 million economically sensible to bring filing or ‘‘bonuses’’ for consumers who was refunded to consumers through 479 individual small dollar claims win claims in certain circumstances. informal dispute resolution, supporting regardless of the availability of statutory Another industry commenter suggested the claim that consumers received attorney’s fees or contingent recoveries. that consumers might not use arbitration significant relief from that process. For example, several public-interest because it is relatively new to consumer This research center commenter also consumer lawyer commenters explained finance and that consumers may not yet cited studies showing that companies that they lacked resources to handle all know about how it can help them do provide informal relief to some of the small-dollar claims that are achieve relief for their claims. This consumers who complain. For example, brought to them by consumers on an commenter, who appeared to the commenter cited a 2014 survey of individual basis and that, as a result, acknowledge that the number of 983 credit card users, in which 86 these consumers frequently abandoned consumers using arbitration is quite percent of consumers who asked their these claims because they could not find low, predicted that consumers would credit card company to reverse a late fee other legal help. These commenters also become more accustomed to using were successful and further asserted arbitration to resolve disputes given noted that a typical attorney’s hourly that success is likely not correlated to time. This same commenter suggested rate—were a consumer to decide on a socioeconomic status because that the opponents of arbitration and the fee-based arrangement with an unemployed customers had about the Bureau itself have helped create a attorney—would quickly eclipse the same rate of success as those who were negative public perception of arbitration 481 value of any such claim. In addition, employed. That commenter cited even when attorney’s fees are available 478 ECOA, 15 U.S.C. 1691e(d); TILA, 15 U.S.C. 480 Consumer Response Annual Report, supra under a statute (e.g., ECOA and 1640(a)(3). note 464, at 46–47 (stating that 65 percent of 479 An example ‘‘bonus’’ provision included in an consumers ‘‘did not dispute the response during the 477 Elizabeth Hill, ‘‘Due Process at Low Cost: An arbitration agreement would require a company to feedback period’’ and another 14 percent were Empirical Study of Employment Arbitration Under pay a consumer double or triple the company’s pending review of the company response). the Auspices of the American Arbitration highest settlement offer if the consumer wins on his 481 Keri Anne Renzulli, ‘‘The Crazy Easy Trick to Association,’’ 18 Ohio St. J. on Disp. Resol. 777, at or her arbitration claim in an amount that exceeds Getting a Credit Card Fee Waived or Your Rate 783 (2003). that settlement offer. Continued

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another study—referenced by the consumers particularly benefit from requiring companies to pay consumers Bureau in the proposal—showing that class actions because these consumers double or triple the company’s highest almost two-thirds of consumer are less likely than others to pursue settlement offer if the consumer wins on complaints to a mid-sized regional bank relief individually. According to one his or her arbitration claim in an in Texas were voluntarily resolved in consumer advocate, limited time, amount that exceeds that settlement favor of the customer in the form of a resources, or confidence may explain offer. full refund.482 The commenter stated why low-income consumers are At least one research center that that study further showed that the substantially less likely to advocate for commenter agreed with the Bureau’s number of consumers who received full their interests by complaining assertion that a consumer’s profitability refunds varied based on the city in informally to a company or by pursuing could factor into the provider’s decision which the consumer lived or the type of formal relief. A public-interest on how to resolve a dispute with that complaint the consumer raised, but consumer lawyer commenter suggested consumer, citing data that credit scores ranged from 56 percent to 94 percent.483 that low-income and vulnerable can influence whether providers decide Other commenters asserted that consumers may not realize that they to waive fees for particular consumers consumers can close their accounts and have been the victim of unlawful while also asserting that the Bureau move to new financial service providers predatory practices. Thus, the cited faulty or incomplete data to if they do not like how their providers commenter asserted, class actions support the theory that providers decide handle informal disputes. Relatedly, an represent the only reasonable, private how to handle complaints based on industry commenter asserted that the means for such consumers to obtain consumer profitability.485 This Bureau had overlooked complaints that relief. Two commenters suggested that commenter contended, however, that consumers file with State attorneys the specific characteristics of consumer profitability would be an appropriate general or other State agencies. financial services class action standard for a provider to use in In contrast, many commenters agreed settlements make them favorably determining whether to resolve a with the Bureau’s preliminary findings structured to provide consumers with dispute with a consumer because it is in as to the role of informal dispute meaningful relief. For example, one of the interest of consumers for the resolution. A consumer advocate and a these commenters noted that damages provider to keep only profitable public-interest consumer lawyer usually can be calculated with precision customers. To the extent that providers commenter both explained that low- (e.g., if based on an improperly charged retain unprofitable customers, the income consumers are significantly less fee) and that classes are often readily commenter asserted that fees become likely to raise concerns directly with a ascertainable because providers higher for all customers. company because they have limited typically have accurate records of their Other industry commenters and a time, resources, or confidence in their customers.484 research center commenter stated that rights. Relatedly, a public-interest With respect to the Bureau’s there is sufficient incentive for consumer lawyer commenter stated that preliminary finding that informal providers to change general practices in it is much easier for low-income dispute resolution is not sufficient response to informal complaints consumers to access justice through the because a company can choose to because it is time-consuming for courts than it is arbitration because respond (or not) to any consumer providers to respond to complaints one arbitration lacks many of the procedural complaint, industry, research center, by one, and thus they would prefer to safeguards available in court. A different and a group of State attorneys general change their practices wholesale with public-interest consumer lawyer commenters asserted that companies respect to all consumers for the sake of efficiency. For this reason, these commenter asserted that profitability with arbitration agreements have commenters disagreed with the Bureau’s models impact companies’ treatment of stronger incentives to provide relief to assertion that companies are unlikely to consumers and thus low-income consumers who complain. For example, globally change practices for all consumers who may be less profitable an industry and a research center consumers when only a fraction of are less likely to be treated favorably. commenter both asserted that Like the public-interest consumer companies have strong incentives to consumers complain. Offering a lawyer commenter referred to above, a resolve complaints informally because different opinion, a consumer law firm commenter stated that, in its experience, consumer law firm commenter agreed companies’ arbitration agreements only hard-fought litigation can get a with the Bureau’s preliminary finding typically require them to pay all of the company to change its underlying that consumers may experience varied filing fees for arbitration, which can be practices; piecemeal, informal, amounts of success through informal as high as $1,500, plus all expenses, and individual complaints are too small and dispute resolution even when similarly that this is a feature unique to arbitration. Therefore, these commenters too easily ignored by most companies. situated. This commenter suggested that Additionally, several commenters, a particular consumer’s sophistication, contended that companies would rationally settle any claim raised by a including industry, research center, and language skills, socioeconomic status, consumer that was under $5,000, which State attorneys general commenters, and tenacity all play important roles in the commenters asserted is the contended that consumers do not file determining whether the company will approximate cost to the company of any formal individual claims because they remedy the problem. Several single arbitration. These commenters prefer instead to move their business to commenters suggested that low-income further noted that there is even greater other companies. The State attorneys incentive for companies to resolve general commenters and an industry Lowered,’’ Money (Sept. 25, 2014), available at commenter cited data from the Bureau’s http://time.com/money/3425668/how-to-get-credit- claims informally when the arbitration card-fee-waived-rate-lowered/. The Study did not agreements include ‘‘bonus provisions’’ consumer survey that they contend appear to examine whether the disputed fees were shows a small number of consumers in fact improper. 484 To support these claims, this commenter cited 482 Jason S. Johnston & Todd Zywicki, a paper that says that in consumer financial services 485 The commenter further asserted that an article ‘‘Arbitration Study: A Summary and Critique,’’ at cases, most consumers were compensated. Brian T. that the Bureau relied upon in its preliminary 31 (Mercatus Ctr. at Geo. Mason U., Working Paper, Fitzpatrick & Robert C. Gilbert, ‘‘An Empirical Look finding in this regard was an editorial. See 81 FR 2015). at Compensation in Consumer Class Actions,’’ 11 32830, 32857 n.370 (May 24, 2016) (citation 483 Id. N.Y.U. J. of L. & Bus. 767, at 788 (2011). omitted).

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would pursue a legal remedy as individual filings is low in comparison out an attorney to pursue such claims, opposed to a market-based one. Thus, to to the relative size of the market for the Bureau believes—based on its keep customers happy, companies consumer financial products and expertise and experience with consumer maintain positive policies and comply services. financial markets and as was noted by with the law regardless of the Explanations for number of individual several commenters—that those availability of private enforcement. claims. Many industry commenters consumers are likely in the minority. Similarly, a few industry commenters disagreed with the Bureau’s preliminary Indeed, the consumer survey conducted suggested that there was no need for findings as to why consumers do not file as part of the Study, as well as the consumers to file claims in arbitration many individual claims. For example, nonprofit’s survey noted above, is or litigation or to pursue informal one research center commenter stated indicative of how unlikely consumers dispute resolution because consumers that claims under certain of the are to pursue claims even when they are can use social media to address business consumer financial laws that provide for confident they have been wronged and practices that consumers believe to statutory damages or double or treble contradicts industry comments harm them. In one commenter’s view, a actual damages if the consumer prevails suggesting otherwise.489 consumer’s social media complaint are necessarily large enough to Third, even if a consumer is both about their provider can quickly attract incentivize consumers and attorneys to aware of a wrong and aware of the support from many other consumers pursue the claims. The Bureau availability of statutory damages and and cause a company to change its disagrees. First, as a matter of logic and attorney’s fees, the statutory damages or practices. as supported by examples provided by attorney’s fees may be insufficient motivation for the consumer or his or Response to Comments and Findings several public-interest consumer lawyer and consumer lawyer and law firm her attorney given the uncertainty of Number of individual claims. commenters, statutory damages cannot recovery and the potential size of such Comments that asserted that the Study incentivize a consumer to bring a claim recovery relative to the time required to methodology undercounted the number about which he or she is unaware. For pursue the claim even if the potential of individual claims filed in court or example, consumers who do not receive value of that claim is larger than the arbitration are addressed above in Part the disclosures to which they are consumer’s actual damages.490 Notably, III.D. Beyond the debates about specific entitled may not know that something most industry commenters did not sources and counting methodologies, was missing. Consumers who are disagree with the Bureau’s preliminary the Bureau emphasizes that it did not subject to discrimination may not know finding that it is difficult for consumers purport to provide a comprehensive that others are being treated more to find attorneys for small claims; report of the entire universe of favorably. Consumers who are charged a indeed, one industry commenter cited a individual consumer financial claims fee disallowed by State law or contract study finding that attorneys will not but instead offered data that is may not know that the fee was take a claim valued at less than indicative of the larger market. Taken impermissible. In some cases, $60,000—much higher than the $1,000 together, the total number of individual consumers may not even be aware that or $1,500 in statutory damages provided consumer financial claims identified in any action has been taken with respect by many of the consumer financial the Study was approximately 2,400 per to them. For example, the Bureau statutes. Thus, even if, as one 486 year. Even multiplying those 2,400 recently settled an enforcement action commenter suggests, most claims are claims by 10 or 100 to account for the with a large bank related to its above $1,000, they may still be too small markets and jurisdictions the Study did widespread practice of opening to be worth the time for most consumers not analyze would amount to less than consumer accounts without their to find an attorney to pursue them. And 250,000 individual claims. The result knowledge.488 Because most of the as discussed further below, even if would still be a low number of victims of this conduct were unaware individual arbitration reduces the individual claims in relation to the that the accounts were being opened, amount of time and need for attorney hundreds of millions of individual those customers could not have representation relative to individual consumer financial products and complained about those accounts to the litigation, the Bureau believes that the services. The Bureau believes this bank through either formal or informal time required to pursue small claims is still sufficient to discourage many supports the finding that a small mechanisms. number of consumers seek individual Second, even if a consumer is aware consumers from doing so. Moreover, redress either through arbitration or the that he or she was harmed, the there are many claims concerning 487 courts. Accordingly, the Bureau availability of statutory damages and consumer financial products or services finds, in accordance with the attorney’s fees (or even particularized for which statutory damages are not preliminary findings, that the number of types of relief like restitution and available, including common law tort rescission available under certain State’s and contract claims. 486 A research center commenter also 1,200 in Federal court, 800 in small claims laws, as one commenter suggested) court, and 400 in arbitration. suggested that small claims are more could only incentivize filing a claim 487 For instance, at the end of 2015, there were commonly filed in arbitration with over a small harm if the consumer were 600 million consumer credit card accounts, based respect to non-consumer financial on the total number of loans outstanding from aware of those statutory provisions. Experian & Oliver Wyman Market Intelligence While there may be some well-informed Reports. Experian & Oliver Wyman, ‘‘2015 Q4 489 See Pew study, supra note 476. As an industry Experian—Oliver Wyman Market Intelligence consumers who are aware and thus seek commenter noted, 23 percent of wronged Report: Bank Cards Report,’’ at 1–2 (2015) and consumers in the nonprofit’s survey would pursue Experian & Oliver Wyman, ‘‘2015 Q4 Experian— 488 Press Release, Bureau of Consumer Fin. Prot., a legal remedy. Oliver Wyman Market Intelligence Report: Retail ‘‘Consumer Financial Protection Bureau Fines 490 In other words, an attorney considering a TILA Lines,’’ at 1–2 (2015). In the market for consumer Wells Fargo $100 Million for Widespread Illegal case that allows for recovery of attorney’s fees must deposits, one of the top checking account issuers Practice of Secretly Opening Unauthorized discount his or her fee by the likelihood that the serviced 30 million customer accounts (JPMorgan Accounts,’’ (Sept. 8, 2016), available at http:// consumer will not prevail or will accept a Chase Co., Inc., 2010 Annual Report, at 36) and in www.consumerfinance.gov/about-us/newsroom/ settlement that compensates that attorney for less the Overdraft MDL settlements, 29 million consumer-financial-protection-bureau-fines-wells- than all of the attorney’s incurred fees and costs in consumers with checking accounts were eligible for fargo-100-million-widespread-illegal-practice- the case. It is this calculus that makes many such relief. Study, supra note 3, section 8 at 40. secretly-opening-unauthorized-accounts/. cases undesirable for plaintiff’s attorneys.

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products and services than for consumer reluctance to pursue formal claims, and unaware of harm in the first instance or finance claims, which the commenter the low value of their claims relative to are aware of harm but do not advocate believes may reflect something the time required to pursue their claims. for informal resolution as effectively as particular about consumer finance For all these reasons, the Bureau finds other complainants, as well as with claims. While a small claims filing rate that there are structural and behavioral those complaints that are resolved in of 3.5 percent for all types of claims is factors that prevent individual dispute ways that do not affect the financial higher than a small claims filing rate of resolution systems—including both institution’s future behavior. 2 percent for consumer finance claims, arbitration and litigation—from As noted in the proposal and both are low rates of filing. Indeed, even providing an adequate or effective discussed further above, for a variety of if the number of consumer finance means of assuring that harms to reasons, many consumers may not be arbitration cases involving small claims consumers are redressed. aware of whether a company they deal were to double, to 4 percent, that would Informal dispute resolution. As for the with is complying with the law or not. mean only an additional 25 cases per industry commenters that disagreed Furthermore, consumers may not even year, still a very low figure.491 With with the Bureau’s preliminary finding think about a company’s customer respect to commenters that suggested that informal dispute resolution cannot service function as a way of seeking that consumers do not file individual explain the low volume of individual redress for certain types of wrongs. For claims because their disputes are cases observed, the Bureau is not example, the Bureau believes, based on adequately resolved through public persuaded. The Bureau acknowledges its experience and expertise, that enforcement, the Bureau will respond to that informal dispute resolution consumers are unlikely to know when that argument in depth below in Part provides at least some relief to some they have received inadequate VI.B.5. consumers who are harmed by and disclosures and, even if they do, they Consumer attitudes regarding complain to their consumer financial are unlikely to call a customer service arbitration. With respect to the service providers. The Bureau stated in department over such an issue. comments that suggested that the proposal that it understands that Similarly, the Bureau is not aware of consumers’ current attitudes and when an individual consumer informal dispute resolution successfully awareness levels about arbitration tend complains about a particular charge or resolving complaints of discrimination, to suppress the number of individual other practice, it is often in the financial systematic miscalculations of interest arbitrations but could be shifted over institution’s interest to provide the rates, certain types of deceptive time, the Bureau views those individual with a response explaining advertising,493 improper furnishing of suggestions as speculative and not that charge and, in some cases, a full or credit information about which the persuasive. Arbitration agreements have partial refund or reversal of the practice, consumer was unaware, and other existed in consumer finance contracts in order to preserve the customer common harms that are largely since the early 1990s, meaning relationship. Indeed, the Bureau cited imperceptible to the average consumer. consumer have had more than 20 years such evidence in the proposal arising Consumers are more likely to use a to become aware of arbitration and yet out of the Overdraft MDL customer service function, for example, the Study found that consumers file (approximately $15 million in informal to question charges that appear on their only a few hundred arbitrations a year. relief had been provided by defendants bill, including fees assessed by the Thus, arbitration is hardly novel and the in those cases), and commenters financial institution. Even in those Bureau doubts that novelty is provided evidence of studies reflecting cases, the consumer first must notice the depressing consumer filings in that companies sometimes provide charge and, in some instances, further arbitration. Indeed, the availability of informal relief to consumers.492 The recognize that there is some basis to individual litigation is not novel, yet Bureau’s consumer complaint function challenge or question the charge if the consumers rarely bring individual cases is specifically designed to facilitate initial request is rebuffed. Based on its in court either. informal dispute resolution and has experience, the Bureau does not believe Even assuming for the sake of been successful in doing so for many that even a majority of consumers have argument that the low use of arbitration thousands of consumers. The Bureau’s such an awareness. Thus, an informal were attributable to awareness levels, concern, however, is not with those dispute resolution system is unlikely to the Bureau is skeptical as to whether it complaints that are resolved, but with be used by most or all consumers who is realistic to believe that all or most those situations in which consumers are are adversely affected by a particular consumers could be educated about the illegal practice. For example, one survey terms of arbitration agreements to 492 With respect to the commenter that cited $1.3 cited by a commenter showed that only billion in consumer relief provided by AT&T as 28 percent of consumers surveyed had significantly improve consumer established by the record in the Concepcion attitudes or awareness. Indeed, even if litigation, the record in that case is not fully ever asked to have such fees waived and every consumer subject to an arbitration developed and does not provide enough detail for not all of these were successful.494 In agreement received education about the Bureau to be able to establish that all of the $1.3 other words, most consumers simply do billion in manual credits reflects relief provided to not seek informal resolution of wrongful arbitration, understood the agreement’s customers who complained to AT&T. See Berinhout terms and had a positive attitude toward Declaration at ¶ 17, Trujillo v. Apple Computer, arbitration—and even if every Inc., No. 07–4946 (N.D. Ill. Oct. 16, 2007), ECF No. 493 For example, the Bureau entered into a arbitration agreement provided for 40. The record does not explain, for example, how settlement in 2014 with a mortgage company for the $1.3 billion was calculated, how the $1.3 billion deceptive advertising about which most individual company-paid filing fees and minimum compares to the amount actually requested by consumers likely were not aware. Press Release, award amounts—it still would be the consumers, nor how much of the consumer relief Bureau of Consumer Fin. Prot., ‘‘CFPB Orders case that use of the arbitration system was necessarily the result of a consumer complaint Amerisave to Pay $19.3 Million for Bait-And- would be limited by consumers’ lack of or the resolution of such complaint. Laster v. T- Switch Mortgage Scheme,’’ (Aug. 12, 2014), Mobile USA, Inc., 2008 WL 5216255, *15 (S.D. Cal. available at https://www.consumerfinance.gov/ awareness of potential legal violations, Aug. 11, 2008). Furthermore, assuming this figure about-us/newsroom/cfpb-orders-amerisave-to-pay- is accurate, the Bureau cannot evaluate the revenue 19-3-million-for-bait-and-switch-mortgage-scheme/. 491 Study, supra note 3, section 5 at 10 (finding generated by AT&T from other consumers who did 494 Martin Merzer, ‘‘Poll: Asking for Better Credit 25 AAA disputes per year which involved not complain or whose complaints were rejected by Card Terms Pays Off,’’ CreditCards.com (Sept. 24, consumer affirmative claims under $1,000 across AT&T and received no part of the amount that 2014), available at http://www.creditcards.com/ six markets studied). AT&T refunded. credit-card-news/poll-ask-better-terms.php.

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actions. Moreover, commenters noted if two consumers bring the same dispute consumers have no choice as to their and studies have found that poorer and to a company, the company might provider, and thus companies need not less educated consumers are less likely resolve the dispute in favor of a worry about losing the consumer’s to seek resolution of disputes through consumer who is a source of significant business if complaints are left informal means because they lack profit while it might reach a different unresolved. This is most obviously true sufficient information to pursue claims resolution for a less profitable with respect to servicing markets, such informally, are unfamiliar with the consumer.497 Indeed, as the Bureau as student loan servicing and debt process, or do not have the time to stated in the proposal, in the Bureau’s collection. pursue it.495 As to commenters who experience it is quite common for One research center commenter suggested that the Bureau overlooked financial institutions (especially the agreed with the Bureau’s preliminary that consumers can pursue claims larger ones that interact with the findings in this regard and stated its informally by contacting their State greatest number of consumers) to belief that a company should deny attorneys general or other regulators, the maintain profitability scores on each Bureau does not believe that it customer and to cabin the discretion of informal relief to less profitable overlooked a substantial number of customer service representatives to consumers in order to maintain complaints that consumers file with make adjustments for complaining reasonable fees for other more profitable State attorneys general or other State consumers based on such scores.498 For consumers. The Bureau agrees that in regulators. To the extent that they do, example, in the study of a midsize bank the context of informal complaint the Bureau addresses the ability of State in Texas cited by some commenters, 44 handling systems—which do not enforcement agencies to remedy harms percent of consumers who complained adjudicate the merits of claims but in section VI.B.5 below. about one type of fee were not offered rather exist to enhance a company’s Further, none of the evidence cited by a refund in one city in which the bank business interests—it is rational for a commenters refuted the Bureau’s operated.499 While there is no way to company to forgive a fee charged to a preliminary finding that companies can know whether the complaints that profitable consumer and not to do so for and do choose—for any reason—not to consumers made in that study reflect an unprofitable consumer. But that is resolve complaints informally, and that violations of the law, it shows the precisely the point: in the eyes of the the outcome of these disputes may be differential treatment that can occur. law, wrongful fees should be unrelated to the underlying merits of the Furthermore, in some markets, reimbursed without regard to the complaint.496 As noted in the proposal, profitability of the customer incurring nothing requires a company to resolve a 497 One study showed that one bank refunded the the fee. This commenter’s argument dispute in a particular consumer’s favor, same fee at varying rates depending on the branch thus illustrated one of the limitations of to award complete relief to that location that a consumer visited. Jason S. Johnston informal dispute resolution as a method & Todd Zywicki, ‘‘Arbitration Study: A Summary consumer, to decide the same dispute in and Critique,’’ at 31 (Mercatus Ctr. at Geo. Mason of enforcing the consumer protection the same way for all consumers, or to U., Working Paper, 2015) (explaining that the laws. In this realm, a company can reimburse consumers who had not process undertaken by one bank in 2014 ‘‘resulted choose which complaints it wishes to raised their dispute to a company. in its refunding 94 percent of wire transfer fees that customers complained about at its San Antonio resolve for which consumers, and that Regardless of the merits or similarities office and 75 percent of wire transfer fees that choice is likely to be very different than between the complaints, the company customers complained about at its Brownsville the decision made by a neutral judge retains discretion to decide how to office. During that same period, the bank responded after a consumer has filed a claim resolve them. This is true even with to complaints about inactive account fees by making refunds 74 percent of the time in San alleging violations of the law. respect to providers that are member- Antonio but only 56 percent of the time in As noted in the proposal, the Study’s owned, like credit unions. For example, Houston.’’). The study did not provide information on how many of the bank’s customers complained discussion of the Overdraft MDL provided an example of the limitations 495 Rory Van Loo, ‘‘The Corporation as or why some customers were successful in Courthouse,’’ 33 Yale J. Reg. 547, at 579 (2016) receiving refunds while others were not. of informal dispute resolution and the (‘‘Studies have shown for decades that wealthy and 498 See, e.g., Rick Brooks, ‘‘Banks and Others Base important role of class litigation in more better educated consumers are more likely to Their Service On Their Most-Profitable Customers,’’ effectively resolving consumers’ Wall St. J. (Jan. 7, 1999), available at http:// complain to corporations and more successful than 500 are low-income consumers.’’); Amy J. Schmitz, www.wsj.com/articles/SB915601737138299000 disputes. In the cases included in the ‘‘Remedy Realities in Business-To-Consumer (explaining how some banks will treat profitable Overdraft MDL, certain customers Contracting,’’ 58 Ariz. L. Rev. 213, at 231 (2016) customers differently from unprofitable ones and lodged informal complaints with banks (‘‘the proactive consumers who obtain remedies citing examples of banks using systems to routinely about the overdraft fees. The subsequent tend to be of higher income and education’’). allow customer service representatives to deny fee 496 Some commentators have advised that refund and other requests from unprofitable litigation revealed that banks had been concerns other than whether a violation occurred customers while granting those from profitable ordering transactions based on the size should be considered when resolving complaints. customers). The Bureau notes that this article is not of the transaction from highest to lowest See, e.g., Claes Fornell & Birger Wernerfelt, an editorial as suggested by one industry amount to maximize the number of ‘‘Defensive Marketing Strategy by Customer commenter. See also Amy J. Schmitz, ‘‘Remedy Complaint Management: A Theoretical Analysis,’’ Realities in Business-To-Consumer Contracting,’’ 58 overdraft fees. As far as the Bureau is 24 J. of Mktg. Res. 337, at 339 (1987) (‘‘[W]e show Ariz. L. Rev. 213, at 230 (2016) (explaining why aware, these informal complaints, while that by attracting and resolving complaints, the firm various groups, such as minorities, women and low- resulting in some refunds to the can defend against competitive advertising and income consumers are less likely to complain and relatively small number of consumers lower the cost of offensive marketing without losing to achieve a positive resolution). market share.’’); Mike George et al., ‘‘Complaint 499 In a preliminary draft of his research paper, who complained, produced no changes Handling: Principles and Best Practice,’’ at 6 (Univ. one commenter addressed this issue and suggested in the bank practices in dispute. of Leicester, Centre for Util. Consumer L. April that banks look at whether the investment in Ultimately, after taking into account the 2007) (discussing research that shows that resolving a consumer’s concern is worth it when relief that consumers had obtained customers who complain are more likely to re- compared to the likelihood that the bank will make purchase the good or service than those who do not a profit off of that customer in the future. See Jason informally, nearly 29 million bank and noting that additional research that shows that Scott Johnston, ‘‘Preliminary Report: Class Actions customers received cash relief in court good complaints culture and processes may well and the Economics of Internal Dispute Resolution settlements over and above relief lead to improved financial performance), available and Financial Fee Forgiveness,’’ (Manhattan Inst. through informal dispute resolution at https://www2.le.ac.uk/departments/law/ Rept. 2016), available at https://www.manhattan- research/cces/documents/Complainthandling- institute.org/html/class-actions-and-economics- PrinciplesandBestPractice-April2007_000.pdf. internal-dispute-resolution-and-financial-fee. 500 Study, supra note 3, section 8 at 39–46.

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processes.501 Furthermore, the litigation whatever the source of the incentives extension, to enforce the consumer resulted in fundamental changes in the that might encourage a company to protection laws for the same primary banks’ transaction ordering processes settle a consumer dispute informally, reason that informal dispute resolution that had not previously occurred as a these incentives only go so far, is insufficient—because many result of the informal complaints and particularly when the company knows consumers do not know that they have informal relief. While industry that the vast majority of consumers who valid complaints or how to raise their commenters cited this example as an complain will not formally pursue the claims through social media. Further, instance where informal dispute matter and that individual complaints companies can choose either to ignore resolution provided significant relief, it can be resolved informally without or resolve such complaints at their own also supports the Bureau’s conclusion systemic change. For example, as option especially in markets where that informal dispute resolution does discussed above in this Part VI.B.2 with consumers cannot take their business not provide systemic relief of consumer respect to the explanation for the low elsewhere; and companies can resolve harms. number of individual claims consumers complaints on a one-off basis with the As to commenters’ arguments that file, the Bureau recently settled an individual complainant. Indeed, as companies with arbitration agreements enforcement action with a large bank discussed above in Part II.E, at least one have strong incentives to resolve concerning its employees’ practices of study of social media complaints found complaints in consumers’ favor in order opening unauthorized accounts on that companies ignored nearly half of to avoid the cost of arbitral fees and the behalf of customers that had pre- the complaints consumers submitted risk of paying a ‘‘bonus’’ award, the existing accounts with the bank.504 and that when companies did respond, Bureau acknowledges that companies During the Bureau’s investigation of that consumers were dissatisfied in roughly with arbitration agreements have at least bank, it uncovered that some individual 60 percent of the cases.507 some incentive to resolve informal consumers had discovered the Thus, while informal dispute disputes with consumers especially unauthorized accounts and complained resolution systems may provide some when the company suspects that the about them; but the bank’s employees relief to some consumers, the Bureau consumer, if unsatisfied, will file an nevertheless continued the widespread finds that these systems alone are arbitration case and cause the company practice with respect to many other inadequate mechanisms to resolve to incur filing fees. It is also true that customers. Similarly, the Bureau settled potential violations of the law that companies without arbitration another enforcement case with a buy- broadly apply to many customers of a agreements have an incentive to resolve here, pay-here automobile dealer particular company for a given product informal disputes with consumers when concerning violations of the FDCPA and or service. The Bureau further finds that they suspect that litigation will the FCRA in which the Bureau the prevalence of these systems cannot otherwise result, since litigation can discovered that several customers had and does not explain the low volume of result in defense costs which exceed the disputed the improper credit reporting individual cases pursued through costs of arbitral fees or of arbitral information with the dealer without the arbitration, small claims courts, and in defense. It is unclear, at best, whether dealer taking any corrective action.505 In Federal court. arbitration agreements create greater some instances, the dealer informed the 3. Class Actions Provide a More incentives to resolve a complaint customers in writing that the account Effective Means of Securing Significant informally than the risk of litigation and information had been corrected when it Consumer Relief for Large Numbers of commenters did not provide data or had not been.506 Consumers and Changing Companies’ evidence to show otherwise.502 Indeed, With respect to the comments that Illegal and Potentially Illegal Behavior one recent news article about AT&T—a suggested that there were few individual claims because companies will change The Bureau preliminarily found, company that includes a ‘‘bonus’’ based on the results of the Study and its provision in its arbitration agreements— practices that harm consumers when consumers complain on social media, further analysis, that the class action reports that only 18 of its approximately procedure provides an important 150 million customers filed claims in the Bureau believes that social media are insufficient to force companies to mechanism to remedy consumer harm. arbitration against the company over a More specifically, the Bureau 503 change company practices and, by two-year period. In any event, preliminarily found, consistent with the Study, that class action settlements are 501 In total, 18 banks paid $1 billion in settlement the event that a customer receives an arbitration relief to nearly 29 million consumers. Id. award greater than the company’s last written a more effective means than individual (explaining how the settlements were distributed). settlement offer, requires it to pay a $7,500 arbitration (or litigation) for assuring These settlement figures were net of any payments minimum recovery and twice the amount of the that large numbers of consumers are made to consumers via informal dispute resolution; claimant’s attorney’s fees.). able to obtain monetary and injunctive an expert witness calculated the sum of fees 504 See Press Release, Bureau of Consumer Fin. attributable to the overdraft reordering practice and Prot., ‘‘Consumer Financial Protection Bureau Fines relief for wrongful conduct, especially subtracted all refunds paid to complaining Wells Fargo $100 Million for Widespread Illegal for claims over small amounts. consumers. The net amount was the baseline from Practice of Secretly Opening Unauthorized As noted in the preliminary findings, which settlement payments were negotiated. See id. Accounts,’’ (Sept. 8, 2016), available at http:// in the five-year period studied, the section 8 at 45 n.61 and 46 n.63. www.consumerfinance.gov/about-us/newsroom/ Bureau was able to analyze the results 502 One commenter, a research center, suggested consumer-financial-protection-bureau-fines-wells- that the Bureau should have analyzed the historical fargo-100-million-widespread-illegal-practice- of 419 Federal consumer finance class evolution of such bonus provisions. The secretly-opening-unauthorized-accounts/. actions that reached final class Preliminary Results did analyze their prevalence 505 Press Release, Bureau of Consumer Fin. Prot., settlements. These settlements involved, and found them to be rarely used. See Preliminary ‘‘CFPB Takes First Action Against ‘Buy-Here, Pay- conservatively, about 160 million Results, supra note 150, at 51. Here’ Auto Dealer,’’ (Nov. 9, 2014), available at 503 Anna Werner and Megan Towey, ‘‘AT&T and https://www.consumerfinance.gov/about-us/ consumers and about $2.7 billion in DirecTV Face Thousands of Complaints Linked to newsroom/cfpb-takes-first-action-against-buy-here- Overcharging, Promotions,’’ CBS Evening News pay-here-auto-dealer/. 507 Sabine A. Einwiller & Sarah Steilen, (May 16, 2017), available at http:// 506 DriveTime Automotive Group, Inc., CFPB No. ‘‘Handling Complaints on Social Network Sites— www.cbsnews.com/news/complaints-att-directv- 2014–CFPB–0017, Consent Order at ¶¶ 42, 43 (Nov. An Analysis of Complaints and Complaint bundled-services-directv-customers-promotions- 19, 2014), available at http:// Responses on Facebook and Twitter Pages of Large overcharging/. See also Concepcion, 563 U.S. at 337 files.consumerfinance.gov/f/201411_cfpb_consent- US Companies,’’ 41 Pub. Rel. Rev. 195, at 197–200 (describing AT&T’s ‘‘bonus’’ provision which, in order_drivetime.pdf. (2015).

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gross relief of which, after subtracting comparison to the cases that provide claims in arbitration recover an average fees and costs, made $2.2 billion class relief. of nearly $5,000 per claim. One available to be paid to consumers in Based on its experience and commenter provided examples of cash relief or in-kind relief.508 Further, expertise—including its review and specific cases involving low payouts. A as set out in the Study, nearly 24 monitoring of these settlements and its group of automobile dealers and a law million class members in 137 enforcement of Federal consumer firm representing automobile dealers in settlements received automatic financial law through both enforcement California similarly commented that in distributions, meaning they received and supervisory actions—the Bureau the class actions studied concerning also preliminarily found that behavioral payments without having to file automobile loans, the average relief relief could be, when provided, at least provided was $337 per consumer, less claims.509 In the five years of class as important for consumers as monetary than a typical consumer’s monthly car settlements studied, at least 34 million relief. Indeed, prospective relief can payment. In this commenter’s view, that consumers received $1.1 billion in provide more relief to more affected 510 average recovery is very low in light of payments. In addition to the consumers, and for a longer period, than the value of the claims asserted in a monetary relief awarded in class retrospective relief because a settlement typical case concerning automobile settlements, consumers also received period is limited (and provides a fixed loans. Relatedly, the same group of non-monetary relief from those amount of cash relief to a fixed number automobile dealers and another group of settlements. Specifically, the Study of consumers), whereas injunctive relief trade associations representing showed that there were 53 settlements lasts for years or may be permanent and automobile dealers criticized class covering 106 million class members that may apply to more than just the defined action settlements as unnecessary for mandated behavioral relief that required class. cases in which consumers have claims changes in the settling companies’ In the discussion that follows, the worth higher dollar amounts, such as, in business practices beyond simply to Bureau reviews comments on these two the commenter’s view, claims comply with the law. The Bureau preliminary findings, addresses concerning automobile purchase loans. further preliminarily found that the fact concerns raised in those comments, and These commenters asserted that that many cases filed as putative class makes its final findings on these issues. individual consumers have sufficient cases do not result in class relief does At the outset, the Bureau notes that the incentive to bring individual claims not change the significance of that relief bulk of the critical comments it received concerning these products, which the on these preliminary findings concern in the cases that do provide it, both commenter asserted were typically for the actual cash compensation to because putative class members may $1,000 or more (though it cited no data consumers in class action settlements 513 still be able to obtain relief on a in support of this figure). and other related concerns commenters Numerous consumer advocates, classwide basis after those individual have about class actions, with far fewer academics, consumer law firms and outcomes and because the cost of commenters addressing behavioral relief research center commenters agreed with defending a putative class case that ends despite its relative importance to the the Bureau’s preliminary finding that in this manner is relatively low in Bureau’s preliminary findings. Thus, class actions provide substantial while the bulk of the discussion focuses monetary relief to consumers. Many of 508 These figures exclude cy pres relief that is on the former preliminary finding, the these commenters highlighted the sums distributed to a third party (often a charity) on Bureau emphasizes below the non- reported by the Bureau in the Study— behalf of consumers, instead of to consumers 511 directly, in cases where making payments to monetary benefits of class actions. that at least 160 million class members consumers directly is difficult or impossible. The Comments Received were eligible for relief via class action number of consumers (160 million) obtaining relief settlements over the five-year period in class settlements excludes a single settlement Monetary Relief Provided by Class studied; that those settlements totaled that involved a class of 190 million consumers. Actions. Many industry and research Study, supra note 3, section 8 at 15. Section 8 of $2.7 billion in cash, in-kind relief, and the Study, on Federal class action settlements, center commenters disagreed with the attorney’s fees and expenses; and that covered a wider range of products than the analysis Bureau’s preliminary finding that class consumers actually received at least of individual arbitrations in Section 5 of the Study, actions provide significant monetary $1.1 billion in those cases. The which was limited to credit cards, checking/debit relief to consumers who have been commenters stated that, in their view, cards, payday and similar loans, general purpose harmed; instead, these commenters reloadable prepaid cards, private student loans, and these are substantial sums and that if automobile purchase loans. Id. section 5 at 17–18. highlighted the fact that the Study many providers had not used pre- If the class settlement results were narrowed to the showed that individuals received, on dispute arbitration agreements, these six product markets covered in Section 5, the Study average, only $32 per person from the sums would have been substantially would have identified $1.8 billion in total relief class action settlements studied.512 ($1.79 billion in cash and $9.4 million of in-kind higher. The academic commenters, relief), or $360 million per year, covering 78.8 Some of these industry and research citing the Study, concluded that class million total class members, or 15.8 million center commenters further pointed out actions are a powerful tool that can help members per year. that the average recovery of $32 is consumers vindicate their rights under 509 Id. section 8 at 27. particularly low if compared to the 510 Federal and State law. They cited both As noted above, see Johnston & Zywicki, supra Study’s finding that consumers who win note 335 and accompanying text, researchers have funds returned to consumer and the calculated that, on average, each consumer that deterrent effect of class actions. received monetary relief during the period studied 511 An additional important benefit of the rule is Numerous consumer advocates, received $32. Because the settlements providing the general deterrent effect of class actions. That is data on payments (a figure defined in the Study, addressed below in Part VI.C.1, insofar as this part public-interest consumer lawyer, and supra note 3, section 8 at 4–5 n.9, to include relief focuses on the benefits of class actions as provided by automatic distributions or actually documented in the Study and Part VI.C.1 focuses 513 Another automobile dealer commenter claimed by class members in claims made on the benefits the Bureau expects consumers to pointed out that arbitration agreements between processes) to class members did not overlap derive from the rule. automobile dealers and consumers are different completely with the settlements providing data on 512 The Bureau notes that $32 is an approximation than arbitration agreements concerning other the number of class members receiving payments, derived from data in the Study, supra note 3, products or services because the automobile dealers this calculation is incorrect. Nonetheless, the section 8. The Bureau believes that this $32-per- provide their arbitration agreements as a separate Bureau believes that it is a roughly accurate class-member recovery figure is a reasonable document, rather than as part of the purchase approximation. estimate. contract.

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consumer lawyers and law firms consumer in a putative class case those large settlements were excluded provided specific examples from their actually receives any compensation from the Study’s data, the average own experiences where class actions from any case filed as a class action. payment to an individual consumer caused defendants to stop harmful One industry commenter cited a study from a class action settlement analyzed practices and consumers received of class action settlements concerning in the Study would be $14, a significant substantial monetary amounts as a claims under certain consumer reduction from the $32 per consumer result of class action settlements. One of protection statutes that estimated that average payment for the Study as a the consumer law firms reported that it only 9 percent of the total monetary whole.516 In these commenters’ view, had obtained millions in relief for award in those cases actually went to the overdraft settlements distorted the consumers via class actions. Another the plaintiffs as further support for its Study to make it seem that consumers consumer law firm commenter noted positions that class actions do not get much more relief than class actions that, in its experience, these cases provide significant relief to typically provide. Further, one industry frequently involved automatic payouts consumers.515 Expressing a related commenter asserted that the overdraft to class members, who did not need to concern, an industry commenter stated settlements may not have been as large submit a form or other documentation to that it did not find data in the Study of had the overdraft activity occurred later receive the benefit of the settlement. how consumers fared in class action because the practices could have been Another commenter noted that class settlements. This commenter stated that the subject of a Bureau enforcement actions provide a practical and efficient the 4 percent claims rate indicated that action. That same industry commenter way to allow consumers to recover for awards were so small as to not be worth suggested that the Bureau failed to relatively low-value abuses. Similarly, the effort required to make a claim. The assess the extent to which consumers’ several commenters suggested that by commenter asserted that the Study did overdraft complaints were resolved allowing class actions, the Bureau not contain enough detail on the nature through informal channels before the would make it possible for consumers to of the settlements or explain how the class actions commenced. The achieve relief when they largely would Bureau was able to conclude that class commenter also suggested that the be unable to do so if arbitration actions were preferable to arbitration conduct at issue was not actually illegal. agreements continue to be used as they (where 32 consumers recovered over One research center commenter are now. A public-interest consumer $5,000). A research center commenter contended that the value of the lawyer and a consumer advocate further stated its belief that low-income overdraft settlements should be commenter each stated that the very consumers are less likely to file claims discounted because the settlements do nature of class action claims—that they and thus such settlements function as a not make customers of those providers are often low value—emphasizes their regressive tax on low-income consumers better off, overall. This commenter overall importance because consumers in favor of plaintiff’s attorneys. hypothesized that most of the overdraft will not otherwise receive relief for Relatedly, an industry commenter fee refunds went to low-income those claims. The commenter further asserted that the Bureau overstates the consumers and that the defendant banks asserted that, when multiplied out, the benefit provided by most class actions— likely perceived those customers as less practices at issue in those cases often gross relief in almost half of the profitable following the settlements generate substantial profits to providers. settlements was $100,000 or less and the (since they could no longer assess as A consumer law firm commenter noted gross relief in 79 percent was $1 million many overdraft fees). The commenter that class actions require the settling or less. posited that, in the event such company to repay all consumers who Several industry and research center customers become unprofitable, the are members of the affected class, not commenters further criticized the settling banks will screen those low- just those individuals who take the time Bureau’s reliance on the Study to income customers from their customer to assert a claim. support its findings that class actions base in the future, resulting in higher Other industry and research center provide significant relief to consumers fees for the customers who remain. This commenters suggested that consumers on the basis that certain cases should commenter stated that after the do not obtain significant relief from have been excluded from the analysis. Overdraft MDL settlements, minimum class actions because settlements often For example, one research center balance requirements to avoid checking require consumers to file claims to commenter asserted that a large account fees have generally increased obtain relief, which most consumers do settlement involving a credit reporting and asserted that this may be linked to not do. For example, many industry agency should have been excluded as class action liability, though that link commenters noted that in settlements distorting the overall effect because it has not been empirically established. requiring consumers to file a claim to provided $575 million of ‘‘in-kind’’ Behavioral and In-Kind Relief in Class obtain relief, the Study showed that relief rather than actual cash relief. A Actions. Several industry and research only 4 percent of consumers filed a number of others commented that the center commenters disagreed with the claim.514 Thus, these commenters Study’s findings on the overall amount Bureau’s preliminary findings that class contended that class action settlements of relief provided in class actions was settlements benefit non-class members do not serve their compensatory not representative of consumer finance because they cause companies to change purpose. Further, a few industry class actions generally because the their harmful practices with respect to commenters contended that taking into Overdraft MDL class-action settlements all consumers, asserting that companies account both the 4 percent claims rate included in the Study were atypically agreed to behavioral relief in only 13 in class settlements where consumers large and unlikely to recur. A research percent of the class action settlements were required to submit a claim and the center commenter also noted that if analyzed. Many industry and research fact that the Study found that only 12 center commenters further stated their percent of putative class cases in the six 515 Joanna Shepherd, ‘‘An Empirical Survey of belief that class actions do not provide selected markets resulted in a classwide No-Inquiry Class Actions,’’ at 2 (Emory U. Sch. of significant relief to consumers because settlement as of the Study cutoff date, L., Res. Paper No. 16–402, 2016) (these ‘‘no injury’’ of the prevalence of non-cash and class actions were not limited to cases concerning there is a very low likelihood that a consumer financial products, as discussed in more coupon relief in lieu of providing cash detail below in this Part VI.B.3 where the Bureau 514 Study, supra note 3, section 8 at 30. responds to these comments). 516 Study, supra note 3, section 8 at 18 tbl. 3.

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directly to consumers in class action plaintiff when the case settles on an class basis because the putative class settlements.517 For example, one individual basis, while imposing members would not be bound by the industry commenter noted that the significant costs on providers. As noted non-class settlement. In this Study found relief other than direct cash above, numerous such commenters commenter’s view, there is no evidence payments, including coupon noted that only 12 percent of the that such follow-on claims are actually settlements, are provided nearly 10 putative class action filings analyzed in brought and, in any event, the times as often (for 316 million the Bureau’s Study resulted in a class commenter asserted that such claims consumers) as cash relief (for 34 million action settlement as of the Study cutoff would likely lack merit and thus that it consumers). The same commenter date, while the remainder of the cases would be difficult for putative class criticized class actions settlements filed as class actions resulted in no members to find attorneys to assert them generally but cited only to examples classwide relief at all.518 These on a class basis. that did not involve consumer finance commenters pointed out that just over Merits of Claims Resolved by Class that provided consumers with 60 percent of the cases filed as putative Action Settlements. Many industry ‘‘worthless’’ coupons for future service class actions resulted in either an commenters disagreed that class actions from the defendant company, rather individual settlement between the benefit consumers because they than with cash. defendant(s) and the named plaintiff or contended the Bureau erroneously In contrast, many consumer advocate, a voluntary withdrawal of the case by assumed that a class action settlement consumer law firm and nonprofit the named plaintiff (which could also necessarily redresses a violation of the commenters agreed with the Bureau’s signal that the parties reached an law. For example, some industry assertion that companies often change individual settlement). Some commenters contended that companies their behavior in ways that benefit commenters further contended that agree to class action settlements when consumers as the result of class action when putative class cases end in a they have not violated the law or where settlements. One such commenter settlement or potential settlement with the claims asserted are frivolous to emphasized the fact that many class only the named plaintiff, that outcome avoid the significant expense of action settlements include injunctive may indicate that the case lacked merit. litigating and to avoid the risk of a much relief, such as requiring companies to One industry commenter cited further higher payout if the case were to survive stop harmful practices that led to the studies indicating that only a fraction of certain stages of court review. In cases class action, to agree to outside cases filed as class actions ultimately like these, the commenters contended monitoring to ensure that further result in classwide relief to that the settlement represents a failure misconduct does not occur, or to consumers.519 One such study found of the litigation system because the provide increased training or other that around one-third of the putative company felt forced to settle claims that safeguards to improve future class cases resulted in classwide lacked merit, rather than a benefit to compliance with the law. As an settlement, while another found that 20 consumers or a redress of harm. One example, one nonprofit commenter percent to 40 percent resulted in such industry commenter supported this 520 cited a class action settlement involving relief. A credit union commenter point by citing court decisions two money transmission companies that provided an example of a putative class recognizing the pressure on companies agreed to not only compensate action case in which the credit union to settle in class action cases. Some consumers but also to halt their use of was a defendant; a settlement was Tribal commenters stated their view that unfavorable exchange rates, provide reached with the named plaintiff on an Tribal treasuries are at risk from the better disclosures, and develop a individual basis for a few thousand prospect of frivolous class action community fund. As another example, a dollars, but the case cost the credit settlements which contradicts consumer law firm commenter union tens of thousands in defense longstanding Federal law that provides explained how a class action was able costs. The credit union commenter that protecting the Tribal treasury to provide complete relief to all affected asserted that the plaintiff’s attorney in against legal liability is essential to the 521 consumers. This relief included not that case privately admitted in oral protection of Tribal sovereignty. Another industry commenter only cash compensation for their conversation that the claims filed were contended that the Study’s data that injuries but also injunctive relief that meritless; the commenter did not explain why it chose to settle a case it dispositive motions were granted before was able to resolve the problem knew to be meritless. class settlement in 10 percent of the permanently and for all affected in a Some industry commenters class actions studied is not relevant to way that an individual action would not challenged the Bureau’s preliminary whether the allegations in those cases have been able to do. Other commenters finding that non-class settlements in were meritorious because defendants provided similar examples. putative class action cases do not Proportion of Cases Filed as Class may choose to settle a case even after undermine the benefits of those cases Actions That Ultimately Provide winning a dispositive motion to avoid that do result in classwide settlements. Classwide Relief. Many industry and the costs of litigation and appeal. The For example, one commenter disagreed research center commenters criticized commenter stated that the low with the Bureau’s finding that putative the Bureau’s preliminary finding that frequency of classwide judgments for class members could pursue subsequent consumers and plaintiffs who prevailed class actions provide significant relief to claims after a case was settled on a non- consumers based on a contention that on dispositive motions suggests that the the majority of cases filed as class underlying claims in putative class 518 Study, supra note 3, section 6 at 37. cases lack merit or are frivolous. Some actions do not, in fact, result in class 519 Mayer Brown LLP, ‘‘Do Class Actions Benefit industry commenters expressed their settlement. The commenters asserted Class Members? An Empirical Analysis of Class that such cases do not provide any relief Actions,’’ (Dec. 11, 2013), available at view that class action litigation is to consumers other than the named www.instituteforlegalreform.com/uploads/sites/1/ inferior to other forms of dispute Class_Action_Study.pdf. resolution, such as arbitration, because 520 Id.; Jason S. Johnston, ‘‘High Cost, Little class action cases do not reach decisions 517 A coupon settlement is one in which a Compensation, No Harm to Deter: New Evidence on company provides class members with a ‘‘coupon’’ Class Actions Under Federal Consumer Protection or other discount of the purchase of a future Statutes,’’ (U. Va. Sch. of L., Res. Paper Series 2016– 521 E.g., Allen v. Gold Country Casino, 464 F.3d product or service. 12, 2016). 1044, 1047 (9th Cir. 2006).

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‘‘on the merits’’ given that class actions sometimes provide a small amount of Further, the Bureau agrees with some almost never go to trial, although they relief per consumer compels a finding consumer advocate commenters that did not explain why the lack of a that they do not provide significant stated that consumers who are unaware decision at trial necessarily makes class relief to consumers in the aggregate or that they have been harmed nonetheless action litigation inferior. A few industry detracts from the Bureau’s preliminary can benefit from a class action. For these commenters pointed out that none of finding that class actions provide a more reasons, the Bureau finds that the cases identified in the Bureau’s effective mechanism of securing relief consumers who fall victim to legally analysis of settlements went to trial and than individual litigation or arbitration. risky practices are better protected by therefore that the class members in The Bureau was not surprised to find receiving relatively small amounts from those putative class action cases never average individualized monetary a class action settlement than being got a ‘‘day in court.’’ recoveries in class actions in such relegated to a system in which their A State attorney general commenter amounts, given that the class action only alternative is to pursue relief noted that, in his State, class action procedure is designed to aggregate individually which, in practice, will plaintiffs seeking to pursue a claim of claims for small damages precisely result in most of them receiving consumer fraud were required to get because rational consumers do not nothing. This is especially true given approval from his office that the spend the time or the money to litigate that class members invest little (and in putative claim was not frivolous before them on their own. many cases none) of their own time or it could be filed in court.522 His office First, in assessing the relevance of the money to receive relief in a class action. has concluded that not a single one of small size of the average relief obtained, The Bureau finds that the overall relief these complaints was frivolous as it is important to compare that to the provided by class actions, coupled with alleged. This commenter made a similar alternative in which these consumers the large number of consumers that point regarding a provision in CAFA obtain no relief at all—because, as receive payments as part of this relief, that permits State attorneys general to discussed above in Part VI.B.2, virtually are the correct measure of their efficacy review settlements.523 This review none of them will pursue their and that overall relief is not undermined (done by a team of State attorneys individual claims. The Bureau finds that by the fact that each of these individuals general) has seldom found a settlement relief of $32 (or even $14, as some may receive relatively small monetary that was abusive or unfair. commenters suggest is a more accurate amounts. Other Concerns Regarding Class figure reflecting their attempts to The Bureau also finds that Actions. A few industry commenters exclude the overdraft settlements from commenters’ comparison between the noted that class actions proceed slowly the Bureau’s data) is a better result for average payment to consumers in a class and asserted that the value of the relief harmed consumers than no relief at all. action (around $32) to the average that they do provide is diminished by As noted above, there were only about individual consumer award in the length of time it takes to receive that 25 disputes a year involving affirmative arbitration (around $5,000) is not apt. relief. One industry commenter further claims in arbitration by consumers for Many commenters have made this noted that class actions proceed much $1,000 or less.524 Second, companies are comparison to contend that consumers more slowly than individual arbitration less likely to harm consumers when fare better in individual arbitration than and asserted thus that individual they face the threat of class action in class litigation and, by extension, that arbitration is therefore a superior forum liability (this ‘‘deterrent effect’’ is class actions do not provide significant than class litigation. discussed in more detail below at Part relief to consumers. This is an apples- Several industry commenters noted VI.C.1). While a single harm may be to-oranges comparison. As discussed that the Study found that consumers small, that amount of that harm (and the above, there is not much money at stake filed more individual arbitrations per value of claims concerning that harm) in the typical claim of a putative year (411) than they did Federal class multiplied by thousands or millions of member of a class action, and thus there actions (187) and asserted that the consumers is substantial.525 Yet the is little incentive for an individual to Bureau should not have counted single harm remains much less than the devote time and money to litigating the putative class members in those class amounts for which consumers will claim. In contrast, the Study found the actions as supporting its finding that choose to challenge or the amounts average claim amount demanded in an class actions benefited more consumers attorneys typically will take individual arbitration to be $29,308, and the than individual arbitration or litigation. cases on contingency; as cited by median to be $17,008.527 No industry commenters and discussed commenters adduced evidence Response to Comments and Bureau above, studies have shown that Findings suggesting that the amounts at stake in attorneys generally will not accept most consumer class actions are even Monetary Relief Provided by Class individual claims worth less than approaching this magnitude on a per Actions. Many industry commenters $60,000 on contingency.526 consumer basis. Thus, arbitration claims disagreed with the Bureau’s preliminary are not the same magnitude as claims findings that class actions provide 524 Study, supra note 3, section 5 at 10. Similarly, that are brought in class actions. Not significant monetary relief to consumers few consumers filed claims in small claims court. surprisingly, the Study found that because they concluded that class action 525 This finding is no less true in cases concerning automobile loans for which the average relief is individual arbitration filings for settlements provide, on average, small $337—that amount is likely still too small of an amounts less than $1,000 were quite amounts of relief per consumer (what amount for a rational consumer to invest the time rare—only 25 per year. In other words, many commenters calculated as $32 per and expenses necessary to file an individual claim. individuals rarely file claims in consumer as shown by the Study) and In the automobile loan class action settlements analyzed in the Study, consumers received over individual arbitration over small that, as a result, they provide no $202 million in cash relief. Id. section 8 at 25 tbl amounts, whereas class actions more meaningful benefit to consumers. For 8. often provide recovery to consumers for several reasons, the Bureau does not 526 Hill, supra note 477, at 783. Indeed, no those claims.528 Thus, the disparity agree that the fact that class actions commenter suggested that attorneys would bring most of these smaller dollar value claims on an individual basis. Nor would it make economic 527 Study, supra note 3, appendix J at 62 tbl. 16. 522 See Iowa Code ch. 714H. sense for a consumer to pay a typical attorney’s 528 As noted above in Part VI.B.2, the Study 523 See 28 U.S.C. 1715(a). hourly rate to bring a small dollar claim. showed that consumers rarely pursue low value

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between the recoveries of an individual Many industry and research center interest consumer lawyers, and consumer in class actions and those in commenters criticized the efficacy of consumer lawyer and law firms individual arbitration is unsurprising. class actions because the settlements confirmed this through their own With respect to the view asserted by often require consumers to submit experiences regarding class actions that an automobile industry commenter that claims to obtain relief and consumers provided substantial benefits to class class actions are not necessary for frequently do not do so. The Bureau members. claims related to that industry because disagrees that the low claims rate in The Bureau acknowledges that, in the claims are typically for $1,000 or more, claims-made settlements undermines 105 class settlements analyzed in the the Bureau does not find it to be the conclusion that significant relief is Study requiring claims where there was supported that claims in that industry provided to consumers from class data on the potential class size and are typically for $1,000 or more (i.e., actions generally. Most of the claims rates, the unweighted average that small claims generally do not exist commenters ignored the fact that in claims rate was 21 percent and the in that market). The commenter asserted many consumer finance class actions, weighted average was 4 percent. While that because the principal balance of an the company’s records make it possible these figures may understate the automobile loan is higher than the to identify the class members entitled to percentage of consumers actually amount of credit extended for other relief and the amount of relief to which eligible for relief who submitted claims consumer financial products and they are entitled, thus obviating the (since the claims rate is sometimes services, the frequency of small claims need for a claims process. The Study calculated based on the number of is therefore substantially reduced. The identified 24 million consumers who potential members of a class, and since Bureau disagrees, however, that the received automatic payouts in the 133 additional class members may have principal balance of a loan is the class settlements that identified the submitted claims after the Study’s 531 primary indicator of the likelihood of number of class members paid. release), the figures do indicate that a 529 small claims. Regardless of the size of Moreover, for the 251 settlements where large majority of consumers potentially the loan, claims can arise with respect the Bureau had data on the amount entitled to claim relief from class to, for example the assessment of late consumers were paid, the Study found actions do not file a claim when one is fees or other ancillary fees, the as many cases that provided automatic required.535 Nevertheless, the Bureau 532 application of individual payments, or relief as provided claims-made relief. finds that, even taking into account the the failure to provide required In total, the Study found that consumers fact that many consumers do not file disclosures. Even claims of received $709 million through claims in class settlements that require discriminatory pricing may not be for automatic payment settlements, $322 them to do so, a system which enabled more than $100 on average, as has been million by submitting claims, and 4 percent of consumers to obtain relief true in certain enforcement actions the another $63 million in cases involving for small claims still would be more Bureau has brought involving both automatic and claims-made effective in providing redress than one automobile lending. 533 relief. No commenters disputed these in which the only alternative is for Furthermore, even if it were true that amounts. The combined total of $1.1 automobile loans claims are typically individuals to pursue their claims billion in actual payments to consumers individually. Moreover, given the for $1,000, the Bureau does not believe represents about half of the total $2.0 that the existence of a $1,000 claim is important role that automatic payment billion in cash relief awarded through settlements play in consumer finance sufficient incentive to encourage large the settlements analyzed. Further, the numbers of consumers to file individual class actions, such actions can deliver actual amounts paid to consumers from relief to far more than 4 percent of class claims, for all of the reasons discussed the settlements analyzed in the Study above in Part VI.B.2, nor did the members. Simply stated, the over $200 are almost certainly higher than what million in relief provided per year on commenter cite evidence to the was reported because the Bureau was contrary. Indeed, multiple consumer average to an average of almost 7 unable to obtain payments data for 79 of million consumers through a lawyer and law firm commenters noted the 208 class settlements it analyzed that it is economically unfeasible for combination of automatic payments and that required consumers to make claims claims made by consumers is significant them to represent consumers who have 534 in order to receive monetary relief. relief to consumers. claims of this magnitude on an Thus, the class settlements in the Study With respect to the paper that individual basis; such claims are only showed that a substantial portion of the commenters cited for the proposition viable when they can be aggregated. For relief awarded was paid, which is that consumers receive only about 9 these reasons, the Bureau finds that the contrary to the suggestions of percent of the settlement amounts in availability of class actions concerning commenters that very little of the class actions, the paper cited does not automobile financing benefits settlement amounts is delivered to state the number of settlements that it consumers notwithstanding the consumers. Numerous comments from analyzed that required consumers to possibility that the average claims consumer advocates, nonprofits, public- amount in those cases in the Study may submit claims as compared to the be higher than in some other markets.530 Indeed, for reasons discussed more fully in the number of settlements that provided Section 1022(b)(2) Analysis below in Part VIII, automatic relief, if any. Instead, the claims in other fora, nor are many such claims consumer awareness of arbitration is not the market paper reached that 9 percent conclusion resolved informally. failure that this rule intends to address. by estimating a 15 percent claims rate 529 Indeed, the Bureau notes that Congress has 531 Study, supra note 3, section 8 at 22 tbl. 6. rather than through any substantive 532 prohibited arbitration clauses in mortgages, where Id. section 8 at 28 n.46. analysis.536 Indeed, the author stated the typical size of the loan is much larger than the 533 Id. typical automobile loan. 534 Id. section 8 at 27. In addition, there were 56 530 With respect to the automobile dealer class settlements that provided injunctive relief that 535 Id. section 8 at 5. commenter that noted that dealers provide covered 106 million class members (as well as 536 Shepherd, supra note 515, at 21. The author arbitration agreements to consumers as a separate future consumers who were not class members) determined, based on citation to other studies, that document, the manner in which the arbitration regardless of whether they submitted a claim. Many claims rates are always 15 percent or less. She then agreement is provided to consumers is not relevant of the class settlements that required consumers to multiplied that by the 60 percent of total awards to the Bureau’s findings that the class rule is for the submit a claim included such injunctive relief. Id. that go to consumers to reach the 9 percent protection of consumers or in the public interest. section 8 at 20–21 and tbl. 5. conclusion.

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that she did not actually obtain the be that claims rates in TCPA cases could litigations involving many millions of claims rates in the settlements analyzed be low, perhaps in some part because affected consumers come along (by contrast, the Bureau’s Study did so). there is no contractual relationship regularly. And even class actions against Thus, the Bureau does not believe that between the harmed consumer and the a single institution can produce large the author’s 9 percent estimated figure company and thus it is more difficult to numbers depending on the scope of the is representative of consumer finance reach those consumers. practice and customer base; for instance, class actions overall because, as Many commenters pointed to the fact one class action against a large bank discussed above, consumer finance class that in the Study, a small number of whose employees routinely opened actions are often particularly amenable settlements—specifically, those that unauthorized accounts for existing to automatic payments. occurred as part of the Overdraft MDL customers recently reached a Further, the paper’s author limited the litigation—accounted for a large portion preliminary settlement of $142 settlements analyzed to a subset of class of the relief obtained and a large portion million.544 action cases under particular statutes of the consumers obtaining relief. The The Bureau thus finds that the body the author classified as ‘‘no-injury.’’ 537 Bureau notes that, rather than indicating of class actions, when taking into As that paper acknowledges, there is no a problem with the Study, this simply account their overall results, including generally accepted definition of a ‘‘no- reflects the fact that the distribution of both the large and small settlements, injury’’ case, and the Bureau does not class action settlement amounts is right- provides significant relief to consumers. agree, for reasons discussed below at skewed. Such distributions are Some commenters suggested that given Part VI.C.1 discussing deterrence, with commonplace in business and finance: the existence of the Bureau, in the the characterization of claims under For instance, a small number of banks future public enforcement can be these statutes as ‘‘no injury.’’ 538 In represent a large fraction of all expected to substitute for large class addition, the bulk of those cases depository accounts, and a relatively action settlements so that settlements of involved claims under the FDCPA, small proportion of individuals hold a the magnitude of those that occurred in TCPA, FCRA, and EFTA, each of which majority of household wealth.541 the Overdraft MDL litigation are cover activity that extends beyond the Similarly, as shown in the Study, unlikely to occur. However, an analysis scope of the Study and this rulemaking, smaller settlements are more common of the complaints in the overdraft cases to include claims involving than larger ones, even setting aside the indicates that many of the claims were nonfinancial goods or services that were overdraft settlements.542 predicated on State law and on the not covered in the Study, that are not Mathematically, the inevitable result of terms of the consumers’ contracts, and subject to the final rule, and that are very small settlements being common thus may not have been claims that the more likely to involve claims-made and very large settlements being Bureau could have brought. Moreover, settlements.539 For example, FCRA class somewhat uncommon is that the large while it may seem easy, in hindsight, to actions can involve merchants and settlements will represent the bulk of identify ‘‘big’’ cases and assert that these employers and thus would not be the total dollars. are cases that public authorities like the consumer financial in nature, while Insofar as these commenters have EFTA class actions in this period were Auto Lending Subjective Markup, Racial Disparity, suggested that this makes the results and Class Action Litigation,’’ 1 R. L. Econ. 22, at often ATM ‘‘sticker’’ claims that no observed in the Study unrepresentative 49 (2012) (noting that value of 11 settlements longer violate EFTA and, in any event, of the benefits that class actions can included $63 million in direct monetary benefits to involve individuals who did not have provide in other time periods, the consumers plus hundreds of millions of dollars contractual relationships with the more in savings to consumers from the companies’ Bureau does not agree. The Bureau agreements as part of the settlement to restrict provider and thus could not involve an believes that the large overdraft markups). Another example is a series of arbitration agreement. As the proposal settlements reflect, in part, that there settlements concerning allegations that mortgage noted, and as finalized, the rule would was an industry-wide practice in a very companies forced consumers to purchase have no impact on such cases. unnecessary or excessive insurance that provided large market that harmed many hundreds of millions of dollars in relief for Similarly, FDCPA class actions cover consumers. While class actions consumers. See, e.g., Order Granting Final Approval collection of all types of debt, including concerning such industry-wide to Class Action Settlement, Hall v. Bank of Am., debt that does not arise from a consumer N.A., No. 12–22700, 2014 WL 7184039 (S.D. Fla. practices may not occur every year, they Dec. 17, 2014) ($228 million settlement); Order financial product or service (such as do occur from time to time and can Granting Final Approval to Class Action Settlement, taxes, penalties and fines), whereas the provide significant relief for Diaz v. HSBC USA, N.A., No. 13–21104, 2014 WL Study and the rule only cover collection consumers.543 Similarly, multidistrict 5488161 (S.D. Fla. Oct. 29, 2014) ($32 million of debt to the extent it is collection on settlement); Order Granting Plaintiff’s Motion for Final Approval of Class Action Settlement, a consumer financial product or service. marketing faxes, calls, texts, or emails. Johnston, Saccoccio v. JP Morgan Chase Bank, N.A., 297 FRD. Finally, TCPA class actions often supra note 520 at 32. 683 (S.D. Fla. Feb. 28, 2014) ($300 million involve marketing communications 541 E.g., Alina Comoreanu, ‘‘Bank Market Share by settlement); Stipulation and Settlement Agreement, unrelated to consumer finance. Such Deposits and Assets,’’ WalletHub (Feb. 9, 2017) Fladell v. Wells Fargo Bank, N.A., No. 13–60721, (noting that the five largest depository banks, based 2014 WL 10017434, *1 (S.D. Fla. Mar. 17, 2014) claims are often brought against a on total assets, hold 47 percent of total bank assets ($19.5 million settlement); see also Order Granting merchant or a company with whom the in the United States); Congressional Budget Office, Final Approval to Class Action Settlement, Lee v. consumer otherwise has no relationship, ‘‘Trends in Family Wealth, 1989 to 2013,’’ (2016) Ocwen, et al., 2015 WL 5449813 (S.D. Fla 2015) contractual or otherwise.540 It may well (indicating that, in the United States, families in the (granting final approval to $140 million settlement top 10 percent of the wealth distribution held 76 with multiple defendants); Opinion and Order, percent of wealth); Bureau of Consumer Fin. Prot., Arnett v. Bank of Am., N.A., 2014 WL 4672458 (D. 537 Shepherd, supra note 515, at 9. ‘‘Monthly Complaint Report: Vol. 21,’’ (Mar. 2017) Or. 2014) (granting final approval to $34 million 538 In any event, the Supreme Court’s recent at 3, 10 (indicating that complaints against the top settlement with one defendant). decision in Spokeo, Inc. v. Robbins reaffirmed that 10 most-complained-about companies constituted 544 Motion and Memorandum in Support of class members must have an actual injury. 136 S. about 30 percent of all complaints). Motion for Preliminary Approval of Class Action Ct. 1540 (2016). 542 Study, supra note 3, section 8 at 26 fig. 4. Settlement and for Certification of a Settlement 539 Shepherd, supra note 515, at 2, 13. 543 For example, between 2003 and 2006, 11 Class, Jabbari v. Well Fargo & Co. et al., No. 15– 540 For example, a different study that analyzed automobile lenders settled class action lawsuits 2159 (N.D. Cal. Apr. 20, 2017) ECF No. 111. As of TCPA filings in one Federal district court over two alleging that the lenders’ credit pricing policies had the date of this Final Rule, the settlement has years found that 58 percent of the claims asserting a disparate impact on minority borrowers under received preliminary approval by the district court violations of that statute related to unauthorized ECOA. Mark Cohen, ‘‘Imperfect Competition in in which the case is pending.

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Bureau would have brought, the view in but the Bureau believes that those the overdraft settlements because the real time is far murkier. The Bureau smaller settlements, in aggregate, effect of the agreements to cease certainly hopes that, given the resources continue to provide significant relief for maximizing overdraft revenue through available to it and the limitations on its consumers and deter wrongdoing by reordering drove up the price on all enforcement authority, it will succeed debt collectors. The Bureau finds consumer checking accounts, the in identifying instances in which large consumers were eligible to receive and Bureau acknowledges that to the extent numbers of consumers are subject to did receive substantial relief from class class actions succeed in curtailing harm and will seek and obtain redress. action settlements separate and apart unlawful practices that generate revenue The Bureau acknowledges that, to the from the overdraft settlements. Again, for financial institutions, the extent this occurs, the impact of the rule the Bureau received numerous institutions may respond by changing could be marginally reduced as comments from consumer lawyers and their pricing structures. Even if the consumers and class action attorneys law firms, consumer advocates, and effect of the overdraft litigation was to might be less likely to pursue class public-interest consumer lawyers cause banks to substitute transparent, actions with respect to that harm. regarding their own experiences within upfront fees on checking accounts for However, as discussed further below in which companies provided substantial back-end fees paid by a small Part VI.B.5, given both resource and payouts to consumers. Most of these percentage of vulnerable consumers,552 authorities constraints, the Bureau examples did not concern the overdraft the Bureau does not agree that it would cannot be certain that it or other cases, but nonetheless they all involved follow that consumer welfare was regulators can or will identify and large sums provided to consumers.548 unchanged or negatively impacted, redress all instances of large-scale As to commenters’ criticisms of the especially since up-front fees are more consumer harm and thereby displace all Bureau’s inclusion of the overdraft likely to generate competition and large class action settlements. settlements in the Study because the shopping than more shrouded elements Moreover, even if it were appropriate Bureau did not attempt to assess the of pricing. In any event, the Bureau to disregard the overdraft cases in extent to which companies in those believes that consumers generally are assessing the Study’s findings, the relief settlements provided informal relief to made better off when companies follow provided to consumers by the class consumers, the Bureau did in fact the law even if in a particular case the action settlements analyzed in the Study address that issue in the Study and in effect of doing so is to eliminate a that was unrelated to overdraft is itself the proposal, and discussed above in subsidy that one group of consumers is significant. Indeed, the Study breaks out Part VI.B.2.549 In fact, as noted in the effectively providing to another. For this the relief provided to consumers Study, the settlement amounts in those reason, too, the overdraft settlements through class settlements by product cases nearly all took into account the made consumers better off in that those and that relief includes at least four amount of informal relief that banks provided a remedy to consumers large settlements of more than $50 companies had provided to consumers for the banks’ violations of the law. million in markets other than checking prior to the settlement.550 More Behavioral and In-Kind Relief in Class and savings accounts (where the precisely, in 17 of the 18 Overdraft MDL Actions. In addition to preliminarily settlements concerning overdraft settlements, the settlement amounts and finding that class actions were a occurred).545 Setting aside all of the class members were determined after relatively effective means for securing cash relief provided by cases related to specific calculations by an expert monetary relief for consumers checking and savings accounts, which witness who took into account the victimized by unlawful practices, the includes cases beyond the overdraft number and amount of fees that had Bureau also preliminarily found that cases, the payments actually made to already been reversed based on informal class actions were effective as a means consumers totaled $622.8 million, or an consumer complaints to customer of providing other forms of relief as average of overage $130 million per service. Even after controlling for these well. With respect to behavioral relief, year.546 Many of these cases also informal reversals, nearly $1 billion in the Study found that behavioral relief resulted in significant behavioral relief relief was made available to more than was provided for in about 13 percent of as well. 28 million class members in these MDL the settlements analyzed. That relief Further, many of the settlements cases.551 These results are consistent inures to the benefit of all consumers, analyzed in the Study were for cases with the Bureau’s more general whether the consumers were part of the alleging violations of statutes for which concerns that, as discussed above at Part settlement class or not. Further, as is the recovery in a single case is capped, VI.B.2, consumers are often unable to discussed below in the Section such as the FDCPA which is capped at pursue informal dispute resolution and, 1022(b)(2) Analysis in Part VIII, the the smaller of $500,000 or 1 percent of when they do, experience varying Study’s definition of ‘‘behavioral relief’’ the defendant’s net worth.547 It is amounts of success. was quite narrow and referred to class therefore not possible for there to be With respect to the contention that settlements which contained a settlements of tens or hundreds of consumers were not made better off by commitment by a defendant to alter its millions of dollars under the FDCPA, behavior prospectively, for example by 548 See, e.g., Wells v. Chevy Chase Bank, 768 A. promising to change business practices 545 The settlements resulting in total payments to 2d 620 (Md. 2001) ($16 million settlement for in the future or implementing new class members over $50 million were: Final raising interest rates above advertised amount). compliance programs.553 The Bureau Approval Order, In re Currency Conversion Fee Several commenters cited to an example, discussed Litigation, No. 01–01409 (S.D.N.Y. Sept. 17, 2008); in the Bureau’s Preliminary Results, involving did not count as behavioral relief a Final Approval Order, Faloney v. Wachovia, No. settlement of three cases against payday lenders in defendant’s agreement simply to comply 07–01455 (E.D. Pa. Jan. 22, 2009); Final Approval North Carolina. The three cases settled for $45 with the law, even though such a Order, Holman v. Student Loan Xpress, Inc., No. million, with payments sent to over 200,000 commitment often does, in fact, result in 08–00305 (M.D. Fla. Jan. 4, 2011); and Final consumers. Another commenter cited a $38.6 Approval Order and Judgment, In re Chase Bank million settlement involving LVNV Funding. See material changes in the company’s USA N.A. Check Loan Contract Litig., No. 09–02032 Finch v. LVNV Funding, LLC, 71 A.3d 193 (Md. Ct. (N.D. Cal. Nov. 11, 2012). Study, supra note 3, Spec. App. 2013). 552 The Bureau is not aware of any evidence section 8 at 28 n.47. 549 81 FR 32830, 32850 (May 24, 2016). demonstrating the extent to which the overdraft 546 Study, supra note 3, section 8 at 36 tbl. 13. 550 Study, supra note 3, section 8 at 45. litigation had such an effect. 547 15 U.S.C. 1692k(a)(2)(B). 551 Id. section 8 at 46 and n.63. 553 Study, supra note 3, section 8 at 4 n.7.

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behavior.554 There were many class purchase the product or service in the relief.560 Only slightly more than 2 action settlements in which companies future. The Study found 53 class percent of the class settlements agreed to stop violating the law, settlements in which defendants agreed analyzed in the Study provided for only behavior that inures to the benefit of all to change their behavior to the benefit in-kind relief (as opposed to cash relief consumers, which are not reflected in of at least the 106 million class by itself or in combination with other the number of cases reporting members, including, for example kinds of relief).561 Moreover, most of the behavioral relief in the Study.555 And agreeing to improve disclosures or stop examples cited by commenters of neither type of behavioral relief was charging certain fees.556 ‘‘worthless’’ coupon settlements are in cases that do not concern consumer accounted for in the Study’s monetary One example of this appears to have financial products and thus are outside calculations. occurred with respect to overdraft the scope of this rule, such as a case No commenters took significant issue practices. In Gutierrez v. Wells Fargo, involving a ticket broker. As used in the with any of these findings; to the extent the court ruled that the defendant that some industry commenters were Study, the term ‘‘in-kind relief’’ refers to bank’s overdraft practices were class settlements in which consumers dismissive of behavioral relief based on illegal.557 Although that judgment was the Study’s stating that it occurred in were provided with free or discounted limited to a California class of the only 13 percent of cases, they appeared access to a service, such as credit bank’s consumers, the bank thereafter to overlook the fact that the Bureau was monitoring. The Bureau believes that in- appears to have also changed its using a very narrow definition for this kind relief can, in appropriate cases, overdraft practices in other jurisdictions determination. Accordingly, in addition provide additional benefits to class in the United States, presumably out of to cash relief provided, the Bureau finds members. The Bureau valued such relief concern regarding other State’s laws.558 that the behavioral relief—understood in the Study based upon the difference Similarly, the Bureau bases this finding broadly—provided by class action between the market price of a service on its understanding of the important settlements is a significant component given to class members and the price the benefits gained by consumers through 562 of the relief provided to consumers. class members were required to pay. behavioral changes companies agree to Indeed, as the Bureau noted in the The Bureau recognizes, that Congress, proposal, the Bureau believes that this make that benefit both existing through CAFA, has provided for the form of relief is often more meaningful customers and future customers. This is, courts to apply heightened scrutiny on to consumers than monetary recovery in for example, why the Bureau frequently in-kind relief, and the Bureau does not individual class actions, an opinion tries to secure such behavioral relief believe that such relief is, by itself, echoed by several consumer advocate from companies through its own generally the primary benefit that 563 commenters. In resolving a class action, enforcement actions. Although the consumers receive from class actions. many companies stop potentially illegal values of these behavioral changes are Proportion of cases filed as class practices either as part of the settlement typically not quantified in case records, actions that ultimately provide or because the class action itself the Bureau believes, based on its classwide relief. The Bureau has informed them of a potential violation experience and expertise, that their considered commenters’ criticism that 559 of law and of the risk of future liability value to consumers is significant. only a fraction of the cases brought as if they continued the conduct in With respect to commenters’ putative class actions reach a class question. Any consumer affected by that criticisms of coupon settlements that settlement that provides relief for practice—whether or not the consumer they contended provide little tangible consumers in the class. While many of these commenters focused on the fact is in a particular class—benefits from relief to consumers and to one that the Study reported that 12 percent the enterprise-wide change. For commenter’s criticism of a large of the cases had resulted in class relief example, if a class settlement only settlement included in the Study, the as of 2012, the proposal reported that involved consumers who had Bureau notes that its analysis of class the percentage of cases in which a final previously purchased a product, a action settlements in the Study class settlement was approved or change in conduct by the company specifically separated such ‘‘in-kind’’ or pending approval had increased to 18.1 might benefit consumers who were not ‘‘coupon’’ relief from cash relief and percent as of April 2016.564 included in the class settlement but who that the data discussed above regarding Approximately 60 percent of the cash relief provided to consumers does putative class actions analyzed either 554 Id. appendix S at 135. not include the value of in-kind 555 See, e.g., Settlement Agreement at 14, Murphy were settled on an individual basis or v. Capital One Bank, No. 08–00801 (N.D. Ill. Jan. resolved in a manner consistent with an 556 12, 2010) ECF No. 76–2 (requiring defendant to Study, supra note 3, section 8 at 22 and individual settlement. continue to ‘‘add[ ]to its periodic billing statements appendix S at 134. The Bureau believes, as it stated in 557 The original bench trial awarded ‘‘a certified a message warning customers that, where the proposal, that the best measure of appropriate, payment of the minimum payment due class of California depositors’’ both cash and shown on their statement may not be sufficient to injunctive relief based on violations of California the effectiveness of class actions for all avoid an overlimit fee’’ and to ‘‘use its best efforts law. Gutierrez v. Wells Fargo Bank, N.A., 730 F. consumers is the absolute relief they to maintain its policy for a period of not less than Supp. 2d 1080, 1082 (N.D. Cal. 2010). provide in light of the number of eighteen (18) months following the entry of the 558 See Danielle Douglas-Gabriel, ‘‘Big Banks Final Judgment’’) (cited at 81 FR 32830, 32932 (May Have Been Gaming Your Overdraft Fees to Charge 560 The cash relief provided by settlements 24, 2016); Settlement Agreement at 13–14, Nobles You More Money,’’ Wash. Post Wonkblog (July 17, analyzed in the Study was $1.1 billion. Study, v. MBNA Corp., No. 06–03723 (N.D. Cal. Dec. 5, 2014), https://www.washingtonpost.com/news/ supra note 3, section 8 at 29. 2008) ECF 179–3 (requiring defendant to continue wonk/wp/2014/07/17/wells-fargo-to-make-changes- 561 to include language in credit agreements compliant to-protect-customers-from-overdraft-fees/ (‘‘Half of Id. section 8 at 19. with California law) (cited at 81 FR 32830, 32932 the country’s big banks play this game, but one has 562 Id. section 8 at 4 n.6 and n.8. Most often, in- (May 24, 2016)); Joint Motion for Preliminary decided to stop: Wells Fargo. Starting in August, the kind relief entailed free access to a service. Approval of Class Action Settlement at 3, Peterson bank will process customers’ checks in the order in 563 See, e.g., Kara L. McCall, ‘‘Coupon Settlements v. Resurgent Capital Services L.P., No. 07–251 (N.D. which they are received, as it already does with Play a Continuing Role in Class Litigation After Ind. Oct. 21, 2008) ECF 47 (‘‘for all members of this debit card purchases and ATM withdrawals.’’). CAFA,’’ ABA Section of Litigation (2012), available class with a known address in Wisconsin, whose 559 Relatedly, as is noted below in this part, the at http://www.americanbar.org/content/dam/aba/ debt is time barred, Defendants will cease all efforts Overdraft MDL cases provide substantially more administrative/litigation/materials/sac2013/sac_ to collect the debt and not sell the debt’’) (cited at relief in perpetuity, to future customers not part of 2013/46_buy_this_all_natural.authcheckdam.pdf. 81 FR 32830, 32932 (May 24, 2016)). the class, than they did in cash settlements. 564 81 FR 32830, 32847 (May 24, 2016).

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consumers who receive this relief, and the Bureau considers the prevalence of outcome is available at the election of not the proportion of putative class these outcomes and the cost of the parties and generally not subject to cases that result in other outcomes. The defending these cases further below in approval by the court. Therefore, the fact that many cases filed as putative discussing whether the proposed rule is Bureau does not agree that there is a class cases do not result in class relief for the benefit of consumers and in the valid basis to draw inferences about the does not change the significance of that public interest (and in its Section quality of the claims alleged in these relief in the cases that do provide it. 1022(b)(2) Analysis below in Part VIII as cases based solely on how the parties Moreover, when a named plaintiff well), it does not believe these outcomes chose, as a voluntary matter, to resolve agrees in a putative class action to an detract from the Bureau’s finding that them. individual settlement, by rule it occurs class actions provide an effective means In addition, the Bureau finds that before certification of a class, and thus of providing consumer relief. individual settlements in putative class does not prevent other consumers from Many of the commenters also cases, when they occur, typically occur resolving similar claims in court or suggested that the high proportion of relatively early in the class action arbitration, including by filing their own putative class cases that resulted in process. The Study’s data on time to class actions. Beyond the named individual settlements or potential resolution of putative class cases plaintiff, an individual settlement of a individual settlements (around 60 suggested that defense costs are likely class case does not bind other percent) demonstrates that the much lower for putative class cases that consumers or affect their right to pursue underlying claims were not meritorious. result in individual settlement than for their claims; in this sense they are no Even if that were true, it still would not a putative class case that reaches worse off than if the individually settled suggest that the class action mechanism classwide settlement. The Study case had never been filed at all. as a whole is ineffective as a means of obtained information on the amount of Accordingly, the Bureau believes it redressing harm to consumers for the time to resolution for the cases it more appropriate to evaluate class reasons discussed above. But the Bureau analyzed and the Bureau expects that a actions based on the number of also notes that there is no way to know company’s defense costs likely increase consumers who obtain relief and the with certainty whether the putative as the time to resolution of the case magnitude of relief that these cases class cases settled on an individual increases. This data showed that the collectively (including the many that do basis had merit or involved potentially median number of days to close for a result in class settlements) deliver to classable claims; the commenters did case filed as a class case but that consumers.565 Thus, even if, as one not provide evidence to support their resulted in a known individual commenter noted, the likelihood that assertions that those cases are, on the settlement was 193 days; for such a case any case filed as a putative class action whole, meritless. Settlement between that resulted in a potential individual results in actual cash relief to a parties to a lawsuit is an everyday settlement, the median days to close consumer is low, the amount ultimately occurrence. Parties may choose to settle was 130 days.567 In contrast, the median provided in those cases that do is large a putative class case on an individual number of days to close when a case enough to compel a finding that class basis for any number of reasons, such as was settled on a classwide basis was 670 actions provide significant relief to because the defendant threatened to days.568 In other words, cases filed as consumers. move the case to arbitration or offered class actions that settled on a classwide The Bureau acknowledges that when the named plaintiff full relief on his or basis typically closed more than a year her individual claim, which a company a case is filed as a putative class action after similar cases that resulted in an may do in litigation in an effort to avoid and settled individually, the defendant individual settlement or a potential defense costs or to avoid providing may incur higher defense costs than if individual settlement. These cases broader relief to other affected the case had been filed individually. settled on an individual basis therefore consumers. Indeed, there are numerous Further, while the purpose of the class involved less litigation and thus likely factors that go into any defendant’s rule is to preserve the ability for there lower defense costs. The relevance of decision to settle, including the legal to be class mechanisms to compensate these findings is discussed further framework of the claims asserted, the consumers when they are harmed, the below in Part VI.C.2 in the discussion of facts underlying the allegations, and the prospect of which deters companies whether the class rule is in the public costs of defense. When a consumer files from further harming consumers as interest. an action in court alleging the Merits of Claims Resolved by Class discussed in more detail below in Part consumer’s individual claims affect a VI.C.1, the Bureau agrees that the Actions. With respect to commenters class of other consumers, the rules of that contend that class action putative class cases that do not end in civil procedure generally allow that class settlement may not themselves settlements do not benefit consumers consumer to conclude the action by because they often occur in cases where further this purpose. Nevertheless, it resolving their individual claims before the defendant may have agreed to settle would not be possible for a rule to allow a court certifies the case is a class the case but did not actually violate the the filing of only such cases that would action. Sometimes, a consumer who has law or where the claims were frivolous, ultimately end in class settlement or filed a putative class action may be the Bureau does not dispute that there favorable judgments for consumers unwilling to pursue that case if the is some pressure to settle contested because the purpose of litigation is to company decides to make the consumer matters of all kinds, whether individual sort such outcomes. Accordingly, while whole, while in other cases, the law may not have allowed the class claims 565 Stakeholders similarly asserted that class 2013) (citing precedent in six Federal appellate to proceed if the company offered full circuits under which offers of complete relief were actions were ineffective because the fact most are 566 resolved on an individual basis indicates that they relief to the named plaintiffs. This held to moot a class action). The Supreme Court were unlikely to result in class certification. The recently held, however, that an unaccepted Bureau is not aware of evidence to support this 566 During the period covered by the Study which settlement offer to the named plaintiff does not assertion. Cases settle on an individual basis for a analyzed cases filed in the years 2010 through 2012, render a class action moot. Campbell-Ewald Co. v. variety of reasons and, as noted, whether and why a majority of Federal circuits had held that an offer Gomez, 136 S. Ct. 663, 670 (Jan. 20, 2016) Study, they are resolved does not alter the value of of judgment to the named plaintiff renders a class supra note 3, section 6 at 46 tbl. 7. aggregate relief awarded in cases that settle on a action moot. Diaz v. First American Home Buyers 567 Id. classwide basis. Protection Corp., 732 F.3d 948, 953 n.5 (9th Cir. 568 Id.

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suits or class actions, to avoid defense that, not infrequently, settlements With respect to commenters that costs or the risk of a judgment. follow a decision by a court rejecting a hypothesized that defendants could Nevertheless, the Bureau does not agree dispositive motion (e.g., a motion to nevertheless agree to enter into a class that the existence of this pressure means dismiss) filed by the defendants. Such action settlement after winning a that a settlement has no correlation with motions provide some evidence as to dispositive motion, the Bureau notes merit or violations of the law. To the the merit of the legal theories that these commenters cited no contrary, a defendant’s assessment of underlying the complaint and, in the examples, and this did not happen in the merits of the plaintiff’s claim— case of summary judgment motions, of the class action filings analyzed in the specifically, the plaintiff’s likelihood of the factual allegations as well. In Study.575 Regardless, if a defendant succeeding at trial—is a key factor particular, court decisions granting such settles on a classwide basis after influencing a defendant’s decision to motions would suggest that the claims winning a motion to dismiss, the Bureau settle.569 The central role that the merits lack merit. Yet the data show that courts believes that the settlement amount is of a plaintiff’s claim plays in this grant dispositive motions relatively likely to be lower than it would have framework is reflected in the fact that it infrequently, indicating that they rarely been if the defendant had lost the is among the primary factors courts find that these cases are devoid of legal motion to dismiss.576 This is because assess when reviewing proposed class merit as pled.571 among the factors a court considers in settlements.570 The Study analyzed these data in two reviewing a settlement is likelihood of Further, the Study showed that different case sets: Class action filings in success on the merits, and if the court certification in a class case almost State and Federal courts in six has already found a claim to lack merit, invariably occurs coincident with a consumer finance markets, and cases that will naturally affect its view of the settlement, and thus that certification is with Federal class action settlements likelihood of success of such a claim on not typically the force that drives across consumer finance markets more appeal.577 settlement. The Study further found generally. Among class action filings in Given the mechanisms within the the six markets, the Study found that litigation process for testing the relative 569 Key factors affecting the expected cost of companies filed dispositive motions in merit of allegations short of trial, the litigation, and thus a defendant’s settlement 37.9 percent of the 562 cases analyzed, Bureau does not agree with commenters amount, include the exposure to the class, the plaintiff’s likelihood of success at trial (a reasonable and that courts granted such a that suggested that the dearth of trials in proxy for the merits of the plaintiff’s claim), and the dispositive motion and dismissed at class action cases suggests that the merit defendant’s litigation costs. E.g., Richard A. Posner, least one company party entirely from of these cases go untested.578 As ‘‘An Economic Approach to Legal Procedure and the case in only 10 percent of the same discussed, short of verdicts, courts have Judicial Administration,’’ 2 J. Legal Stud. 399, at 572 418 (1973); Jennifer K. Robbennolt, ‘‘Litigation and cases. Among Federal class action and use mechanisms to test the merit of Settlement, in The Oxford Handbook of Behavioral settlements analyzed in the Study, 40.3 and dispose of claims that cannot Economics and the Law,’’ at 623 (Eyal Zamir and percent were approved by courts only succeed as pled. Courts dismiss claims Doron Teichman, eds. 2014). after a defendant filed dispositive that fail to state a plausible claim for 570 E.g., 7A Charles Alan Wright & Arthur R. motions and the court denied at least 579 Miller, ‘‘Federal Practice and Procedure: Civil relief and can sanction attorneys that 573 § 1797.1’’ at 82–88 (3d ed. 2002) (identifying factors one such motion. In short, in both for district court’s determination of the fairness of case sets, the Bureau found that 575 See id. at appendix O. proposed relief for a class settlement, including companies regularly sought to challenge 576 See J. Maria Glover, The Federal Rules of Civil ‘‘the likelihood of the class being successful in the the legal or factual basis for claims Settlement, 87 N.Y.U. L. Rev. 1713, at 1730–31 litigation’’ and ‘‘the amount proposed as compared (2012) (‘‘In general, access to discovery is granted to the amount that might be recovered, less asserted in the litigation, and that courts without limitation once a motion to dismiss is litigation costs, if the action went forward’’); infrequently granted these challenges. denied, enabling claimants to impose significant, Federal Judicial Center, ‘‘Manual for Complex The Bureau does not believe that the asymmetric production costs on the opposing party. Litigation,’’ at § 21.62 (4th ed. 2004) (listing ‘‘the Study’s finding that few class cases . . . Accordingly, a claimant will obtain a ‘motion advantages of the proposed settlement versus the to dismiss premium’ in proportion to any temporal probable outcome of a trial on the merits’’ as a conclude with a court granting a or absolute asymmetrical cost imposition in the factor that may bear on review of a settlement). See defendant’s dispositive motions or a discovery stage.’’). also in re Citigroup Inc. Sec. Litig., 965 F. Supp. 2d trial verdict in favor of the plaintiff is 577 See, e.g., Shane Group, Inc. v. Blue Cross Blue 369, 383 (S.D.N.Y. 2013) (noting that securities Shield of Michigan, 825 F.3d 299, 309 (6th Cir. settlement was relatively low due to ‘‘the risk that consistent with a lack of merit in the underlying allegations.574 2016) (‘‘[T]he district court must specifically the plaintiffs might not prevail was significant’’); examine what the unnamed class members would Reynolds v. Beneficial Nat’l Bank, 288 F.3d 277, give up in the proposed settlement, and then 285 (7th Cir. 2002) (Posner, J.) (reversing order 571 The Bureau acknowledges, as some explain why—given their likelihood of success on approving settlement agreement where the ‘‘judge commenters suggested, that survival of a dispositive the merits—the tradeoff embodied in the settlement made no effort to translate his intuitions about the motion is not always indicative of the merits of the is fair to unnamed members of the class.’’); In the strength of the plaintiffs’ case, the range of possible underlying claim, given that courts typically take Matter of Synthroid Marketing Litigation, 264 F.3d damages, and the likely duration of the litigation if allegations as true (in reviewing a motion to 712, 716 (7th Cir. 2001) (determining that a it was not settled now into numbers that would dismiss) or most favorably to the non-movant (in settlement ‘‘is generous in light of the difficulties permit a responsible evaluation of the reviewing a summary judgment motion). facing the class’’ in proving their case on the reasonableness of the settlement’’); Schneider v. Nevertheless, if most class actions truly were merits); TBK Partners, Ltd. v. Western Union Corp., Citicorp Mortgage, Inc., 324 F. Supp. 2d 372, 376 devoid of any merit as many commenters suggested 675 F.2d 456, 464 (2d Cir. 1982) (‘‘[I]n light of the (E.D.N.Y. 2004) (‘‘[W]hen considering whether to they are, the Bureau would have expected approve a proposed class action settlement, ‘the substantial risks inherent in further litigation and defendants to succeed more often in defeating such most important factor is the strength of the case for the limited potential amount of a possible claims before entering into a settlement. successful recovery, we find no reason to overturn plaintiffs on the merits, balanced against the 572 amount offered in settlement.’’’), citing City of Study, supra note 3, section 6 at 38 n.68. the District Court’s evaluation of the settlement as Detroit v. Grinnell Corp., 495 F.2d 448, 455 (2d Cir. 573 Id. section 8 at 38–39. manifestly reasonable.’’). 1974); In re Microsoft Corp. Antitrust Litig., 185 F. 574 While trial verdicts in consumer financial 578 The Bureau notes that one consumer lawyer Supp. 2d 519, 526–27 (D. Md. 2002) (denying class action cases are rare, they do occur. A bench commenter stated that he had been involved in approval of proposed class settlement in part trial in Gutierrez v. Wells Fargo Bank, N.A., led to multiple class actions that reached a verdict in because record was not ‘‘sufficiently developed on a judgment on the merits in favor of the plaintiff favor of the class. various damages issues’’ or the probability of class. 730 F. Supp. 2d 1080, 1082 (N.D. Cal. 2010). 579 Fed. R. Civ. P. 12(b)(6). See also Bell Atlantic plaintiff’s success at trial); Lachance v. Harrington, This case was not included in the Study’s analysis Corp. v. Twombly, 550 U.S. 544 (2007), and 965 F. Supp. 630 (E.D. Pa. 1997) (approving of consumer financial litigation in court because it Ashcroft v. Iqbal, 556 U.S. 662 (2009) (both proposed class settlement where parties adequately was filed in 2007 and the Study analyzed cases elaborating on the requirement that a complaint estimated outcomes and risks of trial as well as filed from 2010 through 2012. Study, supra note 3, must dismissed if it does not state a claim upon value of settlement to proposed class members). section 6. which relief can be granted).

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file frivolous claims without evidentiary these consumers relative to a system particular, consumers’ ability to pursue support for the allegations.580 In which proceeds faster but only handles relief on a classwide basis. Specifically, addition, Congress, through individual cases and thus provides the Bureau preliminarily found, based amendments to the Federal Rules of relief to few consumers. In an economic upon the Study, that arbitration Civil Procedure and enactment of sense, if a consumer receives $32 three agreements are frequently used by CAFA, has and continues to consider years from now, instead of immediately, providers of consumer financial further adjustments to class action the present value of the later income products and services, that the procedures.581 The Supreme Court has may be about $8 less (approximately agreements have the effect of blocking a also rendered a series of decisions $24), but it is more than zero.583 significant portion of class action claims making clear that Federal Rule 23 ‘‘does Similarly, the Bureau does not believe that are filed. Indeed, the Study found not set forth a mere pleading standard’’ that it is instructive to compare the nearly 100 putative class action cases and establishing a number of duration of an individual arbitration that were blocked by arbitration requirements to subject putative class proceeding to the duration of a class agreements.584 The Bureau further claims to close scrutiny.582 Thus as action case that ends in a settlement. preliminarily found that consumers noted above in Part II.B, the law expects Very few individuals pursue claims in rarely filed claims on an individual courts to act to limit frivolous litigation. individual arbitration, and those who do basis once a class action was blocked by Further, the Bureau understands that typically do so because they have a an arbitration agreement, citing to the class action attorneys will typically earn claim worth a significant amount of Study. The Bureau further cited to its nothing for the time invested in money. As commenters seem to agree, case study of opt-outs from settlements developing, filing, and litigating a class those claims are not the types of claims in the Preliminary Results of the Study case that is dismissed on a dispositive typically redressed in a class action. In further demonstrates that consumers motion. The Bureau believes this may addition, as one consumer advocate who opt of receiving cash relief in a serve as an incentive not to bring cases suggested, if all consumers harmed by a class settlement rarely take the that would be dismissed for lacking provider’s widespread practice actually opportunity to file a claim in arbitration. merit. did bring their claims individually, or if For instance, for the 46 class cases With respect to Tribal commenters even a significant portion of them did, identified in the Study in which a that asserted that frivolous class action the time and expense for consumers and motion to compel arbitration was settlements threaten Tribal treasuries, providers alike would likely far exceed granted, there was only an indication of the Bureau notes that Tribal what would occur if the claims could be 12 subsequent arbitration filings in the governments are generally immune from addressed in a single class action. court dockets or the AAA Case Data, private lawsuits and therefore that class With respect to one industry only two of which the Study determined actions should not affect their Tribal commenter’s argument that each class were filed as putative class coffers, as discussed in detail below in action lawsuit should be counted as one arbitrations.585 the section-by-section analysis of filing (despite covering claims of many The Bureau also preliminarily found § 1040.3(b)(2) in Part VII. Further, the consumers) and compared to single that the existence of arbitration Bureau clarifies in § 1040.3(b)(2) of this individual filings in either litigation or agreements suppresses the filing of class Final Rule that any Tribal government arbitration, the Bureau disagrees that action claims in the first place, citing in or an arm of such government that is that is the relevant comparison. Instead, support of this proposition a survey of immune from private suit is exempt the Bureau maintains that because there consumer lawyers who had declined to from the class rule. are thousands or even millions of file class cases concerning products Other Concerns Regarding Class consumers who benefit from class covered by an arbitration agreement.586 Actions. With respect to comments that action settlements, the relevant criticized the value to consumers of comparison when analyzing individual Comments Received class action settlements because they and class action suits is the number of Frequency of use of arbitration proceed slowly and it takes a long time consumers who ultimately benefit from agreements to block class actions. for consumers to obtain relief, the the suit, rather than the number of Several industry commenters disagreed Bureau recognizes that class actions can consumers who file the suit. that arbitration agreements are proceed slowly. As discussed above in For these reasons, the Bureau finds frequently used to block class actions. this Part VI.B.3 with respect to the that the class action mechanism is a One such commenter noted that in the monetary relief provided by class more effective means of providing relief 562 Federal class actions analyzed by actions, however, the Bureau believes for violations of law or contract affecting the Study, companies filed motions to that most consumers who obtain relief groups of consumers than other compel in only 17 percent of the cases in class actions likely would not have mechanisms available to consumers, and those motions were successful in pursued relief through other individual such as individual formal adjudication only 8 percent of the 562 cases. litigation or arbitration. For this reason, (either in court or arbitration) or Accordingly, this commenter suggested the Bureau finds that the relief provided informal efforts to resolve disputes. that arbitration agreements were not to these consumers through class 4. Arbitration Agreements Block Some widely used to block class actions and actions, even if slow to arrive, benefits Class Action Claims and Suppress the that few class actions were actually Filing of Others blocked. The same industry commenter 580 Fed. R. Civ. P. 11. noted that the Study showed that 581 See, e.g., Class Action Fairness Act (CAFA), In the proposal, the Bureau made a arbitration agreements were used rarely Public Law 109–2, 119 Stat 4 (2005); Fairness in number of preliminary findings Class Action Litigation Act, H.R. 985, 115th Cong. regarding the impact that arbitration (2017); Fairness in Class Action Litigation and 584 Study, supra note 3, section 6 at 7. Furthering Asbestos Claim Transparency Act of agreements have on consumers and, in 585 See id. section 6 at 57–58. 2016, H.R. 1927, 114th Cong. (2016); State of Class 586 See Nat’l Ass’n of Consumer Advocates, Actions Ten Years After the Enactment of the Class 583 For example, assuming a 10 percent discount ‘‘Consumer Attorneys Report: Arbitration clauses Action Fairness Act, Hearing before the H. Comm. rate, net present value of $32 drops to $24 in three are everywhere, consequently causing consumer on the Judiciary, 113th Cong. 114–10 (2015); years. By contrast, the value of a company’s claims to disappear,’’ at 5 (2012), available at http:// 582 See, e.g., Wal-Mart Stores, Inc. v. Dukes, 564 agreement to change its behavior does not diminish www.consumeradvocates.org/sites/default/files/ U.S. 338, 350 (2011). over time and may increase. NACA2012BMASurveyFinalRedacted.pdf.

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to block individual cases—motions to accounts.587 In the view of these of cases not filed. Other consumer compel arbitration were filed in only 1 Congressional commenters, the bank’s lawyer and law firm commenters percent of the 1,200 individual Federal use of arbitration agreements to block disagreed, asserting that the survey was cases analyzed. This commenter those lawsuits allowed the bank to accurate and, as noted above, in disputed the Bureau’s assertion that continue its illegal practices for accordance with their own experiences. there were ‘‘large’’ numbers of significantly longer than it would have Specifically, consumer lawyers and law individuals in the putative classes that been able to had the lawsuits been firms stated in their comments examples were compelled to arbitration on the allowed to proceed in court when they from their own experiences of not basis of arbitration agreements because were filed. One public-interest bringing cases due to the existence of an there was no way to know class size if consumer lawyer commenter noted arbitration agreement that a defendant the case was not certified before the several instances in which companies could use to block the case from motion to compel was granted. have said informally to him that they proceeding. For example, one consumer On the other hand, consumer maintained arbitration agreements in lawyer explained how, after a case advocates, public-interest consumer order to block class actions. where it was apparent that his fee lawyers, consumer lawyers and law Pursuit of individual claims after would take a large portion of his client’s firms, and several nonprofits asserted class actions blocked. Some industry potential recovery, he concluded that it that arbitration clauses frequently block commenters further challenged the was economically impossible for him to and chill the filing of class action cases. Bureau’s preliminary finding that continue to handle such individual In many instances, commenters consumers rarely pursued a claim on an cases and thus decided to no longer take proffered examples from their personal individual basis after a putative class them at all. experiences. For example, one claim was dismissed or stayed on the Response to Comments and Findings consumer law firm commenter provided basis of an arbitration agreement. For two examples of class actions that could example, one industry commenter Frequency of use of arbitration not proceed due to the existence of an challenged findings in a case study agreements to block class actions. As arbitration agreement—one case was presented in the Bureau’s Preliminary noted above in Part III.D.1, the Study voluntarily dismissed (and thus would Results indicating that only three of the showed that arbitration agreements are not be counted in the Bureau’s Study) 3,605 individuals who opted out of class widespread in consumer financial and one in which arbitration was action settlements analyzed (comprising markets and hundreds of millions of compelled upon appeal. Another stated approximately 13 million consumers) consumers use consumer financial that he had turned away over 100 cases filed individual claims in AAA products or services that are subject to involving arbitration agreements. A arbitration. The commenter contended arbitration agreements. Arbitration different consumer lawyer contrasted that the Bureau’s data is too limited to agreements give companies that offer or her experience with a series of support its conclusion because the provide consumer financial products automobile finance class actions consumers who opted out could have and services the contractual right to involving what she characterized as filed individual claims with JAMS or in block the filing of class actions in both plainly unlawful behavior; the court, but the Bureau had data only court and arbitration. When a plaintiff commenter noted three cases that concerning AAA arbitrations. files a class action in court regarding a defendants had successfully blocked by Several consumer advocates, claim that is subject to an arbitration invoking an arbitration agreement and nonprofits, and consumer law firms and agreement, a defendant can seek a contrasted those to others in which she lawyers agreed with the Bureau’s dismissal or stay of the litigation in had successfully recovered damages for finding. Specifically, one consumer favor of arbitration.588 If the court grants a class where there was no arbitration lawyer stated that in his experience such a dismissal or stay in favor of agreement. Another consumer law firm individual claims are never filed when arbitration, the class case could commenter stated that it had turned class claims are stayed or dismissed. potentially be refiled as a class away 27 cases in the prior year because Two public-interest consumer lawyer arbitration.589 However, the Study it lacked the resources to try each of commenters explained that, in most showed that, depending on the market, these cases individually, although it cases, only the named plaintiff even between 85 to 100 percent of the would have had the resources and an knows that a claim exists, and even that contracts with arbitration agreements interest in pursuing them as class individual might not have an incentive the Bureau reviewed expressly actions if there had not been arbitration to pursue the claim in arbitration if precluded an arbitration proceeding on agreements prohibiting class there is no promise of benefitting others a class basis.590 The Study did not proceedings. Several public-interest who are similarly situated given the identify any contracts with arbitration consumer lawyer commenters said that relative size of the claim and the costs agreements that explicitly permitted one of the first questions they ask is of pursuing it further. class arbitration, nor did any whether consumers have disputes that Suppression of claims. With respect commenters indicate that such may be governed by arbitration to the Bureau’s preliminary finding that agreements exist. The combined effect agreements and, if so, that they turn arbitration agreements suppress the of these provisions is to enable down those clients. filing of class claims, several industry companies that adopt arbitration A group of Congressional commenters commenters stated that the survey of agreements effectively to bar all class cited the example of a large bank whose consumer lawyers on which the Bureau proceedings, whether in litigation or employees opened millions of relied to support this conclusion is arbitration, to which the agreement unauthorized accounts in the names of flawed because it did not examine the bank’s existing customers over a whether a case turned down by one 588 See Concepcion, 563 U.S. 333 (2011). period of years. The bank successfully attorney was later filed by another nor 589 In class arbitration, a class representative brings an arbitration on behalf of many individual, used arbitration agreements in its does it purport to show the total number agreements with customers for the similarly-situated plaintiffs. The Study identified only two class arbitrations filed before the AAA authorized accounts to block lawsuits 587 E.g., Douglas v. Wells Fargo, BC521016 (Ca. from 2010 to 2012. Study, supra note 3, section 5 by customer’s asserting violations of the Super. Ct. 2013); Jabbari v. Wells Fargo, (N.D. Cal. at 86–87. law with respect to the unauthorized 2015). 590 Id. section 2 at 44–46.

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applies. No commenters disagreed with Thus, over a period of approximately years after the class action was first any of the Bureau’s findings in this five years, nearly 100 Federal and State filed.597 regard. putative consumer class actions were Moreover, while the Bureau was As set out above in Part II.C, the dismissed or stayed because companies unable to determine in what percentage public filings of some companies invoked arbitration agreements in of all class action cases analyzed confirmed that the effect—indeed, often motions to compel arbitration.595 While defendants had arbitration agreements the purpose—of arbitration agreements it is true, as one industry commenter and were in a position to invoke an is to allow companies to shield noted, that every putative class case arbitration agreement, in a sample of themselves from class liability.591 class action cases against credit card blocked by an arbitration agreement Further, companies have stated both to companies known to have arbitration might not have been certified or the Bureau and in public news reports agreements, motions to compel after the proposal was released, that ultimately provided relief to any arbitration were filed 65 percent of the they adopted arbitration agreements for consumers, it is reasonable to expect time and, when filed, they were the primary purpose of blocking private that at least some of those 100 cases successful 61.5 percent of the time.598 class action filings.592 Commenters did would have done so. Because one This is strong evidence that companies not dispute this. Indeed, many industry settled class action case can provide that do include arbitration agreements commenters stated that the class action relief to many consumers, the Bureau in their consumer contracts are very waiver is integral to their offering of finds that arbitration agreements likely to use them to block class actions individual arbitration; they asserted that blocking nearly 100 putative class cases filed against the company. As noted, the the cost of arbitrating individual claims indicates that use of arbitration experiences of many public-interest is too great to bear when they must also agreements affects large numbers of consumer lawyer and consumer lawyer defend class action litigation. (This consumers. and law firm commenters buttress this argument is addressed below in Part As just one example, the Bureau notes finding, as does the evidence with VI.C.1.) respect to companies’ articulated that in the matter discussed above in The Study showed that defendants reasons for including arbitration Part VI.B.3 involving a large bank that were not reluctant to invoke arbitration agreements in their consumer finance agreements to block putative class opened unauthorized accounts on contracts. actions and were successful in many behalf of millions of customers in The Study further indicated that cases.593 With respect to industry violation of the law, that bank relied on companies were at least 10 times more comments that suggested that arbitration arbitration agreements in its contracts likely to move to compel arbitration in agreements were not widely used to with customers for the authorized a case filed as a class action than in a block class actions because companies accounts to block many of those non-class case.599 Put another way, filed motions to compel arbitration in customers from pursuing classwide companies used arbitration agreements only 16.7 percent of the class cases relief in court with respect to the far more frequently to block class analyzed in the Study, the 16.7 percent unauthorized accounts. Plaintiffs filed actions than to move individual court figure is correct but reflects only one of two putative class action lawsuits in cases to arbitration. While some two data sources in the Study on 2015 against the bank for opening industry commenters disputed the motions to compel arbitration. The unauthorized accounts, and both relevance of this comparison because Study cited 92 cases out of 562 putative lawsuits were later dismissed in they contended the overall frequency of class cases analyzed in Section 6 of the response to the bank’s motions pursuant class actions blocked by arbitration Study in which motions to compel to its arbitration agreements.596 Because agreements is low, the Bureau finds that arbitration were filed (16.7 percent) and those lawsuits were blocked, those this data showed that most companies in 46 of those cases, the motions were consumers were not able to pursue relief are more concerned with stopping granted and the case was dismissed or putative class actions from proceeding in court for the bank’s violations of the stayed. The Study also found an than they are with determining in what additional 50 putative class cases that law. The parties in the latter case later forum (court or arbitration) individual were filed outside of the period agreed voluntarily to withdraw an disputes are resolved. Indeed, this data analyzed in the Bureau’s review of appeal of the arbitration dismissal and confirmed the direct evidence that the filings in court and were dismissed on have recently come to agreement on a primary reason many companies the basis of an arbitration agreement.594 proposed class settlement, nearly two include arbitration agreements in their contracts is to discourage the filing of 591 See Discover Financial (Form 10–K), supra more than the initial six markets studied) and were class actions and block those that are note 95. dismissed pursuant to a motion to compel filed. While some industry and research 592 arbitration that cited the Concepcion case. Id. See SBREFA Report, supra note 419, at 16–17; center commenters have touted the see also James Rufus Koren, ‘‘Agency Targets Ban section 6 at 58–59. on Class Actions,’’ L.A. Times (May 5, 2016) 595 In any event, if the commenters that argued benefits of arbitration as a forum of (‘‘ ‘What made arbitration clauses attractive was that arbitration agreements are not actually used to individual dispute resolution because it their impact on class-action litigation,’ [financial block class actions were correct, then it seems is, for example, quicker and simpler services attorney Alan Kaplinsky] said. ‘Most banks unlikely that industry commenters would so than litigation, as discussed below in and companies using it now will conclude it’s no uniformly oppose the likely result of this rule— longer worth it.’ ’’); Kate Berry, ‘‘CFPB’s Arbitration additional class actions filed against providers that Part VI.C.1, for many providers, those Plan Delivers Sharp Blow to Financial Industry,’’ will result in settlements. American Banker (May 5, 2016) (‘‘For 30 years, 596 Jabbari v. Wells Fargo, (N.D. Cal. 2015); 597 Motion and Memorandum in Support of financial institutions have used arbitration Heffelfinger v. Wells Fargo., (N.D. Cal. 2015). Motion for Preliminary Approval of Class Action agreements with so-called class-action waivers to Individuals filed at least two lawsuits in California Settlement and for Certification of a Settlement effectively prevent consumers from banding State court in 2013 against the bank for opening Class, Jabbari v. Well Fargo & Co. et al., No. 15– together in class actions to pursue similar claims. unauthorized accounts, and both lawsuits were 2159 (N.D. Cal. Apr. 20, 2017) ECF No. 111. See ‘Under the CFPB’s proposal, that shield would no dismissed or stayed on the basis of arbitration also Part VI.B.3 above (discussing this proposed longer be available,’ said Walter Zalenski, a partner agreements; one ultimately settled and the other class action settlement) and Part VI.B.2 (discussing at the law firm BuckleySandler.’’). was withdrawn, indicating a possible non-class the Bureau’s enforcement action concerning the 593 Study, supra note 3, section 6 at 57. settlement. Douglas v. Wells Fargo, BC521016 (Ca. same conduct). 594 These putative class cases pertained to Super. Ct. 2013); Mokhtari v. Wells Fargo, 598 Study, supra note 3, section 6 at 61. consumer financial products or services (including BC530202, (CA. Super Ct. 2013). 599 Id. section 6 at 57–58.

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benefits seem ancillary to their ability to class cases that never even go through The Bureau admittedly cannot limit class actions. Indeed, many certification and opt-out processes quantify this effect because there are no industry commenters stated that they would be more likely to refile in records of cases that were never filed in would no longer include arbitration arbitration. Indeed, as two consumer the first instance. Nevertheless, agreements in their consumer contracts law firm commenters noted, most stakeholders that surveyed attorneys if the class rule were finalized, members of putative classes do not even found that respondents reported indicating that the primary purpose of know they have a potential claim. With frequently turning away cases—both those arbitration agreements is in fact to respect to the industry commenter that individual and class—when arbitration block class actions. criticized this data as too limited agreements were present.605 The Pursuit of individual claims after because the Bureau searched only for consumer lawyer and law firm class actions blocked. The Bureau arbitrations filed before AAA and did commenters that provided details on further finds that when courts grant a not search for whether those consumers their personal experiences with cases motion to dismiss class claims based on who opted out filed in a JAMS they declined to pursue support these arbitration agreements, most consumers arbitration or in a case filed in court, as surveys. While industry commenters who would have constituted the noted in the proposal, the Bureau criticized that data as anecdotal and not putative class are unlikely to pursue the obtained data from JAMS—not disputed taking into account whether a case claims on an individual basis in any by any commenter—indicating that the rejected by one attorney was taken up forum and are even less likely to pursue number of consumer arbitrations filed in by another, these commenters produced them in class arbitration. For instance, that forum in 2015 was 115 or no evidence, anecdotal or otherwise, to for the 46 class cases identified in the approximately one-quarter the number suggest that the existence of an Study in which a motion to compel filed with AAA.604 Thus, even if every arbitration agreement does not have a arbitration was granted, there was only single arbitration filed with JAMS bearing on whether an attorney would an indication of 12 subsequent involved a consumer that opted out of pursue a class claim against a company. individual arbitration filings in the a class action, that number would be For all of these reasons, the Bureau court dockets or AAA case data, only small in comparison to the number of finds that arbitration agreements block two of which the Study determined consumers for consumer financial class actions and suppress the filing of were filed as putative class products and services. With respect to others. arbitrations.600 More broadly, the the commenter’s argument that cases 5. Public Enforcement Is Not a overall volume of AAA consumer-filed may have been re-filed in court, the Sufficient Means To Enforce Consumer claims—just over 400 individual cases Study found that individuals file very Protection Laws and Consumer Finance per year—suggests that individual few cases in Federal court in Contracts arbitration is not the destination for any comparison to the size of the consumer significant number of putative class In the proposal, the Bureau financial marketplace, as discussed in preliminarily concluded, based upon members. detail above in Part VI.B.2. The Bureau’s case study of opt-outs the results of the Study and its own Suppression of claims. In addition to from settlements in the Preliminary experience and expertise, that public blocking class actions that are actually Results of the Study further enforcement is not itself a sufficient filed, the Bureau finds that arbitration demonstrated this.601 It reviewed means to enforce consumer protection agreements inhibit putative class action Federal and State class action laws and consumer finance contracts. claims from being filed at all for several settlements that involved 13 million This conclusion was based upon several reasons. Numerous public-interest class members eligible for $350 million findings: Consumer protection statutes consumer lawyers and consumer lawyer in relief from defendants that used explicitly provide for both public and and law firm commenters indicated arbitration agreements in their private enforcement; the market for that—based on their own experiences— consumer contracts, all naming AAA as consumer financial products and they did not file class actions when they the arbitration administrator. In these services is enormous and public knew that a class claim might be settlements, 3,605 of the 13 million enforcement resources are limited; the blocked by an arbitration agreement. class members chose to opt out of Study results supported a conclusion These commenters explained that receiving cash relief.602 Nevertheless, plaintiffs and their attorneys frequently 605 just three out of these 3,605 individuals In response to the Bureau’s Request for choose not to file such claims because Information in connection with the Study, one trade appear to have taken the opportunity to arbitration agreements substantially association of consumer lawyers submitted a 2012 file arbitrations in AAA against the lower the possibility of classwide relief. survey conducted of 350 consumer attorneys. See same settling defendants.603 Although Nat’l Ass’n of Consumer Advocates, ‘‘Consumer Given this evidence and the fact that the case study is a limited sample, the Attorneys Report: Arbitration clauses are attorneys incur costs in preparing and everywhere, consequently causing consumer claims Bureau has little reason to believe (nor litigating a case under a contingency to disappear,’’ at 5 (2012), available at http:// have commenters put forth evidence to www.consumeradvocates.org/sites/default/files/ pricing structure, attorneys decline to the contrary) that consumers in putative NACA2012BMASurveyFinalRedacted.pdf. Over 80 take such cases at all if they calculate percent of those attorneys reported turning down at least one case they believed to be meritorious 600 Id. section 6 at 59. The record reflects that the that they will incur costs with little chance of recouping them. Not because the presence of an arbitration agreement arbitrator denied class status to one of the would make filing the case futile and of those, the arbitrations filed on a class basis; the Bureau does surprisingly, when a consumer or an median number of cases each attorney turned away not have information on the second arbitration. attorney considers whether to file a was 10. Id. The NACA survey indicates that 601 See Preliminary Results, supra note 150, at class action, the existence of an consumer attorneys believe that the presence of 86–87. arbitration agreement that, if invoked, arbitration agreements often inhibit them from 602 See id. at 104. filing complaints, including class actions, on behalf 603 As the Preliminary Results make clear, at most would effectively eliminate the of consumers. The Bureau notes that this survey has three out of 3,605 individuals filed claims before possibility for a successful class claim methodological limits. The survey does not purport the AAA against the same defendants. It is not clear likely discourages many of these suits to indicate the total number of cases turned away from the records provided to the Bureau whether from being filed at all. in aggregate. And the survey does not examine these three consumers pressed the same claims in whether a case that was turned down by a single arbitration that formed the basis of the class attorney was subsequently filed by another settlement. Id. at 104 n.225. 604 81 FR 32830, 32856 (May 24, 2016). attorney.

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that private class actions complement industry commenter reported that eliminate altogether the Bureau’s public enforcement; and there are some Bureau enforcement actions provided enforcement powers. claims concerning consumer financial $440 on average in relief per consumer Class actions complement public products and services for which there is to more than 25 million consumers. enforcement. With respect to the no public enforcement. This commenter contended that the Bureau’s preliminary finding that the threat of public enforcement creates Study showed that private class actions Comments Received sufficient deterrence to ensure that are a necessary companion to public Statutes provide for class actions. Few companies will comply with the enforcement of consumer finance commenters disagreed with the Bureau’s relevant laws. Indeed, another industry injuries, several industry commenters preliminary findings that consumer commenter cited a survey showing that disagreed. One commenter asserted that protection statutes explicitly provide for 86 percent of companies surveyed have the Study’s finding that public both public and private enforcement increased their compliance spending enforcement cases overlap with private and that when Congress and State since 2010, when the Bureau was class actions in 32 percent of the cases legislatures authorized private created.607 One industry commenter analyzed represents a significant enforcement, that generally includes stated that public enforcement actions amount of duplication. An industry private class actions.606 Indeed, are preferable to private enforcement commenter then suggested that overlap consumer advocate and nonprofit (i.e., class actions) because private class would increase because it expected the commenters emphasized the consumer action attorneys are motivated to bring number of Bureau enforcement actions protection role of specific statutes as a cases for their own financial self-interest to rise. Another industry commenter reason not to allow arbitration and care little about curtailing harmful disagreed with the relevance of the agreements to block class actions. A conduct or compensating injured Bureau’s preliminary finding that many research center commenter opined that consumers. At least one industry private class action settlements occur unfettered and meaningful access to the commenter asserted that the preliminary without a corresponding public courts has long played a critical role in findings were deficient because the enforcement action. Another industry the effective functioning of the United Study did not prove that public commenter stated that when a private States’ system of governance. A public- enforcement alone is insufficient to class action is filed without a interest consumer lawyer commenter enforce the consumer protection laws. corresponding government action, the highlighted the role of private litigation One trade association commenter class action could have been based on under fair housing laws as an example representing consumer reporting a news story or other public of where private litigation has provided agencies stated its belief that the Bureau information, and thus may not involve clear benefits to class members. This has sufficient resources to supervise and situations in which the plaintiff’s commenter also noted that public enforce consumer reporting agencies attorney independently discovered the regulatory bodies may also be because the Bureau supervises only 30 wrongdoing. In addition, the commenter geographically distant from sites of such companies pursuant to its larger noted that private class actions filed in harm and generally have access to less participant rule for that market. the absence of a public enforcement information about unlawful conduct as According to the commenter, the Bureau action could have been based on compared to private litigants. should have no resource constraints government investigations that Public enforcement resources are with respect to supervising those 30 uncovered wrongdoing but did not lead limited. With respect to the Bureau’s entities. to an enforcement action, perhaps assertion that public enforcement Consumer advocate commenters, on because the wrongdoing harmed only a resources are limited in comparison to the other hand, agreed with the Bureau’s few individuals or because there was no the size of the market for consumer preliminary findings regarding public wrongdoing at all. financial products and services, enforcement. Specifically, these Another industry commenter numerous industry commenters commenters referenced examples of criticized the Study’s finding that class disagreed. One such commenter noted strained public resources for consumer actions are often filed without a that the Bureau has broad enforcement protection. One public-interest corresponding public enforcement authority and has produced consumer lawyer commenter suggested action as simply wrong. The commenter approximately $11 billion in consumer that private enforcement of some claims suggested that most class actions are relief through the end of 2015, thus saves taxpayers money because such ‘‘copycats’’ of government enforcement demonstrating the extent of the Bureau’s activity allows public enforcement actions, citing law review articles resources to enforce the relevant laws. agencies to concentrate their resources supporting this theory.608 In addition, Another industry commenter stated that on cases that private claims cannot the commenter cited examples of settled Bureau enforcement actions typically reach or that are more appropriate cases class actions in which the FTC filed provide more relief to consumers than for public enforcement. One consumer amicus briefs requesting that fees for the relief provided from class actions. advocate noted that industry class counsel be reduced because the As compared to the approximately $32 commenters were inconsistent in settled case followed directly from an per person that consumers received arguing that the public enforcement by FTC investigation and enforcement from class actions in the Study, another the Bureau provides a sufficient action.609 deterrent given that these same 606 One industry commenter noted that Utah law commenters are asking Congress and 608 John H. Beisner et al., ‘‘Class Action ‘‘Cops’’: permits closed-end credit contracts to include class Public Servants or Private Entrepreneurs?,’’ 57 Stan. action waivers, which the Bureau discusses further others to substantially reduce or L. Rev. 1441, 1453 (2005); see also, e.g., Howard M. below in Part VI.C.2. Another nonprofit commenter Erichson, ‘‘Coattail Class Actions: Reflections on specifically asserted that Congress intended statutes 607 Aptean, ‘‘2015–2016 Aptean Consumer Microsoft, Tobacco, and the Mixing of Public and that provide for statutory damages, such as EFTA, Complaints Compass: A Survey of U.S. Financial Private Lawyering in Mass Litigation,’’ 34 U.C. to be enforced on an individual rather than a Service Executives Regarding CFPB Compliance,’’ Davis L. Rev. 1, 2 (2000). classwide basis, and suggested the rule should only (2016), available at http:// 609 Beisner et al, supra note 608, at 1453 (citing apply to laws that explicitly permit class actions. images.broadcast.aptean.com/Web/Aptean/ Brief of Amicus Curiae The Federal Trade As noted in the Bureau’s Section 1022(b)(2) percent7Bd0da75db-6649-4133-bc5a- Commission, In re First Databank Antitrust Litig., Analysis, however, EFTA does explicitly provide 4f189f65282bpercent7D_Respond_APT_CFPB_ 209 F. Supp. 2d 96, No. 01–00870, (D.D.C. 2002); for classwide damages. Survey_Fast_Facts_03-18-16.pdf. Continued

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Consumer advocates and public- enforcement is insufficient. A public- the Senate reasoned that the damages interest consumer lawyers disagreed. interest consumer lawyer commenter cap it imposed would balance the For example, one consumer advocate opined that public enforcement agencies objectives of providing adequate asserted that companies know that are unlikely to have the resources to deterrence while appropriately limiting public enforcers cannot police every uncover all instances of unlawful awards (because it viewed potential instance of financial fraud and that conduct and that these agencies can be TILA class damages as too high).612 Two companies therefore make compliance subject to political pressures and years later, when the 1976 TILA decisions accordingly. A separate limitations by the executive or amendments increased the cap to the nonprofit commenter stated that legislative branches of government.611 lesser of $500,000 or 1 percent of the legislatures designed laws to have both Academic commenters explained that, creditor’s net worth, the primary basis public and private enforcement; where in their view, the United States legal put forth for the increase was the need the latter is effectively blocked, the system depends in large part on private to adequately deter large creditors.613 laws’ intended effect cannot be enforcement of the laws. This comment No commenters disagreed with any of achieved. Another nonprofit commenter letter contrasted the American system these findings and several consumer contended that private class actions are with those of other countries that invest advocate commenters highlighted other, a necessary supplement to public more in public enforcement. They also similar examples from State law.614 enforcement in the areas of fair lending noted, and cited the Study, that Public enforcement resources are and equal credit and that this was the consumer class actions provide relief for limited. The market for consumer view of Congress in passing the nation’s injuries that are not the focus of public financial products and services is vast, fair lending laws. This commenter also enforcers. An individual consumer encompassing trillions of dollars of noted that individually, privately filed noted in her letter that class actions, assets and revenue and tens if not cases can spur subsequent public unlike increased public enforcement hundreds of thousands of companies. enforcement actions. budgets, do not increase government As discussed further in the Section A group of State attorneys general bureaucracy. Relatedly, another 1022(b)(2) Analysis in Part VIII, this rule charged with enforcing the laws in their individual consumer commenter and a alone would cover about 50,000 firms. States expressed similar concerns about nonprofit both suggested that while In contrast to the size of the market, the the inability of public enforcement class actions should be generally resources of public enforcement authorities—including themselves—to available, they especially should be agencies are limited. For example, the enforce all of consumer protection law. available for claims brought pursuant to Bureau enforces over 20 separate They noted that, in their experience, statutes that expressly provide for Federal consumer financial protection public enforcement is benefited when classwide civil liability. laws (including the Dodd-Frank Act’s consumers can also take advantage of prohibition on unfair, deceptive and Response to Comments and Findings private enforcement. The commenters abusive practices) with respect to every noted that many States’ unfair Statutes provide for class actions. As depository institution with assets of competition and consumer protection noted by many commenters, including a more than $10 billion and non- laws expressly permit private group of State attorneys general, most depository institutions. Yet the Bureau enforcement, often through class consumer protection statutes provide has about 1,600 employees, less than actions. As an example, they quoted a explicitly for private as well as public half of whom work in its Division of decision by the Massachusetts Supreme enforcement mechanisms. For some Supervision, Enforcement, and Fair Judicial Court finding that that State’s laws, only public enforcement is Lending, which supervises for law had been amended to allow private available because lawmakers sometimes compliance and enforces violations of enforcement specifically because the decide that certain factors favor these laws.615 Furthermore, the Bureau public enforcement agency lacked allowing only public enforcement. For capacity to handle the complaints it was other laws, lawmakers have expressly 612 ‘‘Class Actions Under the Truth in Lending receiving.610 Another State attorney decided that there should be both public Act,’’ 83 Yale L.J. 1410, at 1429 (1974) (‘‘Two major concerns were expressed by the Senate in its report general, writing separately, made a and private enforcement. For example, and floor debates on this amendment. First, the similar point. on several occasions, Congress expressly Senate took note of the trend away from class A nonprofit organization commented recognized the role class actions can actions after [Ratner v. Chemical Bank New York that private enforcement was important have in effectuating Federal consumer Trust Co., 329 F. Supp. 270 (S.D.N.Y. 1971)] and the need for potential class action liability to because it may advance more aggressive financial protection statutes. encourage voluntary creditor compliance. The legal theories and seek more substantial Commenters noted that State legislators Senate considered individual actions an insufficient remedies as compared to government have often done the same. As described deterrent to large creditors, and so imposed a agencies. Other public-interest in Part II.A, for instance, Congress $100,000 or one percent of net worth ceiling to provide sufficient deterrence without financially consumer lawyer commenters similarly amended the TILA in 1974 to limit destroying the creditor.’’). emphasized that, in their view, public damages in class cases to the lesser of 613 Consumer Leasing Act of 1976, S. Rept. 94– $100,000 or 1 percent of the creditor’s 590, at 8 (‘‘The recommended $500,000 limit, Brief of Amicus Curiae The Federal Trade net worth. In reports and floor debates coupled with the 1 percent formula, provides, we Commission, In re Buspirone Patent Litig., 185 F. believe, a workable structure for private Supp. 2d 340, No. 1410 (S.D.N.Y. 2002). Id. at concerning the 1974 TILA amendments, enforcement. Small businesses are protected by the 1453–54. 1 percent measure, while a potential half million 610 Slaney v. Westwood Auto, Inc., 366 Mass. 688, 611 In support, this commenter cited to Jason dollar recovery ought to act as a significant 697, 700, 322 NE.2d 768, 775–77 (1975); see also Rathod and Sandeep Vaheesan, ‘‘The Arc and deterrent to even the largest creditor.’’); see also Grayson v. AT&T, 15 A.2d 219, 240 (DC 2010) Architecture of Private Enforcement Regimes in the Electronic Fund Transfer Act (1978), H. Rept. 95– (Providing a private right of action in order to United States and Europe: A View Across the 1315, at 15. ‘‘allow the government to coordinate with the Atlantic,’’ 14 U. of N.H. L. Rev. 306, at 309 (2015) 614 See, e.g., Iowa Code ch. 714H; California nonprofit and private sectors more efficiently.... (noting that ‘‘[w]ith large populations and complex Unfair Competition Law, Bus. & Prof. Code, § 17200 Public-interest organizations will be able to bring economies, even a team of committed public et seq.; Massachusetts Consumer Protection Law, additional resources to consumer protection enforcers cannot be expected to catch, let alone G.L. c. 93A, § 9; N.Y. Gen. Bus. Law § 349(h); enforcement in the District, contributing private prosecute, every violation.... And during times District of Columbia Consumer Protection and donated funds that will advance public of fiscal austerity, government budget cuts further Procedures Act, DC Code § 283905(k)(l)(A). priorities without causing the expenditure of diminish the ability of enforcement agencies to 615 Bureau of Consumer Fin. Prot., ‘‘Financial additional government resources.’’). uncover wrongdoing’’) (internal citations omitted). Report of the Consumer Financial Protection

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is the only Federal agency exclusively consumers are affected by those harms. example, the Bureau has authority to focused on enforcing these laws. Other This prioritization may leave harms that issue civil investigative demands, the financial regulators, including Federal affect relatively fewer consumers, such Bureau does not need to cover its costs prudential regulators and State agencies, as some harms by smaller providers, out of recoveries, does not need to have authority to supervise and enforce unremedied by public enforcement. As certify a class, and can pursue certain other laws with respect to the entities to the amount of money recovered by claims unavailable to private within their jurisdictions, but they face the Bureau, commenters did not state litigants.617 But the fact that public resource constraints as well. that it represents all (let alone a enforcement may be a more effective Additionally, those other regulators meaningful percentage) of the harm that mechanism to secure relief for some often have many different mandates, exists in the marketplace, nor is there consumers on some claims does not only part of which is consumer evidence to support such a contention. mean that it is a sufficient mechanism protection. By authorizing private Based on its experience and expertise, in and of itself to secure relief on all enforcement of the consumer financial the Bureau believes that the amounts it claims for all consumers. Indeed, statutes, Congress and the States have has recovered do not represent all of the private class actions are able to pursue allowed for more comprehensive harm. violations of law that the Bureau does enforcement of these statutory schemes. Furthermore, as several consumer not have the resources or enforcement With respect to commenters that advocate commenters noted, the Bureau authority to pursue, thereby providing believe the amount of relief that the does not have jurisdiction to enforce all additional relief to consumers and Bureau has provided to consumers violations of the law pertaining to deterring companies from future through its enforcement cases consumer finance. Specifically, the violations of the law. demonstrates that the Bureau has Bureau cannot enforce claims for With respect to commenters that sufficient resources to enforce the violation of State statutes, or claims contended that public enforcement relevant consumer protection laws with arising in tort (which includes claims actions are better avenues to address respect to all potential wrongdoers, the sounding in fraud) or those that allege violations of the law because public Bureau acknowledges that it has breach of contract. The Bureau also enforcers are not motivated by their own provided significant relief to consumers cannot pursue claims against depository self-interest to bring cases, the Bureau since 2012. At the same time, the institutions and credit unions with less disagrees that differing motives, if they Bureau is also aware that its than $10 billion in assets. For all of exist, are relevant. Whatever the enforcement and supervision efforts these reasons, the Bureau finds that its motivations of plaintiff’s attorneys to have not been able to examine the enforcement authority alone is bring cases, the Bureau has observed conduct of every provider subject to its insufficient to remedy all violations of that public enforcers do not have the jurisdiction under every law that it the law and deter future violations. resources to bring sufficient cases to enforces.616 As noted above, excluding With respect to the quantity of relief remedy all violations of the law, and the mortgage market and certain other the Bureau has provided to consumers, thus that private enforcement of such types of financial services not covered for the years of 2013 through 2016, the violations is necessary. Further, as by this rule, there are at least 50,000 Bureau brought 165 enforcement actions discussed more fully in Part VI.C.2, the companies that fall within the Bureau’s or an average about 41 enforcement Bureau does not agree that the jurisdiction. The Bureau cannot actions per year. This is significantly motivation of private plaintiff’s conceivably supervise or investigate all fewer than the 85 class action consumer attorneys determines whether class of those firms or even necessarily take finance settlements on average action settlements benefit consumers. action each time it uncovers some identified in the Study per year (a figure Indeed, the prospect of fee awards is evidence of wrongdoing. Thus, with that the Bureau’s Section 1022(b)(2) specifically designed to incentivize respect to the trade association Analysis predicts will be 165 per year plaintiff’s attorneys to bring class action commenter’s contention that the Bureau once this rule takes effect). And while cases that individuals might not could easily supervise all 30 larger the number of Bureau enforcement cases otherwise pursue, and courts monitor participant consumer reporting has increased year-over-year in the near attorney’s fee awards to ensure that they agencies, the Bureau emphasizes that its past, the number of cases that the are fair and reasonable. resources are spread not just among Bureau brings every year is subject to The Bureau notes that most of the those 30 agencies but among the tens of change, as some commenters noted. commenters critical of the Bureau’s thousands of other entities within the Further, only some of these enforcement preliminary findings regarding public Bureau’s jurisdiction. While the number actions and a portion of the enforcement focused on the Bureau’s of larger participant entities in any approximately $11 billion in relief own enforcement authorities and particular market may be small, the total provided by the Bureau through its accomplishments, and to a large extent number of entities for which the Bureau enforcement actions over the past four did not address enforcement by other is tasked with enforcing the law is years concern claims that would be Federal and State regulators. Most of enormous. Indeed, the Bureau has covered by this rule. For example, over these other regulators, as the comment $2.5 billion of that relief concerned recognized it must prioritize when it letter from the group of State attorneys mortgages, a product not covered by this brings public enforcement actions and general noted, enforce not only rule. consumer protection laws but also many generally chooses to do so where the The Bureau acknowledges, as several harms are most egregious and the most other laws and must allocate their commenters noted, that the Bureau’s enforcement resources accordingly. In enforcement actions provided, on Bureau for Fiscal Year 2016,’’ at 13 (Nov. 15, 2016), addition, as several commenters noted, available at https://www.consumerfinance.gov/ average, more relief per consumer than these regulators, like the Bureau, must _ _ _ _ documents/1495/112016 cfpb Final Financial did class action settlements. This manage general budgetary constraints, Report_FY_2016.pdf (stating that, as of Sept. 30, reflects the fact that Bureau enforcement changing legislative priorities, and 2016, the Bureau had 1,648 employees, 44 percent may target higher value cases. It may of whom worked in the Division of Supervision, Enforcement, and Fair Lending). also reflect the fact that the Bureau may 617 Of course, these figures do not include 616 Whether that will change, as one commenter be able to pursue cases more effectively investigations and other cases abandoned by the suggested, is addressed below in this Part VI.B.5. than private class actions because, for Bureau.

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limitations on jurisdiction and private litigation.621 As for the the class rule in the reverse order, authorities, such as over tort or contract commenters that suggested that private beginning with a discussion of the claims, that are more suited to private class actions that did not overlap with protection of consumers and then actions. public enforcement cases are somehow addressing the public interest. As Finally, the Bureau notes that if the less valuable because they may have discussed further below, the Bureau commenters were correct in claiming been based on public news reports or on recognizes that creating incentives to that public enforcement is sufficient to evidence uncovered by public enforcers comply with the law and causing address all misconduct in the covered in investigations that were not pursued, companies to choose between increased the Bureau does not believe the origin consumer finance markets and secure risk mitigation and enhanced exposure of those private cases is relevant. relief for those affected, the Bureau to liability imposes certain burdens on Instead, regardless of origin, those cases would expect to see a low incidence of providers. These burdens are chiefly in provided relief to consumers for class action litigation due to incentives the form of increased compliance costs violations of the law that public facing plaintiff’s attorneys. Further, the to prevent violations of consumer enforcers otherwise did not or were not financial laws enforceable by class Bureau would expect to see small able to pursue. settlements given that settlements are actions, including the costs of forgoing potentially profitable (but also generally a function of the expected C. The Bureau Finds That the Class Rule potentially illegal) business practices value of the claims. As discussed above, Is in the Public Interest and for the that may increase class action exposure, the evidence with respect to number, Protection of Consumers and in the increased costs to litigate size, and relief obtained in class actions In the proposal, the Bureau putative class actions themselves, belies the claim that public enforcement preliminarily found, in light of the including, in some cases, providing is sufficient to fully vindicate Study and the Bureau’s experience and relief to a class and payment to its consumers’ rights under the consumer expertise, that precluding providers attorneys. The Bureau also recognizes protection laws. from blocking consumer class actions that providers may pass through some Class actions complement public through the use of arbitration or all of those costs to consumers, enforcement. The Study showed private agreements would better enable thereby increasing prices. Those class actions complement public consumers to enforce their rights under impacts are delineated and, where enforcement rather than duplicate it. In Federal and State consumer protection possible, quantified in the Bureau’s 88 percent of the public enforcement laws and the common law and obtain Section 1022(b)(2) Analysis below in redress when their rights are violated. actions the Bureau identified, the Part VIII and, with regard in particular Allowing consumers to seek relief in Bureau did not find an overlapping to burdens on small financial services class actions, in turn, would strengthen private class action.618 Similarly, in 68 providers, discussed further below in the incentives for companies to avoid percent of the private class actions the Part VII in the section-by-section legally risky or potentially illegal Bureau identified, the Bureau did not analysis to proposed § 1040.4(a) and in activities and reduce the likelihood that find an overlapping public enforcement the final Regulatory Flexibility Analysis consumers would be subject to such action. Moreover, in a sample of class below in Part IX. action settlements of less than $10 practices in the first instance. The million, there was no overlapping Bureau further preliminarily found that 1. Enhancing Compliance With the Law public enforcement action 82 percent of because of these outcomes, allowing and Improving Consumer Remuneration the time.619 consumers to seek class action relief and Company Accountability Is for the was consistent with the Study and Protection of Consumers In response to commenters that would be in the public interest and for In the proposal, the Bureau asserted that this still left significant the protection of consumers. The preliminarily found that the class rule, amounts of overlap between private and Bureau made this preliminary finding by changing the status quo, creating public cases, the Bureau notes that after considering costs to providers as incentives for greater compliance, and where there was overlap, private class well as other potentially countervailing restoring an important means of relief actions appear to have preceded public considerations, such as the potential and accountability, would be for the enforcement actions roughly two-thirds impacts on innovation in the market for protection of consumers. of the time. Moreover, when there are consumer financial products and private cases that follow public services. In light of all these To the extent that laws cannot be enforcement, courts can and do take the considerations, the Bureau preliminarily effectively enforced, the Bureau earlier public case into account when found that the statutory standard was explained in the proposal that it approving settlements and calculating satisfied. believed that companies may be more attorney’s fees. For example, one The sections below discuss the bases likely to take legal risks, i.e., to engage commenter noted cases where the FTC for the preliminary findings, comments in potentially unlawful business filed an amicus brief requesting that the received, and the Bureau’s further practices, because they know that any court reduce plaintiff’s attorney fees for analyses and final findings in support of potential costs from exposure to a class action settlement that followed a putative class action filings have been public enforcement matter on the same 621 Barbara J. Rothstein & Thomas E. Willging, materially reduced. Due to this facts.620 Further, resources for judges ‘‘Managing Class Action Litigation: A Pocket Guide reduction in legal exposure (and thus a who manage class actions have for Judges,’’ Fed. Jud. Ctr., at 26 (2005), available reduction in risk), companies have less at http://www.uscourts.gov/sites/default/files/ of an incentive to invest in compliance favorably cited this case as a model for classgde.pdf (citing, e.g., Swedish Hospital Corp. v. Federal judges handling such follow-on Shalala, 1 F.3d 1261, 1272 (D.C. Cir. 1993) management in general, such as by (affirming district court’s decision to ‘‘bas[e] its fee investing in employee training with calculation only on that part of the fund for which respect to compliance matters or by 618 Study, supra note 3, section 9 at 4. counsel was responsible’’ where class counsel 619 Id. brought a case that ‘‘rode ‘piggyback’ ’’ on a carefully monitoring changes in the law 620 In re First Databank Antitrust Litig., 209 previous action); In re First Databank Antitrust and making appropriate changes in their F.Supp.2d 96 (D.D.C. 2002) Litig., 209 F.Supp.2d 96, 98 (D.D.C. 2002)). conduct.

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As discussed in the proposal’s Section relevant developments in class action FCRA,627 FDCPA,628 and 1022(b)(2) Analysis, economic theory litigation,624 for instance claims the TCPA.629 supports the Bureau’s belief that the pertaining to EFTA,625 FACTA,626 Relatedly, where there is class action availability of class actions affects exposure, companies and their compliance incentives. The standard representatives will seek to focus more economic model of deterrence holds attention and resources on general 624 A brief search by the Bureau uncovered that individuals who benefit from dozens of alerts advising companies to halt conduct proactive compliance monitoring and engaging in particular actions that or review practices in light of a class action filed management. The Bureau stated in the violate the law will instead comply with in their industry that may impact their businesses. proposal that it had seen evidence of the law when the expected cost from A selection of these alerts is set forth in the next this motivation in various law and violation, i.e., the expected amount of several footnotes and all are on file with the Bureau. compliance firm alerts. For example, the cost discounted by the probability of See, e.g., Jones Day LLP, ‘‘The Future of Mandatory one such alert, posted shortly after the being subject to that cost, exceeds the Consumer Arbitration Clauses,’’ (Nov. 13, 2015) Bureau released its SBREFA Outline, (‘‘Companies that are subject to the CFPB’s noted that the Bureau was considering expected benefit. Consistent with that oversight should take steps now to ensure their 622 623 model, Congress and the courts compliance with all applicable consumer financial proposals to prevent arbitration have long recognized that deterrence is services laws and to prepare for the CFPB’s agreements from being used to block one of the primary objectives of class impending rulemaking [on arbitration]. These steps class actions. In light of these proposals, actions. could help to diminish . . . risks that would result the firm recommended several ‘‘Steps to The preliminary finding that class from the CFPB’s anticipated placement of Consider Taking Now,’’ including, action liability deters potentially illegal substantial limitations on the use of arbitration ‘‘Evaluate your consumer compliance conduct and encourages investments in clauses’’); Ballard Spahr LLP, ‘‘Seventh Circuit management system to identify and fill Green Lights Data Breach Class Action Against any gaps in processes and procedures compliance was confirmed by the Neiman Marcus,’’ (July 28, 2015) (noting in Bureau’s own experience and its response to a recent data breach class action that that inure to the detriment of consumers observations about the behavior of firms its attorneys ‘‘regularly advise financial institutions under standards of unfair, deceptive, and the effects of class actions in on compliance with data security and privacy and abusive acts or practices, and that markets for consumer financial products issues’’); Bryan Cave LLP, ‘‘Plaintiffs Seek Class could result in groups of consumers and services. The Bureau analyzed a Status for Alleged Card Processing ‘‘Junk Fee’’ taking action.’’ 630 Another alert relating variety of evidence that, in its view, Scheme,’’ (Nov. 5, 2015) (‘‘[P]rocessors and indicates that companies invest in merchant acquirers should revisit their form 627 See, e.g., K&L Gates LLP, ‘‘Beyond Credit agreements and billing practices to ensure they are Reporting: the Extension of Potential Class Action compliance to avoid activities that free of provisions that a court might consider Liability to Employers under the Fair Credit could increase their exposure to class against public policy, and that all fees payable by Reporting Act,’’ (Apr. 7, 2014) (‘‘In light of FCRA’s actions. a merchant are clearly identified in the application, damages provisions and the recent initiation of First, the Bureau stated that it was the main agreement, or a schedule to the putative class actions against large national companies, business entities which collect agreement.’’); Jenner & Block LLP, ‘‘Civil Litigation aware that companies monitor class background information for prospective or current litigation relevant to the products and Outlook for 2016,’’ (Feb. 1, 2016) (‘‘Given such employees should stay abreast of the requirements services that they offer so that they can developments, 2016 will bring a strong and of FCRA and related State law, and should be mitigate their liability by changing their continued focus on privacy protections and data proactive in developing sound and logical practices breach prevention both in the class action context to comply with FCRA’s provisions.’’). conduct before being sued themselves. and otherwise.’’); Bryan E. Hopkins, ‘‘Legal Risk 628 See, e.g., K&L Gates LLP, ‘‘You Had Me at This effect was evident from the Management for In-House Counsel & Managers,’’ at ‘‘Hello’’ Letter: Second Circuit Concludes That a proliferation of public materials—such 49–52 (2013) (noting a variety of compliance RESPA Transfer-of-Servicing Letter Can Be a as compliance bulletins, law firm alerts, activities companies should consider in product Communication in Connection with Collection of a Debt,’’ (Sept. 22, 2015) (‘‘[M]ortgage servicers would design in order to mitigate class action exposure). and conferences—where legal and do well to ensure they are paying close attention compliance experts routinely and 625 See, e.g., Bracewell LLP, ‘‘Bankers Beware: when reviewing such letters for FDCPA systematically advise companies about ATM Fee Class Action Suits on the Rise,’’ (Oct. 5, compliance’’ in order to avoid class action liability). 2010) (noting dozens of class action cases regarding 629 See, e.g., DLA Piper, ‘‘Ninth Circuit Approves ATM machines and advising ATM operators ‘‘to Provisional Class Action Certification in TCPA 622 H. Rept. 94–589, Equal Credit Opportunity Act make sure that their ATMs provide notice to Class Action, Defines ‘Prior Express Consent’,’’ Amendments of 1976, at 14 (Jan. 21, 1976). consumers on both the machine and on the screen (Nov. 19, 2012) (‘‘Meyer [a class action] seems to 623 See, e.g., Reiter v. Sonotone Corp., 442 U.S. (with the opportunity for the customer to opt-out make clear that creditors and debt collectors must 330, 344 (1979) (noting that antitrust class actions verify that debtors provided their cell phone before a fee is charged) if a fee will be charged for ‘‘provide a significant supplement to the limited numbers and that the numbers were provided at the resources available to the Department of Justice for providing the ATM service.’’). time of the transactions related to the debts before enforcing the antitrust laws and deterring 626 See, e.g., Arent Fox LLP, ‘‘Unlucky Numbers: contact is made using an automated or predictive violations’’); Hughes v. Kore of Indiana Enter., 731 Ensuring Compliance with the Fair and Accurate dialer. For cell phone numbers provided later by F.3d 672, 677–78 (7th Cir. 2013) (Posner, J.) (‘‘A Credit Transactions Act,’’ (Nov. 18, 2011) debtors, it is imperative that creditors and debt class action, like litigation in general, has a (explaining allegations in one class action and collectors make clear to the owners of those deterrent as well as a compensatory objective. . . . noting that ‘‘ensuring proactive compliance with numbers that they may be contacted at these The compensatory function of the class action has FACTA is crucial because a large number of non- numbers for purposes of debt collection.’’); Mayer no significance in this case. But if [defendant’s] net Brown LLP, ‘‘Seventh Circuit Holds That compliant receipts may be printed before the worth is indeed only $1 million . . . the damages Companies Are Liable Under Telephone Consumer sought by the class, and, probably more important, problem is brought to a company’s attention.’’); Protection Act for Placing Automated Calls to the attorney’s fee that the court will award if the Jones Day LLP, ‘‘If Your Business Accepts Credit Reassigned Numbers,’’ (May 16, 2012) class prevails, will make the suit a wake-up call for Cards, You Need to Read This,’’ (Sept. 2007) (‘‘If (‘‘[C]ompanies must ensure that the actual [defendant] and so have a deterrent effect on future your company has not been sued for a FACTA recipients of automated calls have consented to violations of the Electronic Fund Transfer Act by violation, you still need to act. . . . If any potential receiving them, and take steps to update their [the defendant] and others.’’); deHaas v. Empire violation is noted, correct it immediately. Also, to records when telephone numbers have been Petroleum Co., 435 F.2d 1223, 1231 (10th Cir. 1970) avoid future unknown liability, monitor the reassigned to new subscribers. For example, the Seventh Circuit [in a class action] noted that callers (‘‘Since [class action rules] allow many small claims decisions related to FACTA to determine whether to be litigated in the same action, the overall size could avoid liability by doing a ‘reverse lookup to there are any changes regarding the statute’s of compensatory damages alone may constitute a identify the current subscriber’ or by ‘hav[ing] a significant deterrent.’’); Globus v. Law Research interpretation. With that, your company will be able person make the first call’ to verify that the number Service, Inc., 418 F.2d 1276, 1285 (2d Cir. 1969) to immediately correct any ‘new’ violations found is ‘still assigned’ to the customer.’’). (‘‘Compensatory damages, especially when to exist under the law. If your company has been 630 See, e.g., Jones Day LLP, ‘‘The Future of multiplied in a class action, have a potent deterrent sued, act immediately to come into compliance Mandatory Consumer Arbitration Clauses,’’ effect.’’). with FACTA.’’). Continued

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to electronic payments litigation noted settlements, the lenders agreed to The proposal noted a third example of that firms could either improve their restrict interest rate markups to no more companies responding to class actions compliance efforts or adopt arbitration than 2.5 percentage points. Following by changing their practices to improve agreements to limit their class action these settlements, a markup cap of 2.5 their compliance with the law that exposure.631 Similarly, the Bureau percent became standard across the relates to foreign transaction fees and noted that industry trade associations industry even with respect to companies debit cards. In re Currency Conversion routinely update their members about outside the direct scope of the Fee Antitrust Litigation (MDL 1409) was class litigation and encourage them to settlements.633 The use of caps has a class action proceeding in which examine their practices so as to continued even after the consent plaintiffs alleged, in part, that banks that minimize their class action exposure. decrees that triggered them have issued credit cards and debit cards For example, a 2015 alert from a credit expired.634 violated the law by not adequately union trade association describes ‘‘a As another example, the Bureau noted disclosing foreign transaction fees to new potential wave of overdraft-related in the proposal that since 2012, 18 consumers when they opened suits.... target[ing] institutions that banks have entered into class action accounts.637 In the settlement, two large base fees on ‘available’ instead of settlements as part of the Overdraft banks agreed to list the rate applicable ‘actual’ balance’’ and advises credit MDL,635 in which plaintiffs challenged to foreign transaction fees in their initial unions to take five compliance-related the adoption of a particular method of disclosures for personal checking steps to mitigate potential class action ordering the processing of payment accounts with debit cards.638 A review liability.632 transactions that increases substantially of the market subsequent to the 2006 The Bureau also stated in the proposal the number of overdraft fees incurred by settlement indicated that this type of that while it believed that such consumers compared with alternative disclosure is now standard practice for monitoring and attempts to anticipate methods. Specifically, the litigation debit card issuers across the market, not litigation affect the practices of challenged banks that commingled debit merely by the two large banks bound by companies that are exposed to class card transactions with checks and the settlement.639 action liability, the impacts can be hard automated clearinghouse transactions As the proposal explained, these are to document and quantify because that come in over the course of a day a few examples of industry-wide change companies rarely publicize changes in and reordered the transactions to in response to class actions that the their behavior, let alone publicly process them in descending order based Bureau believed support its preliminary attribute those changes to risk- on amount. Relative to chronological or mitigation decisions. The Bureau, a lowest-to-highest ordering, this an order intended to minimize overdrafts, such as however, identified instances where it practice typically produces more low-to-high or check or transaction order. Independent Community Banks of America, ‘‘The believed that class actions filed against overdraft fees by exhausting funds in ICBA Overdraft Payment Services Study,’’ at 40 one or more firms in an industry led to the account before the last several small (June 2012), available at http://www.icba.org/docs/ others changing their practices, debits can be processed. In the years default-source/icba/solutions-documents/ presumably in an effort to avoid being since the litigation, the industry has knowledge-vault/icba-surveys-whitepapers/ 2012overdraftstudyfinalreport.pdf. Only 8.8 percent sued themselves. For example, between largely abandoned this practice. of community banks reordered transactions from 2003 and 2006, 11 automobile lenders According to a 2015 study, from 2013 to high to low dollar amount. Id. at 42 and fig. 57. settled class action lawsuits alleging 2015, the percentage of large banks that Most of the community banks studied did not that the lenders’ credit pricing policies used commingled high-to-low change their posting order in the two-year period their overdraft practices were reviewed. See id. at had a disparate impact on minority reordering decreased from 37 percent to 42 (noting that 82 percent of community banks had 636 borrowers under ECOA. In the 9 percent. not changed the order in which they posted transactions during the two years before the ICBA’s JonesDay.com (Nov. 2015), available at http:// 633 See F&I and Showroom, ‘‘2.5 Percent Markups study). To the extent that community banks www.jonesday.com/the-future-of-mandatory- Becoming the Trend,’’ (Aug. 9, 2005), available at changed their practices, in the two years preceding consumer-arbitration-clauses-11-13-2015/. http://www.fi-magazine.com/news/story/2005/08/ the 2012 study, 70.7 percent of those that changed 631 Ballard Spahr LLP, ‘‘The Next EFTA Class 2–5-markups-becoming-the-trend.aspx; Chicago their practices stopped high-to-low reordering. Id. Action Wave Has Started,’’ (Sept. 1, 2015), http:// Automobile Trade Ass’n, ‘‘Automotive News: 2.5 637 Third Consolidated Amended Class Action www.ballardspahr.com/alertspublications/ Percent Becoming Standard Dealer Finance Complaint, In Re Currency Conversion Fee legalalerts/2015-09-01-the-next-efta-class-action- Markup,’’ (Nov. 22, 2010), http://www.cata.info/ Antitrust Litig., No. 1409 (S.D.N.Y. July 18, 2006) wave-has-started.aspx (‘‘We have counseled automotive_news_25_becoming_standard_dealer_ (alleging that general purpose and debit cardholders financial institutions and consumer businesses . . . finance_markup/. The Bureau notes that were ‘‘charged hidden and embedded collusively on taking steps to mitigate the risk of claims by California’s adoption in 2006 of the Car Buyer’s Bill set prices, including a hidden, embedded and consumers (such as by adding an enforceable of Rights, which mandated a maximum 2.5 percent collusively set base currency conversion fee equal arbitration provision to the relevant agreement).’’); markup for loan terms of 60 months or less, may to 1 percent of the amount of the foreign currency see also Wiley Rein LLP, ‘‘E-Commerce—The Next also have influenced the adoption of this markup transaction,’’ that ‘‘most member banks tack[ed] on Target of ‘Big Data’ Class Actions?,’’ (Jan. 5, 2016), limit. Cal. Dep’t of Motor Vehicles, ‘‘Car Buyer’s a currency conversion fee of their own,’’ and that http://www.wileyrein.com/newsroom-articles-E- Bill of Rights: Fast Facts,’’ (FFVR 35, revised Nov. all of this was done in violation of ‘‘TILA, EFTA Commerce-The-Next-Target-of-Big-Data-Class- 2016), available at https://www.dmv.ca.gov/portal/ and the State consumer protection laws require[ing] _ _ Actions.html (noting that arbitration agreements can dmv/?1dmy&urile=wcm:path:/dmv content en/ disclosure of such fees in, inter alia, cardholder _ help to avoid class litigation and advising that ‘‘it dmv/pubs/brochures/fast facts/ffvr35. solicitations and account statements’’). would also be advisable for e-commerce vendors to 634 See, e.g., Automotive News, ‘‘Feds Eye 638 Stipulation & Agreement of Settlement at 27– include in their privacy policy an arbitration clause Finance Reserve,’’ (Feb. 25, 2013), available at 30, In re Currency Conversion Fee Antitrust Litig., establishing that any dispute would be adjudicated http://www.autonews.com/article/20130225/ No. 1409 (S.D.N.Y. July 20, 2006). in individual arbitration (as opposed to class RETAIL07/302259964/feds-eye-finance-reserve 639 In some instances, the dynamics of deterrence litigation or arbitration).’’). See also infra note 670 (‘‘Most were settled by 2003, with the lenders may be different. In another example from the In (noting that this trend has continued with regard to agreeing to cap the finance reserve at two or three re Currency Conversion Fee class action litigation, the proposal itself, as law firms have advised clients percentage points. That cap became the industry the defendants voluntarily halted the conduct at to review their compliance materials given the standard.’’). issue upon being sued. Karen Bruno, ‘‘Foreign potential that the Bureau would finalize the 635 See supra note 501 and accompanying text. transaction fees: Hidden credit card ‘currency proposal). 636 See Pew Charitable Trusts, ‘‘Checks and conversion fees’ may be returned—if you file soon,’’ 632 Credit Union Magazine, ‘‘Minimize the Risk of Balances: 2015 Update,’’ at 12 fig. 11 (May 2015), CreditCards.com (May 23, 2007), available at http:// Overdraft Fee Lawsuits,’’ Credit Union Nat’l Ass’n available at http://www.pewtrusts.org/∼/media/ www.creditcards.com/credit-card-news/foreign- (June 26, 2015), available at http://news.cuna.org/ assets/2015/05/checks_and_balances_report_ transaction-fee-1282.php (‘‘[I]n most cases the articles/106373-minimize-the-risk-of-overdraft-fee- final.pdf. According to a different 2012 study, companies voluntarily began disclosing fees once lawsuits. community banks predominantly posted items in the suit was filed.’’).

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finding that exposure to consumer markets represents a considerable average settlement-to-harm rate of 38 financial class actions creates incentives increase.641 percent, and the total cash relief figure that encourage companies to change Furthermore, the Bureau of about $1 billion in the Overdraft MDL potentially illegal practices and to preliminarily found that through such settlements, an estimate of the total invest more resources in compliance in litigation consumers would be better value of harm suffered by consumers in order to avoid being sued.640 The cases able to cause providers to cease the settlements identified by the Bureau help to illustrate the mechanisms, engaging in unlawful or legally risky would be approximately $2.6 billion.643 among others, by which the proposed conduct prospectively than under a More concretely, this figure estimates class rule would deter potentially illegal system in which companies can use the total amount of additional or excess practices by many companies. The arbitration agreements to block class overdraft fees class members paid to the actions. Class actions brought against Bureau stated in the proposal that it settling banks during the class periods particular providers can, by providing believes that the result would be more because of the banks’ use of the high-to- behavioral relief into the future to low reordering method to calculate legally compliant consumer financial consumers, force more compliance overdraft fees. products and services that would where the general increase in incentives This sum—$2.6 billion—can also be advance the protection of consumers. due to litigation risk are insufficient to used as a basis for determining the As discussed in more detail in the achieve that outcome. potential future value of the cessation of proposal’s Section 1022(b)(2) Analysis, The Bureau offered the Overdraft the high-to-low reordering practice. If the Bureau did not believe it possible to MDL as an example to help illustrate the $2.6 billion is the total amount of excess quantify the benefits to consumers from potential ongoing value of such overdraft fees class members paid the increased compliance incentives prospective relief. A 2015 study by an during their respective class periods attributable to the class proposal due in academic researcher based on the because of the high-to-low reordering part to the difficulty of measuring the Overdraft MDL settlements offered rare practice, the same figure (converted to value of deterrence in a systematic way. data on the relationship between the an annualized figure using the class Nonetheless, the Bureau preliminarily settlement relief offered to class period) may be used to estimate how found that increasing compliance members compared to the sum total of much the same class members save incentives would be for the protection injury suffered by class members that every year in the future by no longer has important implications for the value of consumers. being subject to high-to-low reordering of prospective relief. The analysis practice for purposes of calculating The Bureau recognized that some reviewed settlement documents and overdraft fees.644 The prospective companies may decide to assume the found that the value of cash settlement benefits to consumers as a whole are resulting increased legal risk rather than relief offered to the class constituted often even larger because companies investing more in ensuring compliance between 7 and 70 percent (or an average frequently change their practices not with the law and foregoing practices of 38 percent and a median of 40 just with regard to class members, but that are potentially illegal or even percent) of the total value of harm to their customer base as a whole, and unlawful. Other companies may seek to suffered by class members from other companies that were not sued may mitigate their risk but may miscalibrate overdraft reordering during the class also preemptively change their and underinvest or under comply. To period.642 The total value of injuries practices. As this one example showed, the extent that this happens, the Bureau suffered by class members can be prospective relief—because it can preliminarily found that the class estimated using these settlement relief- continue in perpetuity—can have wide- proposal would enable many more to-total consumer harm ratios and the ranging benefits for consumers over and consumers to obtain redress for sum of cash settlement relief. Using the violations than do so now while 643 See id. at 786 and tbl. 3. The calculation is the 641 The Bureau calculates the future number of total amount of relief the Study identified with the companies can use arbitration class actions by estimating that, in any given Overdraft MDL settlements ($1 billion), divided by agreements to block class actions. As set market, the providers that currently use arbitration .38 (the average ‘‘recovery rate’’ of the 15 Overdraft out in the proposal’s Section 1022(b)(2) agreements would face class litigation at the same settlements identified by Fitzpatrick and Gilbert, Analysis, the amount of additional rate and same magnitude as the providers that which ranged from approximately 14 percent to 69 currently do not use arbitration agreements faced percent). While Fitzpatrick and Gilbert’s analysis compensation consumers would be during the five-year period covered by the Study. separately identified the settlement-to-harm ratio expected to receive from class action For all but one of the markets for which the Bureau for each individual bank, the banks were settlements in the Federal courts varies makes an estimate, only one market—pawn shops— anonymized for purposes of their analysis and, was there no Federal class settlement in the period therefore, cannot be matched to the specific class by product and service—specifically, by studied, and the Bureau projects that consumers in settlements set out in the Study. the prevalence of arbitration agreements these markets would receive no additional 644 Assuming the average class period was the 10- in those individual markets—but is compensation from Federal class settlements if the year class period of the largest settlement, the 18 substantial nonetheless and in most class proposal were adopted. Because it did not Overdraft MDL settlements collectively provide have the relevant data, the Bureau did not separate $260 million in prospective relief per year to those State class settlements by markets or project class members identified in our case studies. This 640 Some stakeholders have suggested that even additional compensation attributable to future State estimate assumes that future overdraft fees absent class action exposure there already are class settlements. Where litigation actually occurs, generated from the high-to-low practice would have sufficient incentives for compliance and that class there would also be increased costs to providers in been comparable to the fees generated in the past. actions are too unpredictable to increase the form of attorney’s fees and related expenses. This estimate does not take into account the compliance incentives. The Bureau is not The Bureau addresses these costs below. ongoing benefit to other consumers who were not persuaded by these arguments. The Bureau 642 Fitzpatrick & Gilbert, supra note 484, at 785, class members (those who, for instance, were not recognizes, of course, as discussed further in the (‘‘[N]ot only can we report the average payout for in the jurisdiction covered by the settlement, or Section 1022(b)(2) Analysis, that exposure to class members who participated in the settlements, those who acquired accounts after the settlement), private liability is not the only incentive that but also what the plaintiffs thought these payouts nor does the benefit include those consumers who companies have to comply with the law. However, recovered relative to the damage done to class bank with institutions that were not sued but based on its experience and expertise and for the members.’’). Fitzpatrick worked with Gilbert, an voluntarily stopped the overdraft reordering reasons discussed herein, the Bureau believes that attorney involved in the Overdraft MDL practice. Nor does this figure include any of the companies in many cases can (and should) do more settlements, to identify the total quantum of other settlements identified by the Bureau in to ensure that their conduct is compliant and that overdraft fees attributable to the practice of Section 8 of the Study, which did not contain the the presence of class action exposure will affect reordering in settlements identified by the Study. kind of information on the proportion of calculable companies’ incentives to comply. Id. harm to settlement relief.

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above the value of retrospective relief, the proposal that it was possible that either do not achieve increased and can, through changing the behavior providers would not maintain their deterrence or to the extent that they do of providers subject to a suit, benefit arbitration agreements if they concluded increase deterrence, that increase is other customers of these providers who that individual arbitration provides no unnecessary or even harmful to are not class members. benefit to themselves or their customers, consumers. For all of these reasons, the Bureau but was not persuaded that such an Many of these industry, research stated in the proposal that it believed outcome was certain simply because the center, and individual commenters that the class proposal would increase rule would change the outcome on class contended that class actions do not compliance and increase redress for proceedings. In particular, the Bureau deter violations of the law because they non-compliant behavior and thus would noted that because providers would still exert pressure on companies to settle be for the protection of consumers. To face some individual disputes in any whether or not the claims asserted have the extent that the class proposal would event, it was not entirely clear how merit. The commenters asserted that affect incentives (or lead to more providers would evaluate the tradeoffs such risk is unavoidable regardless of an prospective relief) and enhance between different channels for resolving entity’s compliance efforts, and that compliance, consumers seeking to use those disputes in isolation, if class companies will therefore not in fact particular consumer financial products proceedings were subject to the increase such efforts. The pressure to or services would more frequently proposed rule. settle exists in part, the commenters receive the benefits of the statutory and For example, the Bureau noted that asserted, because defendant companies must bear high discovery and defense common law regimes that legislatures while some companies may have to pay attorney costs and must consider the and courts have implemented and fees to the arbitration administrators risk, no matter how small, of a large developed to protect them. Consumers that they would not have to pay in judgment in a case that is certified as a would, for example, be more likely to court, the empirical evidence indicates class action. The commenters asserted receive the disclosures required by and that the absolute number of cases in that providers are not willing to tolerate compliant with TILA, to benefit from which these fees are incurred is low the risk that such a judgment would the error-resolution procedures required (and that the total fees in any one case 647 involve substantial payouts to each by TILA and EFTA, and to avoid the are also low). Moreover, the costs of member of the class, even if the unfair, deceptive, and abusive debt the upfront fees would be offset against potential savings from arbitration’s likelihood of the judgment occurring is collection practices proscribed by the low. These commenters contended that FDCPA and the discriminatory practices streamlined discovery and other processes, which some stakeholders the pressure to settle regardless of the proscribed by ECOA.645 In those States have argued are a substantial benefit to merit of the claims means that class that provide for private enforcement of all parties. Indeed, as explained in the actions do not deter wrongdoing, they their unfair competition law, consumers proposal’s Section 1022(b)(2) Analysis, are simply a ‘‘cost of doing business.’’ similarly would be less likely to be providers generally already maintain One trade association commenter exposed to unfair or deceptive acts or two systems to the extent that most representing defense lawyers held the practices. Consumers also would be arbitration agreements allow for opposite view: class actions do deter more likely to receive the benefits of litigation in small claims courts. Thus, violations of the law and in fact, they their contract terms and less likely to be the Bureau did not understand why the create ‘‘over-deterrence.’’ In this exposed to tortious conduct. costs of resolving a few cases in commenter’s view, many class actions The Bureau also discussed in the arbitration, even if somewhat greater in the financial services market involve proposal that some stakeholders had than resolving these cases in litigation, ambiguities and uncertainties in the predicted during the SBREFA phase and would alone cause companies to law, rather than clear violations. Thus, other early outreach that pursuing a withdraw an option that they often when companies settle class actions class rule would lead them to remove asserted benefits both themselves and without final adjudication of these arbitration agreements, either because consumers. Further, the Bureau stated uncertain legal issues and change their arbitration agreements served no that it did not believe that any resulting behavior to cease the conduct at issue, purpose if they did not operate to block constraints on individual dispute the commenter asserted that the class actions or because the costs of resolution would be so severe as to companies may be avoiding behavior individual arbitration to providers were outweigh the broader benefits of the that is lawful, creating over-deterrence. substantial enough that providers would class rule to consumers. Relatedly, another industry commenter want to eliminate that dispute stated its view that class action resolution channel in the absence of Comments Received settlements are unfair when the law is offsetting benefits from blocking class Deterrence. Many industry, research ambiguous or uncertain and thus actions.646 The Bureau acknowledged in center, State attorneys general, and companies cannot predict that their individual commenters took issue with conduct may violate the law and subject 645 See generally Study, supra note 3, section 8 the Bureau’s preliminary finding that them to a class action. A nonprofit at 13 and fig. 1 (noting the number of class the threat of private class actions deters commenter also agreed that class actions settlements by frequency of claim type). deter wrongdoing, but contended that 646 The Bureau addressed this concern in the companies from violating the law. proposal in the context of its preliminary findings However, these commenters generally compliant providers are more likely to that the class proposal was in the public interest. did not disagree with the Bureau’s basic be sued in class actions than ‘‘bad In this final rule, however, the Bureau addresses premise that a system that provides for actor’’ providers because the latter are this concern in the context of its finding that the likely judgment proof. In the class rule is for the protection of consumers, liability for violations of law promotes because many commenters raised concerns that the deterrence; instead they asserted that commenter’s view, this fact creates an loss of individual arbitration as a forum would while deterrence in general may exist in imbalance wherein compliant providers harm consumers. As noted below in Part VI.C.2, such a system, class actions themselves are more deterred from bad behavior however, if providers choose to remove arbitration than non-compliant ones. agreements from their contracts, the loss of individual arbitration as a form of dispute incorporates this discussion with respect to its In the Study, the Bureau found that resolution arguably impacts both providers and the public interest findings as well. class action settlements typically occur public interest. Accordingly, the Bureau 647 See Study, supra note 3, section 5 at 75–76. in conjunction with class certification,

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which the Bureau stated in the proposal that the remedy for violations of certain consumer overdrafts in such a way as to suggests that class certification does not State disclosure requirements for maximize the fees charged to the itself pressure defendants to settle.648 automobile purchases is restitution of consumer, despite that settlement. The Some industry commenters disagreed the vehicle purchase price, resulting in commenter agreed, however, that the with the significance of this finding, enormous pressure for those dealers to percentage of banks that employ this contending that there is pressure to settle cases alleging violations of those practice has diminished since the settle class actions at every stage of laws. As another example, a trade overdraft class action litigation began. litigation, not just after class association representing consumer An industry commenter asserted that certification. Many industry and reporting agencies that offer credit the Bureau’s examples of deterrence research center commenters further monitoring products directly to were misplaced because they concerned contended that the pressure to settle consumers identified the penalty of settlements, not actual findings or non-meritorious class actions is disgorgement of all fees paid for the admissions that the defendants had particularly acute in cases asserting service for violations of CROA as broken the law and thus the Bureau claims under statutes that provide for disproportionate. In the view of the lacked examples of illegal conduct being statutory damages, such as FACTA, commenter, the prospect of such deterred. Asserting a similar concern, FCRA, and FDCPA, because the catastrophic damages does not deter another industry commenter contended statutory damages multiplied by wrongdoing; instead the commenter that to the extent that the class actions hundreds or thousands of potential class contends that compliance with CROA affect change in business practices, members can create potential liability of for its products is impossible, for private class action settlements are not hundreds of millions or even billions of reasons discussed below in this Part an efficient policymaking tool. One dollars.649 In these commenters’ view, VI.C.1 and in the section-by-section industry commenter further contended statutory damages were designed to analysis of § 1040.3(b) below in Part VII. that because it views class actions as incentivize individual claims, and when On the other hand, a consumer inefficient, the Bureau could more claims pursuant to those statutes are advocate commenter, quoting Judge efficiently deter violations of the law by pursued using the class action device, Richard Posner, contended that this is deciding which practices are unfair or they can create the potential for ruinous precisely the point: deceptive and then informing liability that creates massive pressure Society may gain from the deterrent effect companies of them. for companies to settle. of financial awards. The practical alternative Several industry commenters Some industry commenters agreed to class litigation is punitive damages, not a disagreed with the Bureau’s preliminary that the threat of class action liability fusillade of small-stakes claims. The finding that class actions deter deters at least some violations of the deterrent objective of [EFTA] is apparent in wrongdoing because they believe that law, but contended that its deterrent the provision of statutory damages, since if the threat of public enforcement from effect is imprecise and inefficient only actual damages could be awarded, the the Bureau, other Federal agencies, or providers of ATM services . . . might have because of statutes that provide for 651 State attorneys general is more likely to recovery of attorney’s fees and double or little incentive to comply with the law. deter companies from violating the law treble damages. In these commenters’ One research center commenter cited than any class action could. A group of view, these remedy features incentivize the Overdraft MDL settlements as an State attorneys general similarly attorneys to bring claims under statutes example of massive liability where asserted that State consumer protection that have them (as opposed to bringing consumers were not actually harmed laws and the threat of State public claims under other statutes or common and thus disagreed with the Bureau’s enforcement are sufficient to deter law without those features) in order to reliance in the preliminary findings on violations of the law. Other industry maximize their own profit. One those settlements as evidence of commenters contended that companies commenter asserted that the lawsuits deterrence. The commenter asserted that are more likely to be deterred from themselves therefore bear no relation to banks lose money on free checking violating the law by the threat of the merit of the claims and thus do not accounts and that overdraft fees were individual lawsuits or the threat that deter wrongdoing.650 This inefficiency therefore necessary in order for banks to consumers will take their business is compounded, according to the subsidize free checking accounts for elsewhere once they learn of the commenters, by the fact that statutory consumers. The commenter therefore companies’ violations; one of these damages often provide for significant believed that the overdraft settlements commenters cited the Study’s survey liability for technical violations of the did not remedy harm to consumers, but data on the likelihood of this occurring. law even where there has been no actual actually caused harm by decreasing the A Tribal commenter stated its belief that harm to consumers. For example, likelihood that banks will offer free consumers who obtain products or another commenter pointed out that checking accounts going forward. The services from Tribes are sufficiently companies can face massive liability same commenter criticized the Bureau’s protected through Tribal regulation and class actions against merchants under inclusion of the overdraft settlements as enforcement of those regulations and FACTA for accidentally printing credit an example of litigation that prompted thus there is no need for the deterrent card expiration dates on a receipt, companies to change behavior because effect of class actions with respect to activity which the commenter contends some banks continue to reorder Tribes. does not harm consumers. A law firm Several industry commenters asserted commenter representing individual 651 Hughes v. Kore of Ind. Enter., 731 F.3d 672, that even if class actions do deter automobile dealers in California stated 677 (7th Cir. 2013) (citations omitted) (further wrongdoing, the deterrence they noting that ‘‘The smaller the stakes to each victim provide is not necessary because of unlawful conduct, the greater the economies of 648 Study, supra note 3, section 6 at 7. class action treatment and the likelier that the class companies already comply fully with 649 The Bureau notes that the FDCPA caps members will receive some money rather than the law. In support, a credit union damages in a class action at the lesser of $500,000 (without a class action) probably nothing, given the commenter provided data on the or 1 percent of net worth of defendant; capped difficulty of interesting a lawyer in handling a suit amount credit unions already spend to amount is in addition to any actual damages; for such modest statutory damages as provided for punitive damages are not expressly authorized. 15 in the [EFTA].’’). As the Bureau notes above, comply with regulations ($6.2 billion) U.S.C. 1692k(a)(2)(B). Congress amended EFTA to remove ATM sticker and what it asserted was a similar 650 Shepherd, supra note 515, at 2. provisions. additional financial impact of those

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regulation to its business practices. markets for these products or services commenter’s view did not benefit Separately, one industry commenter have particular features which, in their consumers because disclosure is rejected what it characterized as an view, encouraged full compliance by ineffective. assertion by the Bureau that companies providers.653 A trade association In contrast, numerous individuals, are ‘‘scofflaws.’’ Such commenters cited representing debt collectors stated that consumer advocates, public-interest data noting that companies have because arbitration agreements may not consumer lawyers, nonprofits, and significantly increased their spending always be written in such a way that the consumer lawyers and law firms agreed on compliance since the Bureau was class action prohibition can be relied with the Bureau’s findings that class established. Other industry, research upon by a debt collector, whether a debt action exposure deters wrongdoing and center, and State regulator commenters collector may be subject to class action encourages others to comply with the contended that there is no empirical liability is typically uncertain. Because law. One of these consumer advocate evidence that compliance with the law of this uncertainty with respect to the commenters suggested, as the Bureau is currently under-incentivized and that arbitration agreements, the commenter preliminarily found, that the deterrent there is nothing in the Study that stated that debt collectors fully comply effect of class actions is their most supports the Bureau’s contentions to the with the law and thus that the threat of potent benefit. Several of these contrary. Similarly, one industry class actions does not serve to deter debt commenters remarked that the public commenter criticized the preliminary collectors. Several credit union and nature of class actions and class finding regarding deterrence because the credit union association commenters settlements deter wrongdoing. One Bureau did not study compliance rates asserted that their member-owned, not- consumer law firm commenter noted of companies with and without for-profit cooperative structure provides that companies often require arbitration agreements, arguing that the adequate accountability incentives to notification to upper management and Bureau thus had no empirical evidence fully comply with the law, such that the boards of directors about class actions that companies with arbitration prospect of class actions are not because of their potentially large agreements have lower levels of necessary to deter them from violations liability, emphasizing that such senior compliance. Relatedly, an industry of the law. Similarly, a community bank leaders are capable of changing the commenter asserted that the rulemaking commenter stated that community underlying policies at issue. By contrast, record, including the SBREFA Report, banks are relationship-oriented, and the the commenter stated that individual indicates that companies do not intend need to develop customer relationships actions are often resolved at lower levels to spend more on compliance and thus and retain customers provide an of the company and that upper it has no deterrent effect. One State adequate incentive for them to comply management may not be made aware of regulator commenter also urged the with the law. the problem. Academic commenters Bureau to do a thorough quantitative A few commenters challenged the suggested that many named plaintiffs analysis to determine whether examples the Bureau cited in the pursue classwide relief not so that they companies currently comply with the proposal (and summarized above in this can be compensated but to prevent the consumer financial laws at less than Part VI.C.1) of companies that monitor company from harming similarly optimal levels. Relatedly, a comment class action lawsuits and adjust their situated consumers in the future. from a group of State attorneys general conduct accordingly as supporting the Similarly, a public-interest consumer asserted that market forces sufficiently Bureau’s preliminary finding that class lawyer and consumer advocate suggested that class action exposure encourage firms to comply with the law actions deter violation of the law. deters bad behavior and prevents harm because they do not want to be However, none of the commenters to victims other than the named perceived as ‘‘bad actors’’ relative to disagreed with the general observation plaintiff. A consumer law firm their competitors such that they might that companies monitor class action 652 commenter explained that class actions lose customers. Similarly, a nonprofit litigation to minimize their class action deter misconduct in ways that commenter stated its belief that exposure and at least one industry individual actions cannot. Similarly, a individual lawsuits sufficiently deter commenter agreed that doing so is a consumer advocate commenter stated violations of the law because an prudent business practice. One that class actions are critically individual lawsuit can alert a company commenter criticized the Bureau’s important not only for compensating to its violation of the law as well as a consideration of law firm alerts about class action lawsuit can. Accordingly, victims of corporate law-breaking but class action cases concerning ATM fee also for the deterrent effect of civil this commenter contended that class notices pursuant to EFTA as evidence actions are not necessary to deter litigation. that class actions create deterrence Commenters also provided specific violations of the law. because those cases were not analyzed Some industry commenters stated examples, from their personal as part of the class action litigation experience, of deterrence. For example, their belief that class actions were not filings in the Study and because necessary to deter violations of the law two public-interest consumer lawyer Congress has since amended EFTA such commenters described class actions with respect to providers of certain that the conduct at issue in those cases products or services because the involving automobile dealer markups is no longer unlawful. That same that resulted in an industry-wide commenter criticized the Bureau’s 652 This comment also asserted that the savings agreement to put in place caps on clause in section 2 of the FAA, which permits citation to foreign currency litigation, compensation so as to avoid future arbitration agreements to be invalidated by contending that the only behavioral litigation over this issue. A consumer generally applicable contract defenses such as change companies made in response to advocate commenter cited examples of ‘‘fraud, duress or unconscionability’’ (Concepcion, that litigation was to add more 131 S.Ct. at 1746), also protect consumers from bad deterrence in the auto-lending, payday conduct. The Bureau is not aware of any evidence consumer disclosure, which, in the loan, deposit account, and credit card to suggest that such defenses are widely available industries. to consumers or that they address most harms that 653 A few of these commenters requested that they Commenters offered various befall them and thus does not believe that exception be excluded from the rule’s coverage for this reason. to the FAA has any significant impact on its These requests for exclusion are discussed below in explanations for why, in their view, Findings with respect to whether the class rule is Part VII in the section by section analysis to class actions deter violations of the law. for the protection of consumers. § 1040.3. For example, a consumer advocate

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asserted that the risk of damages and deterring civil rights violations and group of State attorneys general reputational harm from a class action systemic discrimination. Members of contended that providers would, in fact, helps deter wrongdoing. Similarly, a Congress cited to a fact sheet written by remove arbitration agreements from consumer law firm commenter a consumer advocate regarding their contracts and that depriving suggested that the public nature of class discrimination class actions. This fact consumers of access to individual actions provides an important deterrent sheet, which summarized others’ work arbitration would harm them.655 With effect against wrongdoing. Another on the topic, asserted that individual regard to the first point, these consumer advocate stated that the civil discrimination cases are an unrealistic commenters asserted that providers justice system reinforces the efforts of option for remedying discrimination incur significant costs in connection regulatory programs aimed at preventing because, among other reasons, it is with providing arbitration to their such harms before they can occur, and expensive to prove institutional customers. As examples, commenters that the threat of incurring civil liability discrimination, and that class actions cited the filing fees, hearing fees, and adds a complementary deterrent factor may be the only way to prove and arbitrator compensation that providers that can discourage individuals and remedy a pattern or practice of often agree to pay when consumers file businesses from breaking the law and discrimination.654 Without class actions arbitrations against them. These engaging in other kinds of harmful deterring companies, stated one commenters suggested that providers behavior. A public-interest consumer consumer advocate commenter, are not willing to pay these costs for lawyer commenter asserted that, if a financial services companies would be individual arbitration unless they can company could block class actions, it able to go on enriching themselves by use arbitration agreements to block class may have a powerful incentive to breaking the law at the expense of their actions and thereby avoid class action engage in widespread violations of law largely unsuspecting customers. A defense costs. A few industry that result in small, but significant, consumer law firm commenter stated commenters argued that it is inevitable individual harms while benefiting the that class actions force corporate that companies would remove their company significantly in the aggregate. decisionmakers to think twice before arbitration agreements because it is The commenter further suggested that inflicting harms that would otherwise economically impossible for companies this incentive has led companies to act escape review if consumers could only to pay arbitration costs related to deceptively in small ways to reap proceed on an individual basis. individual arbitration and also pay class additional profits. With respect to the Bureau’s action defense costs. Nevertheless, no preliminary finding that precluding commenter provided a specific A consumer law firm cited to the providers from using arbitration accounting of providers’ costs or any Gutierrez overdraft case cited in the agreements to block class actions would other concrete evidence to buttress these proposal and described above, asserting better enable consumers to enforce their assertions. that it demonstrates how defrauding rights and obtain redress when their This lack of evidence is particularly consumers over small amounts can rights are violated by providers, many important because the Bureau stated in increase a company’s profits. The consumer advocate and consumer law the proposal that it was skeptical that commenter noted that there was little firm commenters agreed. By contrast, the class rule would cause providers to risk to the company that adopted those many industry commenters asserted that incur significant additional costs by practices because it had an arbitration the rule would lead companies to maintaining ‘‘two tracks’’ of dispute agreement in its customers’ contracts remove arbitration agreements from resolution (arbitration and court) given and few consumers noticed the fee their contracts which would make it that many providers already maintain practices at issue. When companies more difficult for consumers to obtain two tracks for dispute resolution in know consumers can sue in class relief in arbitration, a forum that the small claims court and arbitration and actions regarding such conduct, the commenters viewed as superior to that few companies compel arbitration commenter said that they are deterred. litigation. As discussed above, however, when an individual consumer first files A local government commenter some industry, research center, and in court. Several industry commenters explained that, in its experience, class State government and State attorneys explained why, in their view, the class actions have the potential of changing general commenters asserted that rule would impose significant corporate policy. Two consumer consumers have adequate alternative additional costs and why providers advocate commenters asserted that means of obtaining relief, whether currently permit small claims court deterrence works because of the risk of through the informal dispute resolution filings and rarely move to compel damages and reputational harm from a channel, pursuing individual disputes arbitration in individual litigation. A class action; when this risk is low, via litigation or arbitration or few industry commenters asserted that unfair or deceptive practices become enforcement. Consumer advocate and litigating disputes in both arbitration easier to adopt. Similarly, another nonprofit commenters disagreed with and small claims court is not consumer advocate commenter stated these assertions. substantially more burdensome for that without the deterrent effect of class Whether the rule will cause providers providers than litigating disputes only actions, companies’ worse instincts are to remove arbitration agreements. With in arbitration, because small claims unleashed—they become more driven to regard to the debate over whether courts have many of the same maximize profits and executive adopting the class proposal would harm streamlined procedures as arbitration, compensation at the expense of consumers by prompting providers to such as limits on discovery and protecting consumers. One public- remove arbitration agreements from individualized proceedings. interest consumer lawyer commenter their contracts entirely, many industry Consequently, in the commenter’s view, provided examples specific to civil commenters and a comment from a the fact that businesses litigate disputes rights class actions, explaining that it viewed private class actions as critical 654 See Center for Justice & Democracy, ‘‘Fact 655 Separately, one industry commenter asserted to protect civil rights in the financial Sheet: Civil Rights Class Actions: A Singularly that the combined effect of the class proposal and markets and that civil rights consumer Effective Tool to Combat Discrimination,’’ (Jan. 6, monitoring proposal would cause providers to drop 2014), available at https://centerjd.org/content/fact- their arbitration agreements. The impact of the class actions provide relief beyond the sheet-civil-rights-class-actions-singularly-effective- monitoring proposal is discussed below in Part named plaintiff by remedying and tool-combat-discrimination. VI.D.

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in both arbitration and small claims are less expensive for consumers than experience. Some industry commenters court does not indicate that they can comparable fees in court. For example, and a group of State attorneys general afford to ‘‘subsidize’’ arbitration while these commenters noted that the AAA’s noted that arbitration hearings were paying class action defense costs (and consumer arbitration rules require typically held in locations that were therefore continue to maintain two consumers to pay no more than $200 in convenient for consumers and often tracks if the Bureau finalized the class costs for arbitration, and that many occurred via telephone, Skype or email rule). The commenter also disagreed providers use arbitration agreements without the consumer having to appear that the Study showed that companies that require the provider to pay the in person. In contrast, these commenters already maintain two tracks of litigation consumer’s entire filing fees in certain noted that litigation typically requires because they move to compel arbitration circumstances. In contrast, commenters consumers to appear in person and in only about 1 percent of individual noted that filing fees for individual suits often during the day, requiring them to cases filed in Federal court and about 5 in Federal court are $400, and that State miss work. An industry and research percent of the 140 cases against court filing fees vary but are often more center commenter and a group of State companies known to have an arbitration than $200. A research center noted that attorneys general noted that the agreement. The commenter asserted that arbitration saves money for both arbitration process is simpler than the Bureau’s sample size of 140 cases is consumers and businesses. litigation and therefore easier for too small to draw the conclusion that Many of these same industry, research consumers to navigate. Relatedly, an companies rarely invoke arbitration center, and State attorneys general industry commenter noted that fees are agreements in individual litigation, commenters noted that individual modest and disclosed in arbitrations although no commenter cited any disputes filed in arbitration are, on and that arbitrators may waive or reduce evidence to the contrary. The average, resolved more quickly than them further. An industry commenter commenter also argued that companies’ those filed in individual litigation. One asserted that arbitration is better than low rate of invocation is not evidence of industry commenter noted that litigation because consumers can play a companies’ willingness to litigate in arbitrations analyzed in the Study were role in choosing their arbitrator, while both arbitration and court, because there resolved in a median of four to seven they cannot choose a judge. An industry are many reasons why a provider may months, depending on whether the commenter and several State attorneys not move to compel arbitration despite consumer appeared at the hearing and general asserted that arbitration benefits its preference for litigating disputes in whether that hearing was in person or consumers because they are more likely arbitration, such as the consumer opting by telephone. By contrast, the to receive a decision on the merits as out of the arbitration agreement, a commenter noted that the average time compared to class actions, where the provider’s offer of settlement, or the to reach trial for an individual suit filed Study showed no trials occurred in class consumer’s failure to prosecute the case. in Federal court was 26.7 months.657 actions. In response to the Bureau’s skepticism Several of these industry commenters Many of the industry and research in the proposal as to whether the costs further stated that many State courts center commenters noted that the Study of individual arbitration will cause have significant backlogs, thus showed that consumers prevailed on providers to remove arbitration increasing the time to resolution in their claims in arbitration at least as agreements if the class rule is finalized, those courts. much as they did in litigation. They other industry commenters noted that Many industry and research center noted, for example, that the Study many arbitration agreements include commenters also stated their belief that showed that consumers received a ‘‘anti-severability provisions,’’ which arbitration is a better forum for favorable decision from an arbitrator 6 state that if the agreement’s no-class consumers to resolve their disputes with percent of the time and settled with provision is held unenforceable, the consumer finance companies than companies 57 percent of the time in entire arbitration agreement is individual litigation in court because arbitration (appearing to reflect data 656 unenforceable as well. The consumers may proceed without an from the Study that identified known commenters stated that through these attorney in arbitration. These and likely settlements), while anti-severability provisions, providers commenters believe that arbitration’s consumers received a favorable have already effectively chosen to streamlined process, which does not judgment in 7 percent of their claims in eliminate their arbitration agreements if typically include motions or discovery individual litigation and settled 48 the no-class provision is not available practice common to litigation and has percent of claims filed in court and thus the Bureau’s skepticism is simpler pleading requirements, allows (appearing to reflect data from the Study unfounded. consumers to pursue their own claims that identified known settlements only). Whether loss of individual arbitration without an attorney and are far lower Many industry commenters and a group harms consumers. Numerous than what one industry commenter of State attorneys general further Congressional, industry, and research contended that successful consumers asserted is the astronomical cost of center commenters, as well as a group won significant amounts in arbitration; litigation. Indeed, these commenters of State attorneys general asserted that according to the Study, the average noted that the Study showed that arbitration is a superior form of dispute consumer who received a favorable unrepresented consumers more often resolution for consumers relative to award received more than $5,000 and a received favorable decisions from individual litigation and that consumers group of State attorneys general noted arbitrators than did consumers would therefore be harmed if the class that arbitration agreements rarely limit represented by attorneys. On the other rule causes providers to remove consumers’ recovery. arbitration agreements from their hand, one industry commenter asserted Several of these same commenters consumer contracts. These commenters that when consumers do have an also asserted that arbitration is at least cited several factors in support of their attorney in an arbitration, that attorney as fair for consumers as litigation argument. Many stated that arbitration is likely to have prior arbitration because the major arbitration is a superior forum for resolving administrators, AAA and JAMS, each 657 U.S. Courts, ‘‘Federal Judicial Caseload individual disputes because filing fees Statistics 2016,’’ (June 2016) available at http:// have due process standards that require www.uscourts.gov/statistics-reports/federal- arbitrators to handle claims fairly. An 656 Study, supra note 3, section 2 at 46–47. judicial-caseload-statistics-2016. industry commenter and a research

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center both further noted that courts deposit not properly credited at an ATM Some industry commenters stated have authority under the FAA to machine, was improperly charged a fee, their belief that arbitration was invalidate arbitration agreements that or had incorrect interest calculations on particularly useful, as compared to impose unfair terms on consumers, such his or her account when other litigation, for claims concerning certain as those that limit consumers’ right to consumers did not. One of these products or services. For example, a recovery in ways not permitted by commenters stated that, in its opinion, debt collection industry trade Federal or State law. In addition, these such individualized non-classable association stated that in debt collection commenters noted that the Study found claims are a significant majority of all disputes, consumers place a particularly that few arbitration agreements consumer claims. However, the high value on confidentiality, which it contained provisions that these commenters did not provide any believed arbitration better preserves. It commenters thought were unfair to empirical evidence for their assertions also stated that debt collection claims consumers on their face, such as those that most injuries to consumers occur are simpler to adjudicate, and thus that required arbitration to occur in an because of unique or individualized suited to a simpler process, which it inconvenient forum or that required the harms. believed arbitration offers. consumer to pay for all arbitration fees Many of these same industry and On the other hand and as noted above if the consumer failed to win the claim. research center commenters noted that in Part VI.B.2, consumer advocates, Commenters additionally asserted that without arbitration, many consumer consumer lawyers, trade associations of the majority of arbitration agreements finance claims may be filed in court. consumer lawyers, public-interest contain provisions intended to ensure Specifically, they contended that small consumer lawyers, consumer law firms, fairness for consumers, citing provisions claims courts are not an adequate forum nonprofits, and many individual such as those fully disclosing the for these claims that would have been commenters commented at length as to arbitration process, allowing consumers resolved in arbitration. While small why, in their view, litigation in court of to opt out of the arbitration agreement, claims courts ostensibly allow individual disputes along with the and allowing consumers to file claims consumers to pursue low-value claims availability of class actions was far that meet the relevant claims limits in more simply than in State courts of preferable to pursuing the same claims small claims court rather than be subject general jurisdiction or in Federal court, in arbitration. Several of these to arbitration. One industry commenter these commenters cited evidence commenters stated that industry went further and asserted that suggesting that small claims courts are preferred to funnel all disputes into arbitration is in fact more fair than the overcrowded or closing as a result of individual arbitration not to benefit alternatives because disputes can be budget cuts in some jurisdictions (citing consumers but instead to insulate reasonably aired, considered, and examples in parts of California, themselves from class actions and that resolved. Alabama, and Texas). The commenters they did not have consumers’ best Some industry and research center further contended that to the extent that interest in mind when suggesting that commenters asserted that individual small claims courts are over-crowded arbitration was preferable. arbitration is frequently and (or non-existent), they are slow in As discussed above in Part VI.B.1, successfully used by both consumers providing relief to consumers who are many of these commenters further and companies in other areas of the law, injured or do not provide relief at all. stated that individual arbitration was so such as in employment, securities, and These commenters also pointed out that unfair relative to individual litigation medical malpractice. They further small claims courts typically require that the Bureau should have protected contended that, given time, consumer consumers to appear in person during individual consumers by banning finance arbitration can achieve the same standard working hours, which can be outright the use of pre-dispute 658 difficult for many consumers who arbitration agreements. For example, levels of success. They did not state 659 how much time would be required nor cannot take time off from their jobs. some commenters argued that consumer what should happen to consumers arbitration outcomes cannot be 659 bound by arbitration now until that While many commenters asserted that consistently fair because arbitration individual arbitration is a superior form of dispute naturally favors providers, as repeat threshold is crossed. One industry resolution to individual litigation, a few industry commenter asserted that consumers are commenters asserted that individual arbitration is players, over consumers, who may only more satisfied but did not provide a superior form of dispute resolution to class face an arbitration once. One public- litigation. One industry commenter noted that evidence supporting this claim nor did interest consumer lawyer commenter individual arbitration proceeded significantly more argued that individual arbitration is it explain what consumers were more quickly than class litigation, stating that consumer satisfied with—their provider or arbitration was up to 12 times faster than class necessarily worse for consumers than arbitration. action litigation when comparing resolution on the litigation because consumers cannot Several industry and research center merits in arbitration to a class settlement. Another find legal representation and few industry commenter noted that arbitration hearings consumers file arbitrations in any case. commenters stated that the loss of occurred significantly more often than do trials in individual arbitration as an option for litigation and thus asserted that arbitration claims Accordingly, these commenters did not consumers is particularly problematic were ‘‘heard on the merits’’ more often than were agree that a loss of individual claims in class action litigation. For example, arbitration, if it occurred in response to because, in their view, most injuries hearings occurred in 30 percent of the arbitrations suffered by consumers in consumer analyzed in the Bureau’s Study whereas not one of the Bureau’s rule, would negatively finance cases are individualized and the class actions analyzed in the Study went to trial impact consumers. Instead, many of therefore could not be remedied through (those cases ended by a plaintiff’s withdrawal of these commenters thought that claims, a settlement, or a dismissal by the court). consumers would be better off without class action lawsuits, which are the The Bureau does not believe such a comparison is focus of the Bureau’s class rule. These dispositive to an assessment of whether arbitration it. commenters cited, as examples, cases in is better than litigation for resolving individual One industry commenter challenged which an individual consumer had a disputes. Moreover, even assuming that arbitration an argument it believed was raised by resolves claims more quickly than class litigation or some consumer advocates who it claims holds hearings on the merits more often than class 658 A few commenters pointed out that the Bureau litigation, the Bureau believes that consumers and have asserted that the widespread requires its employees to sign pre-dispute the public interest benefit more from the arbitration agreements and to arbitrate employment availability of class actions than from the consumers who choose it), for all the reasons stated claims against the Bureau. availability of individual arbitration (for the few in this Part VI.C.1.

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removal of pre-dispute arbitration some pressure to settle class action violations of CROA’s requirements. agreements would not harm consumers lawsuits given attorney’s fees and the These companies currently offer credit because both sides would mutually potential of a large verdict. At the same monitoring services that would not meet agree to ‘‘post-dispute arbitration’’ (i.e., time, plaintiff’s attorneys have an CROA’s requirements if they were a voluntary agreement to arbitrate incentive to bring cases with the greatest applied to them. They contend that they reached after a dispute has arisen).660 likelihood of success since the amount would be forced to increase their prices The commenter disagreed with this they can secure in fees will be affected, and there is a possibility they would not argument, asserting that parties are less at least in part, by the amount they are be able to offer credit monitoring likely to agree to post-dispute able to obtain for the class. Precisely services if they had to comply with arbitration because they become because all that is true, companies that CROA’s requirements because doing so invested in their positions and refuse to face the threat of class actions will have would be infeasible both practically and arbitrate and because attorneys an incentive to avoid being sued and to financially. Further, they believe they discourage them from doing so in order reduce the expected value—and thus are able to offer these services without to maximize attorney’s fees in litigation. the likely settlement costs—of any suits significant risk now because they The commenter also asserted that post- that are filed. That, in turn, means that include arbitration agreements in their dispute arbitration would be less the potential for class action litigation consumer contracts, thus insulating attractive to consumers than pre-dispute creates an incentive for companies to them from class action liability. Setting arbitration because providers are rigorously adopt compliance measures aside, for the moment, the legal question unwilling to pay as many of the costs in and to avoid legally risky practices. of whether CROA does apply to credit such cases. In the commenter’s view, While compliance with the law may not monitoring and if it did, the policy post-dispute arbitration would therefore fully insulate a company from the threat question of whether these companies not replace pre-dispute arbitration, even of a class action lawsuit, failing to should be able to offer credit monitoring where it is the most efficient option for comply with the law would almost services to consumers without both parties. certainly increase the likelihood that complying with CROA,664 these Response to Comments and Findings company will be sued and the value of comments suggested that the prospect of the claims asserted. Thus, because the class action liability would alter how The Bureau has carefully considered Bureau believes that the likelihood of these companies approach providing the comments received on these aspects being sued in a class action and the their product. In other words, their of the proposal and further analyzed the expected value of class claims are ability to insulate themselves from issues raised in light of the Study and inversely proportional to the efforts a CROA class action liability has caused the Bureau’s experience and expertise. company makes to assure compliance them to offer a service that the Based on all of these sources and for the with the law, then it necessarily follows companies fear courts could hold reasons discussed above in Part VI.B, in that an increased risk of class action violates CROA. Were they to lose that the proposal, and further below, the litigation will incentivize companies to insulation, they say they will be Bureau finds that precluding providers improve compliance efforts. deterred from offering that service. from blocking consumer class actions An example of this deterrent effect As another example, debt collector through the use of arbitration can be found in comments from a credit agreements would substantially commenters noted that debt collectors reporting agency that provides credit do not underinvest in compliance strengthen the incentives for companies monitoring and a consumer data trade to avoid legally risky or potentially because the presence of class action association representing providers of waivers does not provide enough illegal activities, thereby reducing the credit monitoring. These commenters likelihood that consumers would be certainty to them that they will be contended that two Federal appellate always able to minimize class action subject to such practices in the first courts have improperly interpreted instance. To the extent that companies liability. The Bureau believes that one CROA to apply to at least one credit corollary of this argument is that some nonetheless engage in unlawful 661 monitoring product. As discussed in debt collectors could be encouraged to conduct, permitting class actions would more detail in the section-by-section also better enable consumers to enforce spend less on compliance if they had analysis of § 1040.3(a)(4) below in Part more certainty about their ability to their rights under Federal and State VII, among the requirements that CROA consumer protection laws and the block class actions. To the extent this is imposes on credit monitoring are a true, the Bureau believes that debt common law and obtain redress when disclosure to potential consumers, their rights are violated. For these collectors would be less deterred if they waiting three days before commencing were more certain that they could block reasons and those discussed below, the the services with a right of cancelation Bureau finds that both of these results class actions, and conversely would be for the consumer, and prohibiting pre- more deterred if they knew with are for the protection of consumers. payment of fees.662 CROA further Deterrence. With respect to certainty that they could not block class provides for statutory damages for actions. commenters that contended that class violations of the statute that amount to actions do not deter wrongdoing disgorgement of the fees paid for the As for the commenter that criticized because, in practice, companies face product.663 In the view of these the behavioral relief in the foreign pressure to settle class actions whether commenters, if they were subject to currency fee litigation as worthless or not they are meritorious, the Bureau CROA, they would face significant risk because disclosures provided about does not agree that the conclusion of class action exposure for what the these fees are ineffective, the Bureau follows from the premise. As discussed commenters referred to as ‘‘technical’’ first notes that Congress believes in the above in Part VI.B.3 and below in the importance of timely and Section 1022(b)(2) Analysis in Part VIII, 661 Stout v. Freescore, LLC, 773 F.3d 680, 686 (9th understandable disclosures for the Bureau understands that there is Cir. 2014); Zimmerman v. Puccio, 613 F.3d 60, 72 (1st Cir. 2011). 664 That issue is addressed more fully below in 660 The Bureau did not receive any comments 662 Credit Repair Organizations Act (CROA), 15 Part VII in the section-by-section analysis of from consumer advocates or others asserting this U.S.C. 1679 et seq. § 1040.3, in which the Bureau responds to the position, however. 663 15 U.S.C. 1679g(a)(1)(B). CRA’s request for an exception to the class rule.

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consumers.665 In addition, the Bureau the Bureau disagrees with industry Affected companies should use this time, notes that, following settlement of the commenters that assessments as to the before implementation, to mitigate class foreign currency fee cases, the number value to consumers of particular action claims that previously might have protections afforded by the law are been subject to arbitration. Companies of credit cards charging fees for foreign should consider a review of all consumer- currency transactions decreased relevant to the question of whether or facing documents to confirm language dramatically.666 Based on the Bureau’s not class actions have a deterrent complies with applicable federal and state understanding of this industry, it effect.668 Instead, these examples law. Additionally, internal policies and believes that had companies not agreed illustrate the broader principle that procedures must be reviewed to ensure that to disclose these fees, the competitive companies have altered or would alter product origination and servicing is pressure to eliminate them would have their behavior in response to class consistent with all legal requirements. been lower. In any event, the Bureau action exposure. To the extent that the Likewise, vendor agreements must be commenters were really trying to argue reviewed in relation to applicable law— cited the foreign currency fee class including, most importantly, principal- action settlements in the proposal as that the underlying laws provide no agency theories. It is imperative that evidence of deterrence because those benefit to consumers, that argument is companies anticipate ways to limit liability settlements caused issuers to disclose addressed separately below. and manage future class action risks now— their exchange fees. The fact that other Indeed, the Bureau notes that while as class action defense litigation spending is companies changed their practices is some industry commenters resisted the anticipated to surge in every consumer 671 evidence of the deterrent effect, even if premise that potential class action finance sector. some commenters disagreed that liability produces deterrent effects, One industry commenter asserted that disclosure of such fees is beneficial. other industry, individual, and research class actions create over-deterrence Along the same lines, in response to the center commenters agreed with the because class settlements may commenter that claimed the overdraft Bureau’s finding and supplied encourage companies to avoid behavior settlements did not deter such behavior additional evidence in support of it. that is legally ambiguous but not because a few banks have not changed One such individual commenter (who necessarily unlawful.672 To the extent their overdraft practices following the otherwise strongly opposed the wave of class action litigation, the proposal) agreed that class actions have management system. Evaluate your consumer commenter itself admitted that the the ability to ‘‘prompt ‘enterprise-wide compliance management system to identify and fill change’ ’’ in providers. Similarly, one of any gaps in processes and procedures that inure to litigation has encouraged most banks to the detriment of consumers under standards of change their overdraft practices. This the studies cited by industry and unfair, deceptive, and abusive acts or practices, and bolsters the Bureau’s finding that those research center commenters that that could result in groups of consumers taking class actions deterred banks from analyzed the results of class action action.’’); Paul Hastings LLP, ‘‘Class (Not) lawsuits included interviews of Dismissed: CFPB Proposes New Rule Prohibiting further violations of the law with Mandatory Arbitration Clauses, Encourages respect to their overdraft practices, even corporate representatives regarding class Consumer Class Action Law Suits,’’ (May 12, 2016), if there are some banks that did not action liability in which those available at https://www.paulhastings.com/ change their practices. Indeed, perfect representatives acknowledged that publications-items/details/?id=8e53e969-2334- ‘‘damage class action lawsuits have 6428-811c-ff00004cbded (stating that ‘‘CFPB- compliance with the law is unlikely to regulated entities should consider the following be achieved through any mechanism, played a regulatory role by causing them action items,’’ including ‘‘review[ing] customer whether agency enforcement or class to review their financial and complaint logs to identify those products and 669 services that elicit the most frequent consumer action litigation. employment practices.’’ Furthermore, upon issuance of the complaints and could potentially serve as the basis With these examples, as well as the for consumer class action lawsuits’’); Venable LLP, Bureau’s proposal, several law firms EFTA ATM ‘‘sticker’’ litigation example ‘‘The CFPB’s New Arbitration Clause Ban: How to advised their clients to review their Prepare Your Organization,’’ (June 15, 2016), slide discussed in the proposal and above,667 compliance given the possibility of the 31, available at https://tinyurl.com/l32qjdb Bureau finalizing the proposal and the (analyzing what the proposed rule ‘‘mean[s] for 665 See Dodd-Frank section 1021(b) (‘‘The Bureau regulatory compliance’’ and advising entities to is authorized to exercise its authorities under clients’ subsequent increased risk of ‘‘assess litigation exposure,’’ ‘‘assess recourse Federal consumer financial law for the purposes of class actions.670 As one firm advised: available to consumers,’’ ‘‘know the terms of your ensuring that . . . consumers are provided with contract,’’ and ‘‘consider product and service timely and understandable information to make 2013, the Bureau issued a final rule implementing enhancements’’). These law firm alerts were responsible decisions about financial this amendment. preceded by others before the issuance of the transactions’’). proposal providing similar advice to companies to 668 The Bureau notes that the EFTA ATM sticker 666 improve their compliance management and systems Sienna Kossman, ‘‘Survey: More Cards Bid requirements are no longer in place. A few in anticipation of the rule. 81 FR 32830, 32862–63 Farewell to Foreign Transaction Fees,’’ commenters criticized the fact that the Bureau cited (May 24, 2016). A compliance firm similarly CreditCards.com (March 31, 2015), available at EFTA ATM sticker cases in the proposal as an advised its clients to ‘‘batten down the hatches’’ by http://www.creditcards.com/credit-card-news/ example of companies changing their behavior in taking steps to ‘‘mitigate the flow of class actions.’’ foreign-transaction-fee-survey.php (finding that, response to class action lawsuits because cases See Treliant Risk Advisors, ‘‘Pre-dispute Arbitration from 2012 to 2015, ‘‘the eight issuers that charge related to that conduct were not included in the Clauses: Batten Down the Hatches,’’ available at foreign transaction fees on at least some of their Study. The fact that those cases were not included https://www.treliant.com/News-and-Events/New- consumer cards have increased the total number of in the Study is irrelevant—the salient point is that Coordinates-Newsletter/NC-Articles-Details/ fee-free cards from 21 to 38.’’). companies changed their behavior in response to 667 ArticleID/27227 (Summer 2016) (listing several In 1999, Congress amended the EFTA to class action lawsuits being filed and thus that those steps firms can take to reduce risk, including that require that ATM operators make disclosures about cases deterred companies from violating EFTA in they should ‘‘analyze complaints . . . to identify ATM fees to be charged consumers, both (1) ‘‘on or that regard. [compliance] problems’’ and to ‘‘complete thorough at’’ the ATM itself (usually a sticker on the 669 Deborah R. Hensler, et al., ‘‘Class Action root cause analysis for any concerning trends’’). machine) and (2) on the screen of the ATM during Dilemmas: Pursuing Public Goals for Private Gain,’’ 671 Katten Muchin Rosenman LLP, ‘‘CFPB Issues the transaction or on the receipt after the at 9 (Mar. 24, 1999) (RAND Inst. for Civil Just.). transaction. This EFTA amendment made ATM Proposed Rule to Restrict Use of Mandatory operators liable for actual and statutory damages in 670 Jones Day LLP, ‘‘CFPB Proposes New Rule on Arbitration Clauses and Class Action Waivers,’’ individual and class cases if consumers did not Mandatory Consumer Arbitration Clauses,’’ (May (May 16, 2016), available at https:// receive both disclosures. A number of class actions 2016), available at http://www.jonesday.com/cfpb- www.kattenlaw.com/CFPB-Issues-Proposed-Rule-to- were filed and settled on the grounds that the ATM proposes-new-rule-on-mandatory-consumer- Restrict-the-Use-of-Mandatory-Arbitration-Clauses- operator had failed to comply with the ‘‘on or at’’ arbitration-clauses-05-16-2016/ (in an alert and-Class-Action-Waivers. requirement because the ATM sticker was missing. regarding the potential impact of the proposal, 672 The Bureau adopts this definition of ‘‘over- In 2012, Congress amended EFTA again to instructed companies subject to Bureau regulation deterrence’’ (i.e., deterring legally ambiguous and eliminate the ATM sticker requirement, and in to ‘‘[c]onduct a review of your compliance Continued

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that the comment was referring to the deterrent effect of a larger settlement. In above in Part VI.B.5. For this reason, ‘‘over-deterrent’’ effect as to a company other words, class action settlements even if such a practice were more that engaged in the legally ambiguous involving ambiguous or uncertain efficient than unfettered class actions, behavior and that was sued because of violations of the law may deter some the Bureau has many competing it, the Bureau notes that the company lawful conduct at the margins, but the priorities and likely would not be able was not deterred by the threat of class Bureau does not believe this deterrent to identify and communicate every type action liability to the extent that it did, effect would be significant. And, even if of unfair or deceptive practice for the in fact, engage in the behavior that was there is some small impact from these many thousands of products or services the subject of the class complaint. settlements on legally ambiguous but within its jurisdiction. Accordingly, a company that takes the not unlawful behavior, the Bureau As for commenters that contended risk of engaging in conduct that may believes that, on balance, that it would that statutory damages were designed to violate an ambiguous or uncertain law be a reasonable cost to achieve the incentivize individual claims and are was neither deterred nor ‘‘over- benefits of the class rule for the public misapplied when asserted in class deterred.’’ To the extent that the and for consumers.673 As to the research actions, the Bureau does not agree that comment was referring to an ‘‘over- center commenter that contended that the class action liability that results deterrent’’ effect as to that same bad actors are likely not deterred from under statutes that provide for statutory company once it chooses to stop violations of the law because they are damages is unintended or accidental. engaging in the behavior that generated judgment proof, the commenter offered Instead, and as discussed more fully in the class action settlement or as to other no evidence to support that most or all Part II.C, Congress has repeatedly companies that become aware of the providers that violate the law are enacted measures to address the settlement and avoid similar behavior, judgment proof. In any event, the interaction of statutory damages and the the Bureau understands that the Bureau believes for all of the reasons class action mechanism, as evidenced prospect of class action liability may, at stated above that the prospect of class by its adoption of classwide damages the margins, deter some conduct that is action liability deters violations of the caps for many statutes.674 The statutory legally ambiguous but not necessarily law for providers that are not judgment regimes enacted, including whether the illegal. But, even if at the margins, the proof, regardless of whether some statute allows for class action liability, effect of the class rule would be to deter judgment proof defendants may not be reflect policy decisions by Congress. conduct that may be legal from deterred. Commenters may disagree with those occurring, the Bureau believes that, on With respect to the industry decisions, but it is Congress who makes balance, that would be a reasonable cost commenters that contended that statutes them, not the Bureau. In any event, as to achieve the benefits of the rule for the providing for statutory damages or discussed below in Part VI.C.2 and in public and consumers. Moreover, the double and treble damages compound the Study, most of the consumer credit Bureau believes that most providers the pressures to settle and thus create a protection statutes cap statutory consult attorneys to assess the legal risk deterrent effect that is imprecise or damages. of engaging in particular conduct and inefficient, the Bureau does not dispute Similarly, commenters that criticized that providers likely have different that the existence of statutory damages the underlying statutes as incentivizing levels of tolerance for the legal risk that or attorney’s fee provisions may private lawsuits when the commenters arises from engaging in conduct that is encourage lawsuits under those statutes. claim there is ‘‘no harm to deter’’ are, legally ambiguous. Some commenters contended this is in essence, either claiming that courts Moreover, as discussed in more detail ‘‘imprecise’’ or ‘‘inefficient.’’ It is will allow the lawsuits to proceed in Part VI.B.3 above, there is a nevertheless a direct consequence of the despite the absence of an in injury-in- relationship between the likelihood of statutory regime adopted by Congress fact (which the Constitution requires for success on class action claims and the and the States and, if anything, is Federal court litigation 675) or are amount of the settlement. For this evidence that lawmakers chose to expressing concern about the measure of reason, the Bureau believes, all else emphasize the need for compliance with damages for injuries that these equal, that a class action that asserts these laws. As for the commenter that commenters asserted to be minor. As to legally ambiguous but not clearly suggested that class actions are an the first, Federal courts have repeatedly unlawful claims is likely to result in a inefficient policymaking tool, the considered what it means for a plaintiff smaller settlement, if any, than a class Bureau disagrees that class actions to establish individual, concrete harm in action that asserts a clear violation of constitute policymaking themselves. order to have standing to assert a claim the law. As a result of a smaller Rather, the Bureau believes that class for statutory damages. Indeed, the settlement amount, the deterrent effect action settlements occur only because Supreme Court recently addressed the of a settlement with regard to a legally Federal and State legislatures had issue.676 The judicial system can and ambiguous or uncertain claim would be already adopted policy choices by does address whether plaintiffs must correspondingly smaller than the enacting particular statutes or the suffer harm in order to allege the common law had developed to reflect violation of a statute; the Bureau is not potentially lawful behavior) solely for purposes of certain policy judgments. In response to in the position to make such addressing the argument raised by the commenter. the commenter that suggested that the assessments in the context of this In economic terms, the existence of over-deterrence rulemaking. As to the second, these would generally imply that providers were Bureau should determine which responding to the deterrent (class actions) by taking conduct is unfair or deceptive because actions where the costs (e.g., foregone profits) that would be more efficient than class 674 See infra note 740 (classwide statutory damage exceed the social benefits (e.g., avoided harm to actions, the Bureau’s resources are caps). consumers). That is, over-deterrence leads to more 675 Lujan v. Defenders of Wildlife, 504 U.S. 555, compliance than is socially optimal, regardless of limited, for all of the reasons discussed 560–61 (1992). the exact legal status of the conduct. As discussed 676 Spokeo, Inc. v. Robbins, 136 S. Ct. 1540, 1549 in the Bureau’s Section 1022(b)(2) Analysis in Part 673 The Bureau notes that it similarly finds below, (2016) (affirming that injury to a legal interest must VIII below, the Bureau believes that in general the in Part VI.C.2, that even if the class rule may, at the be ‘‘concrete’’ as well as ‘‘particularized’’ to satisfy level of compliance in consumer financial products margin, the deter certain innovations from the injury-in-fact element of standing and because is below the optimal level, although there may be occurring, the Bureau believes that, on balance, that Congress is ‘‘well positioned to identify intangible exceptions for particular firms in particular would be a reasonable cost to achieve the benefits harms that meet minimum Article III requirements, markets. of the rule for the public and consumers. its judgment is . . . instructive and important.’’).

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commenters may be disagreeing, to practices enabled the banks to offer free In response to commenters that some extent, with Congressional checking accounts to its customers. contended that there is no need for the decisions about the remedies for certain Whether those overdraft policies deterrence provided by class actions harms. For example, commenters cited generated revenue from overdrafters that because companies are fully deterred many statutes that they believe create subsidized free checking accounts for from violating the law by the threat of violations of law and large penalties consumers generally is beside the point; public enforcement, the threat of without any corresponding harm to when companies violate the law, the individual litigation, the threat of consumers. Those statutes include consumers who are victims of the wrong consumers taking their business FACTA requirements for printing credit are better protected and accountability elsewhere, or by Tribal regulation and card numbers on receipts that apply to is improved when there is an effective enforcement, the Bureau explained why merchants, a now-repealed EFTA remedy, regardless of how the company each of these is insufficient in enforcing requirement concerning ATM fee may have invested the profits from the law above in Part VI.B. To the extent notices, TCPA restrictions concerning those violations. If companies were these other mechanisms do not allow for unsolicited telephone calls, California excused from violating the law because sufficient enforcement of the law they disclosure requirements for automobile doing so allowed them to charge lower also do not sufficiently deter companies purchases, and CROA, which concerns prices, they could, for example, justify from violating the law. As discussed credit repair products and provides for charging higher prices to a certain race there, the Bureau finds these avenues the remedy of disgorgement of fees paid. or gender in order to subsidize lower both individually and jointly While commenters may disagree that prices to other groups. The Bureau does insufficient to fully enforce the unwanted telephone calls, the printing not believe such a result would protect consumer protection laws. of credit card expiration dates on consumers and likewise does not agree Moreover, the Bureau has observed, receipts, or the failure to disclose that the overdraft settlements harmed through its experience and expertise certain terms of automobile purchase consumers in the way the commenter that there is not full compliance with transactions harm consumers, Congress suggested. To the contrary, the Bureau the law. Indeed, despite the Bureau’s and the State legislatures have the believes that consumers benefitted from creation and subsequent work, it authority to make those judgments and these aspects of the overdraft continues to receive thousands of set the remedies for the harms it settlements, which resulted in more complaints per month and regularly chooses. transparent upfront pricing that uncovers wrongdoing that has not been With respect to CROA, as discussed facilitates comparison shopping by deterred simply by the existence of the below, since 2005, there have been a consumers. Bureau or the threat of individual number of efforts in Congress to For all of the reasons stated, the dispute resolution, whether formal or determine whether CROA could be Bureau finds that class action informal. Further, the Bureau does not improved by clarifying the CROA credit settlements are not wholly random and believe that the wrongdoing it uncovers monitoring coverage issue that are sufficiently correlated to merit to is the only wrongdoing that exists, in commenters raised here. No consensus deter wrongdoing. The Bureau also does part because the markets for consumer has been reached to date and the FTC not agree that the deterrence provided financial products and services are has twice expressed concern about the by class actions is limited to those cases numerous and often large, and the difficulty in structuring a revision to that result in class settlements or even Bureau’s work is necessarily limited by CROA to address this concern. This those that are filed at all. Mere exposure its resources. Thus, the Bureau finds history suggests that the author of CROA to the potential to be sued for a that the commenters’ assertion that all (Congress) and its enforcer (the FTC) are meritorious class action, in the Bureau’s providers comply fully with all not certain CROA should be revised, or view, creates an incentive to refrain applicable laws to be unsupported. how. In any event, with respect to from the conduct that would give rise to As for those commenters that CROA and all statutes, it is Congress that action. As one commenter noted, suggested that specific types of that sets the remedies and determines the exposure to potential liability based providers—such as debt collectors, coverage for its statutory regimes. on cases filed against other companies credit unions, and community banks— Further, though some providers may often put upper management and boards have sufficient incentives because of the currently be able to block class actions of directors on notice of widespread nature of their particular product or under these statutes through their use of misconduct in a way that individual service to comply fully with the law, the arbitration agreements, these statutes cases are unlikely to do. To appreciate Bureau does not find evidence that nevertheless govern providers’ conduct the potential for such a suit, it is not these entities are sufficiently deterred and those providers who violate the law necessary for a company to be aware from violation in a way that warrants may be subject to individual claims. In that another company engaged in the their exclusion from the class rule. With short, to the extent that commenters same conduct and was sued.677 The respect to debt collectors, commenters believe class actions provide outsized Bureau therefore adopts its preliminary noted that whether debt collectors can liability under particular statutes findings, as further elaborated here, rely on arbitration agreements is without requiring proof of any real harm with respect to the fact that class actions uncertain. This, they contend, means to consumers, courts, Congress, and deter violation of the law.678 that they already sufficiently invest in State legislatures are presumptively the compliance. Accordingly, while debt proper branches of government to 677 Although, as discussed above, the fact that collectors may have more incentive to address this concern. providers monitor such filings in order to determine comply with the law than providers that Relatedly, one research center whether adjustments in their practices may be are certain that they can block class advisable demonstrates that the deterrence commenter cited the Overdraft MDL incentives are meaningful. actions, debt collectors still have less class settlements as examples of 678 The Bureau notes that one commenter incentive to comply than providers that violations of the law where consumers requested that the Bureau commit, if the rule is were not harmed. In fact, in the finalized, to revisit the rule and determine if an for the Bureau to decide whether it will conduct an commenter’s view, consumers received increase in frivolous lawsuits occurs as a result. The assessment of this final rule pursuant to Dodd- Bureau notes that it regularly monitors and receives Frank section 1022(d), similar to what it has a benefit from the violations, because feedback from interested stakeholders on all of the announced recently regarding certain other final the fees generated by those overdraft rules that it administers. However, it is premature rules.

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do not include arbitration agreements in similar reasons, the Bureau further In general, the Bureau disagrees with their contracts at all. In other words, believes that the presence of a financial commenters that stated that the Bureau while the legal uncertainty with respect institution in a community, with the should have further studied current to the ability of debt collectors to rely interest of developing and retaining levels of compliance in the marketplace. on arbitration agreements to block class customers in that community, also is The Bureau’s supervision function has actions suggests they may be somewhat not a sufficient compliance incentive to the purpose of assessing compliance more deterred from violations of the law replace a right to enforce relevant laws and remedying non-compliance either than providers who are certain that they on a class basis. through supervisory resolutions or can do so, the Bureau believes that debt Moreover, in the period since the through referral of cases for public collectors will be further deterred from Bureau released the proposal, several enforcement actions. The Bureau’s violations of the law once the class rule more large-scale violations of consumer enforcement function investigates cases takes effect and debt collectors are finance law have become public. In one where there is reason to believe certain that they may not rely on example discussed above, the Bureau violations are occurring and pursues arbitration agreements to block class fined a large bank $100 million for those where the evidence warrants actions. With respect to credit unions, widespread illegal practices related to doing so. It would not be practical to the Bureau does not believe that the opening of thousands of somehow study compliance levels member ownership is a sufficient unauthorized accounts on behalf of its independent of the work the Bureau compliance incentive to replace a right customers.682 The Bureau’s order in this does on an ongoing basis through to enforce the relevant laws on a class case addressed unfair and deceptive supervision and enforcement, nor basis, in part because the members of a conduct between 2011 and the date of would the Bureau expect companies to credit union are not necessarily aware of the order. The existence of the Bureau be forthcoming with evidence of non- legal harms and thus may be unable to and the threat of enforcement and compliance were the Bureau to attempt use the membership structure to hold supervisory actions evidently did not such a study. their credit union providers to account. deter employees of the bank from With respect to the Bureau’s Moreover, even when consumers are routinely opening unauthorized preliminary finding that precluding aware, credit union customers do not accounts on behalf of its customers. Nor providers from using arbitration necessarily engage in active efforts to did the prospect of individual lawsuits agreements to block class actions would hold management of the credit union or the threat of losing customers better enable consumers to enforce their accountable, such as by attending apparently deter the bank’s employees rights and obtain redress, some annual meetings.679 Just as an from that conduct. commenters suggested that the other individual consumer is very unlikely to Another example involved a large means do sufficiently remedy all bring formal legal action over a small- money transmitter that recently agreed violations of law. Those comments are dollar harm, a credit union customer is to a $586 million settlement with discussed in above in Part VI.B. not necessarily likely to know about several public enforcement agencies, Otherwise, no commenters disagreed membership accountability mechanisms including the FTC and the Department with the Bureau’s findings in this regard much less to spend the time and effort of Justice. In that settlement, the money and the Bureau adopts these findings to coordinate a campaign to use them to transmitter admitted to criminal and with respect to the final class rule. hold a credit union accountable for civil violations of the law involving Whether the rule will cause providers small-dollar harms.680 Further, even if aiding and abetting massive wire fraud to remove arbitration agreements. The credit union customers do participate in by its agents.683 As the complaint in this Bureau is not persuaded by the industry the accountability process, very few are case demonstrates, the money commenters’ claims that, if the Bureau’s likely to exercise their vote on this basis transmitter not only failed to meet legal rule goes into effect, providers alone, particularly over small-dollar requirements to maintain an effective inevitably would remove their pre- harms. Indeed, the Bureau has observed anti-money laundering program but also dispute arbitration agreements because violations of the law by credit unions appeared to ignore ample evidence they would be unwilling to subject with respect to their members.681 For gathered through its complaint system themselves to the costs of arbitration (i.e., its mechanism for resolving while simultaneously being exposed to 679 Robert F. Hoel, ‘‘Power and Governance: Who informal disputes) that indicated the class action defense costs. Once the Really Owns Credit Unions,’’ at 25 (Filene Research extent of the problem.684 Bureau’s rule goes into effect, class Institute 2011), available at https://filene.org/ actions will become available to all assets/pdf-reports/244_Hoel_Power_ Governance.pdf. administrative-orders.aspx (listing dozens of consumers. Thus, the relevant question government enforcement actions against credit 680 Although Appendix A to the Proposal is whether, in a world where class unions each year). identified several class action settlements from the actions are available, maintaining 682 Press Release, Bureau of Consumer Fin. Prot., Study involving credit unions related to products arbitration agreements would no longer and services that would be covered by the rule (i.e., ‘‘Consumer Financial Protection Bureau Fines excluding EFTA ATM ‘‘sticker’’ litigation), industry Wells Fargo $100 Million for Widespread Illegal be in the companies’ interest, resulting commenters did not point to any efforts by Practice of Secretly Opening Unauthorized in the loss of arbitration as a dispute customers at these or other credit unions to hold the Accounts,’’ (Sept. 8, 2016), available at http:// resolution option for those consumers credit union accountable through membership www.consumerfinance.gov/about-us/newsroom/ consumer-financial-protection-bureau-fines-wells- that would have elected to pursue it. If accountability mechanisms. a company were to decide to remove 681 E.g., Press Release, Bureau of Consumer Fin. fargo-100-million-widespread-illegal-practice- Prot. ‘‘CFPB Orders Navy Federal Credit Union to secretly-opening-unauthorized-accounts/. Pay $28.5 Million for Improper Debt Collection 683 Press Release, Fed. Trade Comm’n, ‘‘Western The complaints allowed the company to identify Actions,’’ Oct. 11, 2016, available at https:// Union Admits Anti-Money Laundering Violations particular agents that should have made the www.consumerfinance.gov/about-us/newsroom/ and Settles Consumer Fraud Charges, Forfeits $586 company aware of the agents who were likely cfpb-orders-navy-federal-credit-union-pay-285- Million in Settlement with FTC and Justice implicated in fraudulent transfers. The company million-improper-debt-collection-actions/; Tina Department,’’ (Jan. 19, 2017), available at https:// not only ignored these complaints on an individual Orem, ‘‘12 Credit Unions Face Overdraft Suits,’’ www.ftc.gov/news-events/press-releases/2017/01/ basis but also did not take steps to eliminate the Credit Union Times (Jan. 5, 2016), available at western-union-admits-anti-money-laundering- fraudulent agents from its network. See Complaint http://www.cutimes.com/2016/01/05/12-credit- violations-settles. at ¶¶ 18–19, FTC v. The Western Union Co., No. unions-face-overdraft-suits. See generally NCUA, 684 The complaint in this case detailed how the 17–00110 (M.D. Pa. Jan. 17, 2017), https:// ‘‘Administrative Orders,’’ available at https:// company had gathered 550,928 complaints of www.ftc.gov/system/files/documents/cases/ www.ncua.gov/regulation-supervision/Pages/rules/ fraudulent money transfers involving $632 million. western_union_complaint-jan2017.pdf.

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individual arbitration agreements from of which were filed by consumers.687 understands that providers have their consumer contracts, the Bureau Because individual providers face so adopted anti-severability provisions for believes that these decisions would not few arbitrations, even if individual the purpose of preventing cases from be motivated by the costs associated arbitration is marginally more expensive proceeding as class arbitrations if a with individual arbitrations because than defending the same claim in court court were to find a no-class provision those costs are minimal. Instead, such a (and the Bureau makes no to be unenforceable in a particular decision would suggest the company determination on that issue), providers case.690 Because those provisions were only viewed the agreement as useful for are unlikely to realize such dramatic created for a different purpose, the blocking class actions and no other cost savings by removing their Bureau does not construe the clauses to significant purpose. arbitration agreements that it is reveal a preference against maintaining Insofar as the Bureau believes that the inevitable that they will do so for cost individual arbitration once this rule cost of individual arbitration is savings reasons alone. becomes effective.691 minimally different from litigation, it The Bureau also remains skeptical For the reasons described above, the remains skeptical that this is the reason that providers would be unwilling to Bureau does not believe that that will cause companies to remove litigate individual disputes in both commenters set forth persuasive reasons arbitration agreements from their arbitration and court once the Bureau’s for concluding that the costs of contracts. Specifically, the Bureau is rule goes into effect because providers individual arbitration would cause them unpersuaded that providers incur already litigate disputes in both fora to remove their arbitration agreements significant net costs in connection with today. Providers with arbitration once the class rule becomes effective. maintaining pre-dispute arbitration agreements also must litigate in State Whether loss of individual arbitration agreements today. As the commenters and Federal court to the extent they are harms consumers. The Bureau further indicated, providers generally pay the sued by individuals with whom they do believes that, even if providers do bulk of the filing fees, hearing fees, and not have contractual relationships or to remove their arbitration agreements, arbitrator compensation in individual the extent that consumers sue them in harm to consumers would be negligible consumer financial arbitrations. In Federal or State court and the provider because so few consumers pursue consumer arbitrations conducted by does not move to compel arbitration arbitration today. The Study showed AAA, the provider is responsible for a (which the Study showed occurred in that very few individual consumers filing fee of $1,700 to $2,200; a hearing nearly all individual cases filed in filed claims in arbitration about fee of between $0 and $500; and Federal court).688 While commenters consumer financial products; as noted, arbitrator compensation of between cited several reasons why providers there were just over 600 arbitration $750 per case and $1,500 per day, currently maintain two tracks of filings per year in the six product markets studied and just over 400 of depending on the type of arbitration.685 litigation, they did not challenge the those were filed by consumers. By However, the Bureau believes that, in Bureau’s underlying assertion that contrast, more than 60 million many cases, these fees may be offset by providers indeed do so. With respect to consumers per year were eligible for savings from streamlined procedures, the commenter that criticized the either cash or in-kind relief from class such as limited discovery in arbitration, Bureau’s sample of 140 individual actions in the five-year period covered fewer in-person hearings, reduced Federal court cases against companies by the Study. Indeed, more than 34 motions practice, and less need to hire with arbitration agreements as too small million of these consumers obtained local counsel, among others.686 Indeed, to draw the conclusion that providers cash relief over five years studied, or one research center commenter that rarely invoke arbitration in individual cases, the Bureau disagrees because its more than six million per year. Thus, otherwise strongly opposed the rule the number of consumers who sought stated its belief that arbitration saves analysis of individual Federal cases reviewed 1,205 cases and found relief in arbitration pales in comparison money for both consumers and to the number who actually obtained companies. Further, as noted above, invocation of arbitration was very rare.689 More broadly, neither that relief through class actions. The number while commenters asserted that they of consumers who sought relief in expend significant resources to commenter nor others cited specific evidence suggesting that the Study arbitration also pales in comparison to ‘‘subsidize’’ arbitration, no commenter the benefited to consumers from the provided a specific accounting or any undercounted instances in which companies invoked arbitration clauses deterrent effect of class actions, which other concrete evidence to support this is discussed above in this Part VI.C.1. assertion. in individual cases. With respect to some industry In any event, even if consumers do The commenters’ arguments that they not have access to arbitration for incur significant net costs in connection commenters’ contention that anti- severability provisions in arbitration individual claims those still can be filed with individual arbitration are further in court, including small claims court. undermined by the fact that most agreements show that providers would choose to remove arbitration agreements providers face no arbitrations and those 690 if this rule were finalized, the Bureau See, e.g., Alan S. Kaplinsky & Mark J. Levin, that do, face very few. The Study ‘‘Arbitration Update: Green Tree Financial Corp. v. identified about 616 AAA consumer Bazzle–Dazzle for Green Tree, Fizzle for 687 arbitrations per year for six large Study, supra note 3, section 1 at 11. Practitioners,’’ 59 Bus. L. 1265, at 1272 (2004) 688 Id. section 6 at 57–60. (stating that companies should consider adopting consumer financial markets, about 411 689 Id. section 6 at 59. The 140 individual cases anti-severability provisions ‘‘in order to protect cited by the commenter were those against credit themselves from class-wide arbitration such as 685 AAA, ‘‘Consumer Arbitration Rules,’’ at 33 card companies where the Bureau could determine occurred in [Green Tree Financial Corp. v. Bazzle, (fees effective January 1, 2016). that those companies included arbitration 539 U.S. 444 (2003)].’’). 686 See generally Study, supra note 3, section 4 agreements in their consumer contracts. Id. section 691 With respect to the industry commenter’s (comparing the procedures available in Federal 6 at 61. In that set of cases, the rate of invocation contention that post-dispute arbitration will not fill court with the generally more streamlined was 5 percent. In the larger set of 1,205 Federal the void created by the removal of pre-dispute procedures in arbitration). See also AT&T Mobility, individual cases where the Bureau could not arbitration agreements, the Bureau does not address LLC v. Concepcion, 563 U.S. 333, 345 (noting that determine whether the defendant companies this comment because the Bureau did not assert in ‘‘the informality of arbitral proceedings is itself included arbitration agreements in their consumer the proposal (and does not assert in the final rule) desirable, reducing the cost and increasing the contracts, the Bureau also found a very low rate of the argument that this comment is addressing, nor speed of dispute resolution.’’). invocation, only 1 percent. Id. section 6 at 59. did any other commenter make it.

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As is discussed above, the Bureau is not Moreover, some of the commenters contradicted the Bureau’s Study and making a finding as to whether that addressed the cost of arbitration supported commenters’ assertion that individual arbitration is superior to only compared it to the cost of litigating most harms were individualized and not individual litigation for consumers; it in Federal court. The Bureau believes classable.695 finds that any such comparison is that many of the consumers who would Some industry commenters have inconclusive. However, even assuming otherwise choose arbitration will pursue argued that more consumers would use that arbitration is a better forum for their claims in small claims courts or arbitration if only they understood the resolution of individual disputes than courts of general jurisdiction if process more, if arbitration agreements the courts—and the Bureau does not arbitration is not available going were drafted more clearly, or if have any basis to so assume—the few forward. Filing fees in these courts are consumers were properly educated to hundred consumers who would be frequently quite reasonable and almost the benefits of arbitration (whether by forced to file in court rather than in always far lower than Federal court.693 the Bureau or by providers or both), arbitration if providers stopped using As to the comments that noted that thereby reducing the disparity between arbitration agreements would be harmed consumers often succeeded in the number of consumers who use only to the extent that arbitration is arbitration claims without an attorney arbitration and the number who obtain worse for them than litigation. These and thus did not need attorneys in relief in class actions. The Bureau is not consumers would not be left without a arbitration, the Bureau notes that persuaded that the presence of forum to prosecute their individual consumers likewise do not need education or promotional materials claims. Given the extremely low number attorneys to pursue claims in small would, for dispute resolution, materially of consumer-filed AAA and JAMS claims court, which is the most apt alter the dynamics that result in so few arbitrations, the Bureau believes that the comparison to arbitration because it individual arbitrations for all of the magnitude of consumer benefit, if any, offers streamlined procedures similar to reasons discussed above at Part VI.B.2. of individual arbitration over individual those available in arbitration.694 As to The alternatives offered by commenters litigation would need to be implausibly the comments that noted that arbitration are addressed in detail in the Section large for the elimination of some, or can be conducted telephonically or 1022(b)(2) Analysis below at Part VIII.G. even all, arbitration agreements to make online, the Bureau notes that this may 2. By Enhancing Compliance With the a noticeable difference to consumers in save consumers some time compared to Law and Improving Consumer the aggregate. individual litigation which may be Remuneration and Company Because the Bureau believes that required to be filed and heard in-person. Accountability, the Class Rule Is in the preserving consumers’ right to But this time savings alone does not Public Interest participate in a class action is for the make arbitration superior, given the other issues described above. In the proposal, the Bureau also protection of consumers even if preliminarily found that the class rule providers will no longer include As for the commenters’ assertion that most harms that are suffered by would be in the public interest. This arbitration agreements in their preliminary finding was based upon consumer contracts, it is not necessary consumers are individualized and not classable, the Study showed that there several considerations which to address each individual argument individually and collectively supported cited by commenters about why are millions of consumers who suffer group harms, as reflected by the number that finding. First, as discussed arbitration is a superior forum for extensively above, the Bureau believed dispute resolution than litigation. of consumers who obtained relief in class actions (60 million per year), and that its preliminary finding that the However, the Bureau notes that there is class proposal would protect consumers reason to be skeptical of those the Bureau’s experience and expertise in supervision and enforcement is also contributed to a finding that the arguments. For example, while many class proposal would be in the public industry commenters asserted that consistent with this conclusion. Most consumer financial products and interest. arbitration is less expensive for Second, the Bureau preliminarily services involve products offered on the consumers to pursue than litigation found that the proposal was in the same terms to all customers, so it stands because filing fees are generally less, the public interest because of the effect it to reason that when these terms violate Bureau notes that one-third of the would have on leveling the playing field the law, they harm all consumers bound arbitration agreements analyzed in the in markets for consumer financial by them. While there was no dispute Study required consumers to reimburse products and services. The Bureau fees and expenses paid by the company that some consumers suffered preliminarily found that the class if the consumer loses the arbitration.692 individualized harms, commenters did proposal would create a more level Thus, while arbitrating a successful not put forth any data that both playing field between providers that claim might cost less in fees than an concentrate on compliance and 693 E.g., N.Y. Uniform. Just. Ct. Act section individual litigation, arbitrating an 1803(a) (setting filing fees for small claims court at providers that choose to adopt unsuccessful claim could be quite between $10 and $20); Cal. Civ. Proc. sections arbitration agreements to insulate expensive for a consumer, especially as 116.230(b)–116.230(d) (same with fees between $30 themselves from being held to account compared to litigation where a and $75). See also Study, supra note 3, section 4 by the vast majority of their customers at 10–12 (which stated that the fee for filing a case consumer will not bear additional in Federal court is a $350 plus a $50 administrative and, as the Study showed, from expenses if he or she loses a claim. fee, while the fee for a small claims filing in virtually any private liability. Indeed, this risk may even deter Philadelphia Municipal Court ranges from $63 to consumers who are aware of these cost- $112). 695 While many commenters highlighted that the shifting provisions from pursuing 694 E.g., District of Columbia Court, ‘‘Small Claims amount of relief awarded in arbitration was much and Conciliation Branch,’’ (noting that ‘‘The Small higher than what was awarded in individual individual arbitration because a Claims Branch is less formal than other branches of litigation, they failed to explain the relevance of consumer who loses the case could end the Court. The procedures are simple and costs kept this distinction. As noted above in Part VI.B.2 class up worse off than if he or she had never low so that most people do not need a lawyer to actions are typically brought to remedy small harms filed a claim in the first place. represent them in their small claims case. You must suffered by large groups of people that are unlikely be 18 years old to file a case.’’). http:// to be brought individually. Thus, it is not surprising www.dccourts.gov/internet/public/aud_civil/ that those claims that consumers do bring 692 Study, supra note 3, section 2 at 65–66 tbl. 13. smallclaims.jsf (last visited Dec. 20, 2016). individually involve much larger claim sums.

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Specifically, the Bureau stated in the the public good by distorting the superior form of dispute resolution than proposal that it believed that companies efficient functioning of these markets. individual litigation. The Bureau notes, that adopt arbitration agreements with These Federal and State laws, among however, that if providers choose to class action prohibitions to manage their other things, allow consumer financial remove arbitration agreements from liability may possess certain advantages markets to operate more transparently their contracts, that the loss of over companies that instead make and to operate with less invidious individual arbitration as a form of greater investments in compliance to discrimination, and for consumers to dispute resolution arguably impacts manage their liability, both in their make more informed choices in their both providers and the public interest. ability to minimize costs and to profit selection of financial products and Accordingly, the Bureau incorporates from the provision of potentially illegal services. Thus, the Bureau believed that that discussion with respect to its public consumer financial products and by creating enhanced incentives and interest findings as well. services. The Bureau does not expect remedial mechanisms to enforce With respect to pass-through costs, that eliminating the advantages enjoyed compliance, the class proposal could the Bureau preliminarily found that the by companies with arbitration improve the functioning of consumer class rule would still be in the public agreements that have class action financial markets as a whole. First, interest, even if some costs of the rule prohibitions would necessarily shift enhanced compliance would, over the may be passed through to customers. market share to companies that eschew long term, create a more predictable, First, the Bureau stated in the proposal such arbitration agreements (and instead efficient, and robust regime. Second, the its belief that compliance, litigation, and focus on upfront compliance) because Bureau also believed enhanced remediation costs generally are a the competitive balance between compliance and more effective remedies necessary component of the broader companies would continue to depend could also reduce the risk that consumer private enforcement scheme, and that on many additional factors. It thus did confidence in these markets would certain costs are vital to uphold a not count the effects of this factor as a erode over time as individuals, faced system that vindicates actions brought major element of the Section 1022(b)(2) with the non-uniform application of the through the class mechanism. Thus, the Analysis. However, the Bureau law and left without effective remedies Bureau preliminarily found that the preliminarily found that eliminating for unlawful conduct, may be less specific marginal costs that would be this type of arbitrage as a potential willing to participate in certain sections attributable to the class rule are source of competition would be in the of the consumer financial markets. For similarly justified, even if some of those public interest.696 all of these reasons, the Bureau stated in costs are passed through to consumers. Third, the Bureau preliminarily found the proposal that it believed that Second, the Bureau preliminarily found that the class proposal was in the public promoting the rule of law—in the form that given hundreds of millions of interest because it would have the effect of accountability under transparent accounts across affected providers, the of achieving greater compliance with application of the law by providers of hundreds or thousands of competitors the law which creates additional consumer financial products or in most markets, and the numerical benefits beyond those noted above with services—would be in the public estimates of costs as specified in the respect to the protection of individual interest. Section 1022(b)(2) Analysis, the Bureau consumers and impacts on responsible In the proposal, the Bureau also did not believe that the expenses due to providers. Federal and State laws that addressed several reasons stakeholders the additional class settlements that protect consumers were developed and had given during both the SBREFA would result from the class rule would adopted because many companies, process and ongoing outreach to support result in a noticeable impact on access unrestrained by a need to comply with their belief that the class rule was not to consumer financial products or such laws, would engage in conduct in the public interest. These services. Similarly, the Bureau that is profit-maximizing but that stakeholders had expressed concern that preliminarily found that the potential lawmakers have determined disserves the class rule would, among other cost impacts on small providers, and things, cause providers to remove individual providers more generally are 696 The Bureau recognizes, of course, that under arbitration agreements from their not as large as some stakeholders have the current system companies without arbitration suggested based on the detailed analysis agreements can level the playing field by adopting contracts thereby negatively impacting such agreements. But the Bureau believes that the the means available to consumers to in the Section 1022(b)(2) Analysis that public interest would be served by a system in resolve individual disputes formally factors in the likelihood of litigation, which a level playing field is achieved by bringing and informally, impose costs on recovery rates, and other considerations. all companies’ compliance incentives up to the With respect to innovation, the level of those that face class action liability for non- providers that would be passed through compliance. The public interest would not be to consumers, and reduce incentives for Bureau noted that some stakeholders served by a system in which the level playing field innovation in markets for consumer suggested that the class rule would is achieved by bringing compliance incentives financial products and services. In the discourage innovation in that providers down to the level of those companies that are would refrain from developing or effectively immune from such liability. Indeed, proposal, the Bureau addressed ‘‘races to the bottom’’ within the consumer financial concerns regarding whether the class offering products and services that services markets were a significant concern rule would cause providers to remove benefit consumers and are lawful due to prompting Congress to enact the Dodd-Frank Act arbitration agreements from their concerns that the products may pose because of their potential impacts on consumers, legal risk, for instance because they are responsible providers, and broader systemic contracts in the context of its public stability. The Restoring American Financial interest finding; however, for this final novel. The Bureau preliminarily found Stability Act of 2010, S. Rept. 111–176 (2010), at rule, the Bureau addresses those that some innovation can disserve the 10 (‘‘This fragmentation led to regulatory arbitrage comments above in Part VI.C.1 in public and that deterring such between Federal regulators and the States, while the innovation would actually be in the lack of any effective supervision on nondepositories connection with its finding that the led to a ‘race to the bottom’ in which the class rule is for the protection of public interest. The Bureau noted institutions with the least effective consumer consumers. The Bureau does so because examples of such innovation in the regulation and enforcement attracted more many commenters contended that the mortgage market that were a major cause business, putting pressure on regulated institutions of the financial crisis and led to the to lower standards to compete effectively, ‘and on loss of individual arbitration would their regulators to let them.’’). harm concerns because arbitration is a introduction of a set of high-risk

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products and underwriting practices.697 on the public interest generally did not trade association cited to a law review Similarly, the Bureau noted that dispute the affirmative points made by article discussing economic principles. Congress enacted the CARD Act in the Bureau in the proposal, but rather That industry commenter also asserted response to ‘‘innovation’’ in the credit cited several reasons that the that the Bureau’s preliminary findings card marketplace—such as the practice commenters believed led to the largely rejected the notion that of triggering interest rate hikes based on conclusion that the class proposal was businesses pass on the cost savings of ‘‘universal default’’—that made the not in the public interest (at least some arbitration to consumers. pricing of credit cards more opaque and of which the Bureau had preliminarily In contrast, some commenters were unpredictable for consumers and addressed in the proposal). These supportive of the Bureau’s preliminary distorted what was then the second arguments are discussed in detail below. finding acknowledging that some costs largest consumer credit market.698 Many consumer advocate and of the rule may be passed on to Conversely, the Bureau preliminarily individual commenters agreed with the consumers, but concluded that this found that some innovation is designed Bureau’s preliminary findings that the effect did not negate the impacts of the to mitigate risk. For example, many class proposal is in the public interest rule that advanced the public interest. banks and credit unions are because it would level the playing field For example, two commenters experimenting with ‘‘safe’’ checking between providers and produce other questioned whether providers would in accounts (accounts that do not allow benefits through enhanced compliance fact pass through costs to consumers. A consumers to overdraft) and these with the law. For example, a consumer public-interest consumer lawyer stated products are designed to reduce advocate commenter agreed with the that, in its view, assertions of pass- overdraft risks to consumers. Similarly, Bureau’s preliminary finding that pre- through costs have not been supported some credit card issuers have dispute arbitration agreements harm by credible economic data or studies. experimented with products with fewer competition and put providers that do Similarly, a research center stated that or no penalty fees as a means of follow the law at a competitive the Bureau’s Study supported the reducing risk to consumers. The Bureau disadvantage. An individual commenter conclusion that any cost savings from believed that to this extent the class that was formerly the FINRA Director of arbitration agreements are not, in fact, proposal would affect positive Arbitration also agreed that the rule was passed on to consumers. A few innovations of this type—it would tend in the public interest and cited the long- consumer advocate commenters and a to facilitate them. The Bureau further term success of FINRA’s similar rule as public-interest consumer lawyer preliminarily found that even if the applied to broker-dealers and their commenter stated their belief that there class rule deterred some positive customers.700 is no evidence that companies pass- innovation on the margins, the benefits Pass-through costs. Numerous through savings from pre-dispute of the class proposal justified any such individual commenters expressed a arbitration agreements to customers and impact on innovation.699 Thus, the general concern about the possibility of thus conversely no evidence that the Bureau preliminarily found that the higher prices for their products as a class rule would increase costs for class rule would still be in the public result of the proposal. These comments consumers. interest, notwithstanding its impact on urged the Bureau not to adopt the An individual commenter contended innovation in the consumer financial proposal but did not elaborate on their that higher prices passed on to marketplace. pricing concerns.701 Numerous consumers may force some consumers out of particular credit markets that the Comments Received industry, research center, and State regulator commenters also asserted that consumers could have afforded if the The Bureau preliminarily found that the potential for pass through of costs of Bureau’s proposal were not finalized. the class proposal would protect the rule to consumers and related effects Several automobile dealers commented consumers for all of the reasons on consumers should invalidate the that the class rule will raise the price of described above in Part VI.C.1, level the Bureau’s preliminary finding that the automobile loans significantly, even playing field in the market for consumer class proposal was in the public pricing some credit-challenged financial products and services, and that interest. These commenters contended customers out of automobiles, although compliance with the law generally that an increase in defense costs for the commenters provided no specific benefits the public interest. Commenters companies will force them to raise calculations or details. A group of that opposed this preliminary finding prices for consumers, decrease their automobile dealers also asserted that the services or slow innovation, none of cost of a motor vehicle could increase. 697 See Fin. Crisis Inquiry Comm’n, ‘‘The which are in the public interest. For Several other automobile dealers further Financial Crisis Inquiry Report,’’ at 104–05 (2011), example, a comment from trade asserted that costs may be passed on by available at https://www.gpo.gov/fdsys/pkg/GPO- the indirect automobile lenders to the FCIC/pdf/GPO-FCIC.pdf (discussing creation of a associations representing depository larger, new, subprime mortgage market, expanded institutions cited law and economics dealers through indemnification use of high-risk products such as certain adjustable research—some of which relied in part obligations. An individual commenter rate mortgages, and looser underwriting practices). on empirical studies outside of the further noted that, although Section 10 698 See Bureau of Consumer Fin. Prot., ‘‘CARD of the Study found no statistically consumer finance context and one of Act Report,’’ at 27, 74 (2013), available at http:// significant increase in the total cost of files.consumerfinance.gov/f/201309_cfpb_card-act- which made claims about the lack of credit (whether for consumers overall or report.pdf. consumer benefit achieved by statutory 699 any sub-segment) in analyzing credit In the proposal, the Bureau also discussed two claims—as support for its conclusion other reasons that stakeholders had given for why card pricing patterns after some issuers that the cost of class actions are passed the class rule was not in the public interest: that temporarily dropped their arbitration class settlements deliver windfalls to named through to consumers and that agreements, the Study found an increase plaintiffs and class members and that the class rule consumers gain little benefit in return. in Annual Percentage Rate (APR) for would negatively affect the means available for To support this point, another industry consumers to resolve individual disputes in consumers with lower credit scores and arbitration because the class rule will cause an increase in annual fees for all companies to remove arbitration agreements from 700 FINRA, ‘‘Class Action Claims,’’ at Rule their contracts. The first issue is addressed above 12204(d). customers. In the view of this in Part XX, and the second issue is addressed above 701 The Bureau received over 110,000 similar commenter, this data suggests that the in Part XX. comments, mostly from individuals. card issuers’ goal was not necessarily to

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pass on new costs to their customers, small businesses, or to invest in Payments to plaintiff’s attorneys. but instead to adjust certain pricing technology upgrades and employee Many Congressional, industry and components that tended to make cards retention. The commenter referred to individual commenters and a research appear less attractive for riskier this effect as creating ‘‘dead capital.’’ center criticized the Bureau’s customers. That is, this commenter Innovation and availability of preliminary finding that class actions believed card issuers sought to ‘‘screen products. Several industry commenters, are in the public interest because they out’’ lower-value customers in a research center, and a group of State believe the Bureau failed to adequately particular due to the increased attorneys general contended that the consider the costs of class actions that probability that amounts would be class rule as proposed is not in the settle, both to consumers and to refunded in class actions, which public interest because it would deter industry. Many industry and individual rendered such customers particularly innovation. In general, these comments commenters stated their view that class less profitable to the card issuer.702 were very high-level and did not offer actions are not in the public interest An industry association representing specific data or examples of how this because a disproportionate share of small-dollar lenders and a commenter in would happen. A group of State class action settlement proceeds go to this industry asserted that because many attorneys general, who described the plaintiff’s attorneys rather than to States limit not only the interest rates rule as paternalistic, asserted in their consumers. According to many of these but also the fees that small-dollar comment that the class proposal would commenters, the amounts that plaintiff’s lenders can charge consumers, those limit competition among providers and attorneys receive from class actions are lenders may not be able pass through that competition benefits consumers relevant to determining whether class such costs onto consumers. These because it generally produces lower actions are in the public interest commenters contended that the class prices and better products. An because attorney’s fees are often rule would therefore pose a particular association of State regulators asserted deducted from settlement amounts that threat to the business model for small- that the rule will deter innovation, would otherwise go to consumers. For dollar lenders, who are lenders of last which would harm consumers and the example, one industry commenter noted resort for consumers. The commenters public interest. An industry commenter that the Study showed that plaintiff’s predicted that the class rule could force asserted that the class rule is not in the attorneys received, on average, more consumers to resort to unlawful lenders public interest because it would deter than $1 million in fees from each class if the rule forced small-dollar lenders innovation without producing a settlement. As a percentage of the total out of business. Similarly, a Tribe that corresponding benefit to consumers or settlement amount, the commenter operates a small-dollar lender stated the public. further noted that the attorney’s fees that the class rule would harm the Generally, comments about the were 41 percent of each settlement, on impacts on innovation did not touch on underbanked in particular. Several average, with a median of 46 percent.704 particular products. The Bureau did credit union and credit union trade Another commenter cited examples receive comments from a credit association commenters noted that from an external study of class actions reporting agency and an industry trade credit unions are member-owned and in which class members received small association that raised concerns thus the cost on providers to defend payouts while attorneys received large regarding the impact the class rule additional class actions is passed on to fee awards.705 their members directly even in the could have on their ability to offer credit Relatedly, many industry commenters absence of higher fees. A credit union monitoring and related credit education criticized the Study for reporting on the trade association also cited a survey of products they may develop due to percentage of attorney’s fees compared its members as indicating that almost potential for new exposure to CROA to the total settlement amount available half expected to need to raise the cost class actions, as discussed more fully to consumers, rather than compared to of credit as a result of the class rule.703 above in Part VI.C.1 above. The Bureau the amount actually paid to consumers. As discussed above in Part III.D.9, explains below in the section-by-section analysis of § 1040.3(a)(4) in Part VII why These commenters stated that this was automobile dealer commenters and misleading because consumers in class others also criticized the Bureau’s Study it finds an exemption for these products not to be in the public interest. A settlements often do not file claims in of pricing by credit card issuers that had those cases that require it and thus removed arbitration agreements from research center commenter also stated its belief that the rule would have a consumers rarely receive the full their consumer contracts as the result of settlement amount. Accordingly, these litigation and raised a number of devastating effect on peer-to-peer lending and financial technology commenters believe that the proportion criticisms of the methodology and of the settlement payments that are paid analysis of that Study. A Congressional products because individuals lending money through these platforms may no to attorneys is significantly higher than commenter stated his view that the class reflected in the Study. One research rule would likely cause financial longer be able to do so if they are subject to class action lawsuits and have to bear center commenter suggested that the institutions to increase the cash reserves Bureau should have considered whether they hold to mitigate litigation risk. The that risk. One industry commenter appeared to the total amount of money paid to commenter stated that this increase in agree with the Bureau’s preliminary plaintiff’s attorneys from class action cash reserves could, in turn, reduce the finding that some types of innovation settlements analyzed in the Study— amount of cash that institutions have can harm consumers and the public $424,495,451—is an acceptable cost. available to lend to consumers and interest while noting that some types of This commenter also noted that the innovation fall in a ‘‘gray area’’ between Study showed that attorney’s fees were 702 Some commenters also characterized the removal of arbitration agreements by companies in benefitting and harming the public a significantly higher proportion of response to the class rule as a form of pass-through interest. A consumer advocate smaller class action settlements than of costs to consumers. The Bureau analyzes the issue commenter agreed with the Bureau’s larger settlements. For example, the of whether providers will remove arbitration preliminary finding, asserting that commenter noted that attorney’s fees agreements separately, above in Part VI.C.1. 703 The application of the rule to Tribal entities valuing unbridled innovation over and credit unions is discussed below in the section- compliance with the law is 704 Study, supra note 3, section 8 at 34 tbl. 11. by-section analysis of 1040.3 in Part VII. inappropriate. 705 Mayer Brown, supra note 519.

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were 56 percent of the total relief in disputed claims that attorney’s fees are members actually receive that amount. settlements of less than $100,000. excessive in class actions. Several This commenter further asserted that Some industry commenters comments cited to the Study and noted plaintiff’s attorneys often enter into questioned the accuracy of the Bureau’s that fees were a reasonable 21 percent ‘‘clear sailing’’ agreements with defense Study with respect to the amounts paid of cash compensation paid to consumers counsel in class cases, through which to plaintiff’s attorneys from class action and only 16 percent of all relief defendants agree not to object to awards settlements because those amounts were awarded. One of these commenters cited of attorney’s fees below a certain lower than found in other studies. For to another study that showed that amount. In the commenter’s view, these example, whereas the Bureau’s Study attorney’s fees may be even lower than agreements benefit plaintiff’s attorneys found that the combined plaintiff’s found in the Study—only 15 percent of at the expense of absent class members attorney fees over all of the 419 class awards in an analysis of 688 Federal because the plaintiff’s attorneys have no action settlements analyzed were 16 class actions.709 A public-interest incentive to negotiate for better percent of gross relief made available, consumer lawyer commenter further compensation for class members when and 21 percent of the combined disputed the relative impact of they know that they will receive high payments made to consumers, one attorney’s fees by noting its agreement fees through the settlement. One research center commenter cited a study with the Bureau that mechanisms exist industry commenter added together the of class action settlements in cases filed to curtail frivolous litigation. A amounts awarded to plaintiff’s attorneys in one Federal district court concerning comment from a consumer lawyer in the Study and the Bureau’s estimate both consumer financial and other explained that attorney’s fees provide of costs to defend class actions from the products under a limited number of motivation to private attorneys to act as Section 1022(b)(2) Analysis below in Federal statutes that found plaintiff’s a market check on bad actors and bad Part VIII and contends that the attorney fees were rarely less than 75 practices. One consumer advocate combined totals indicate that attorneys percent of the total amount paid to the commenter noted that the cost of class (whether plaintiff’s attorneys or defense class.706 Similarly, another industry action settlements, including the cost of attorneys) benefit more from the rule commenter cited a 1999 study of class settlements themselves and defense than do consumers.710 action settlements that found that in costs, is likely lower than the cost of The same industry commenter further three out of 10 cases studied, involving litigating each class member’s claims in contended that courts do not adequately a range of consumer markets not limited a separate case. Another consumer supervise class action settlements to to consumer finance, plaintiff’s lawyer acknowledged that some ensure that they are fair to absent class attorneys received more in fees than lawsuits are frivolous but stated that the members, notwithstanding the court’s consumers received in compensation.707 court system does a good job at weeding obligation to do so under the Federal Another industry commenter criticized them out. Rules of Civil Procedure and analogous the efficiency and fairness of class Several industry commenters State rules. The commenter, citing a law action settlements that provide criticized the Bureau’s preliminary review article that refers to the significant plaintiff’s attorney fees but finding that class actions are in the legislative history leading to the provide only cy pres relief to public interest because they contend adoption of CAFA, asserted its belief consumers.708 that the class action mechanism that courts face pressure to approve Several consumer advocate primarily benefits plaintiff’s attorneys settlements in class action cases to clear commenters explained that in many who abuse the mechanism for their own their dockets and thus do not cases attorney’s fees are awarded after a financial gain. One such industry adequately supervise settlements.711 A settlement is reached and that, commenter contends that attorneys file research center commenter cited a study therefore, they do not impact putative class claims out of self-interest, for the proposition that judges are more consumers’ recovery; one commenter rather than to benefit consumers. That likely to approve class settlements in also provided several examples. A same industry commenter cited cases where the claims are weak consumer advocate commenter instances from the mid-2000s where because of the high cost of litigating the explained that courts typically calculate courts or prosecutors found plaintiff’s case on the merits.712 fees as a reasonable percentage of the attorneys had made improper payments A consumer advocate commenter value of the settlement and, therefore, to individuals to recruit potential disputed the relevance of attorney’s attorneys receive fees only when they plaintiffs. The commenter further fees, noting that they often come from have created value for class members. contended that class action settlements a common fund, meaning that the cost This commenter noted that Federal Rule are typically structured to benefit the of litigation is paid out of the common 23(h) empowers judges to determine plaintiff’s attorneys rather than the fund created by the settlement, and that reasonable compensation for attorneys absent plaintiffs because the named attorneys only receive fees when they in class actions. Several commenters plaintiffs have almost no involvement in have created value for class members. noted that various factors, including the case. Indeed, the commenter argued Other commenters, including consumer results achieved, risk, and the age and that because plaintiff’s attorney fees are advocates, consumer law firms, law difficulty of the case may impact a based on the total amount of the court’s fee award. A letter from a settlement, attorneys have an incentive 710 The Bureau notes that the commenter coalition of consumer advocates further to negotiate a high settlement amount, incorrectly totaled the Bureau’s estimates of defense but have no incentive to structure the costs from the proposal, as noted in the Section 706 Note that this figure refers to the amount paid 1022(b)(2) Analysis below in Part VIII. to the class (e.g., after claims have been made), not settlement such that absent class 711 Linda S. Mullenix, ‘‘Ending Class Actions as the amount actually awarded. Johnston, supra note We Know Them: Rethinking the American Class 520. 709 The commenter cited to Brian T. Fitzpatrick, Action,’’ 64 Emory L. J. 399, at 430 (U. Tex. Sch. 707 Hensler et al., supra note 669, at 5, 14. ‘‘An Empirical Study of Class Action Settlements of L., Pub. L. Res. Paper No. 565, 2014) (citing Notably, this Study pre-dated the passage of CAFA. and Their Fee Awards,’’ (Vand. U. Sch. of L. Pub. Edward Purcell, ‘‘The Class Action Fairness Act in 708 In class actions, cy pres relief is relief that is L. & Legal Theory Working Paper No. 10–10, 2010), Perspective: The Old and The New in Federal distributed to a third party (often a charity) on available at https://ssrn.com/abstract=1442108 (this Jurisdictional Reform,’’ 156 U. Pa. L. Rev. 1823, at behalf of consumers, instead of to consumers paper analyzed all Federal class action settlements 1883 (2008) (citing House Judiciary views in CAFA directly in cases where doing so is difficult or in all markets, not just consumer finance, in 2006 legislative process). impossible. and 2007). 712 Johnston, supra note 520, at 13.

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academics and others emphasized that behavior nationwide in response to Public policy concerning arbitration attorneys should be compensated for class actions brought under a single and legal uncertainty. Many industry their time. One of these commenters State’s consumer protection laws, which commenters contended that public explained that attorneys litigate class could lead to that one State’s consumer policy strongly favors arbitration, as actions at considerable risk to protection laws trumping Federal laws exemplified by the Supreme Court’s themselves. In addition to paying all and other States’ laws. This decision in AT&T v. Concepcion.715 In costs upfront, they do not get paid for phenomenon was described by the Concepcion, the Court held that the their time unless they prevail or settle commenter as ‘‘inverse federalism,’’ FAA preempted a California law that the case. which the commenter viewed as would have prohibited the enforcement Strain on the court system. Several problematic because it contended that of a consumer arbitration clause that industry commenters, a group of State certain State legislatures are captured by disallowed participation in class attorneys general, and a group of the plaintiff’s bar and thus pass statutes actions. The commenters noted that, in Congressional commenters contended that are not in the public interest. An doing so, the majority opinion had the class proposal is not in the public industry commenter expressed a similar referenced ‘‘a liberal Federal policy interest because it would increase the federalism concern. Similarly, an favoring arbitration.’’ 716 In these number of class action lawsuits filed industry commenter contended that commenters’ view, the class rule would and therefore create a strain on the Gutierrez v. Wells Fargo,714 the override both the FAA and the Supreme Federal and State court systems, which overdraft case discussed above in Part Court precedent upholding arbitration the commenters believe are already VI.B.3 is an example of such inverse agreements and is thus against this overburdened. These commenters federalism in that the case was based on public policy. These commenters asserted that an increase in class action State contract law, rather than Federal believed that the authority provided to lawsuits will cause delays in judicial law, but nonetheless generated the Bureau under Dodd-Frank section administration and increased costs to nationwide changes in behavior with 1028 is insufficient to supplant this Federal and State courts. One regard to bank overdraft practices. longstanding policy in the absence of commenter pointed out that even an Impairment of freedom of contract. A clear evidence from the Study, which unmeritorious class action lawsuit group of State attorneys general these commenters asserted the Study creates a burden on the court system commented that the class proposal is did not provide. because a court must use its resources not in the public interest because they A group of State regulators contended to determine whether it should be believed that it would impair the that the class rule will harm the public dismissed. Several industry commenters freedom of contract by preventing interest because they predicted that the cited reports and statistics for both State consumers and financial institutions rule would create legal uncertainty in and Federal courts supporting this from agreeing to certain forms of various ways, thereby amplifying the overcrowding and showing that the arbitration. In these commenters’ view, risk of litigation exposure for consumer number of cases filed have increased there is significant benefit to financial service providers. For significantly since 2013.713 One empowering consumers and companies example, the commenter asserted that it industry commenter referred to the class to contract freely in part because doing is unclear how a class rule would affect proposal as an ‘‘unfunded mandate’’ so creates prosperity and political future cases following Concepcion and that the Bureau is imposing on the freedom. Similarly, one industry other case law regarding preemption of courts. In contrast, a consumer commenter suggested that the class rule State law under the Federal Arbitration commenter expressed an opinion that would deprive consumers of the ability Act. The commenter asserted that there strain on the courts should be minimal to choose a consumer financial product was uncertainty with respect to whether because parties pay their own court or service with an arbitration agreement proposed § 1040.4(a)(2) would apply to costs (as opposed to taxpayers funding that blocks class actions in order that class actions under consumer finance additional public enforcement). the consumers could avoid being part of laws only or to all State and Federal Harm to relationships between a class action or potentially having class actions. The commenter asserted customers and providers. Another contact with plaintiff’s attorneys. A there was also uncertainty concerning industry commenter criticized the research center commenter and a whether Congress’s delegation of proposal as not in the public interest comment from several State attorneys authority to the Bureau under section because the commenter predicted that it general asserted that because arbitration 1028 was proper. would harm the relationships between agreements are not universal in Impact on certain State laws. An consumers and their financial consumer finance contracts, they do not industry commenter contended that the institutions. The commenter stated its pose substantial problems for proposal was not in the public interest belief that the availability of class consumers because consumers can (or for the protection of consumers) actions discourages consumers and therefore choose products without them. because of the effect it may have on financial institutions from informal In contrast to these comments, a certain State laws. The comment resolution of disputes. consumer advocate commenter stated its specifically referred to a Utah statute Federalism concerns. An individual belief that arbitration agreements in which authorizes creditors to include commenter contended that the class rule consumer contracts are contracts of class-action waivers in bold type and all is not in the public interest because the adhesion because consumers lack capital letters in consumer contracts for commenter predicted that it would bargaining power with their providers closed end credit.717 The commenter encourage companies to change their and do not negotiate the contracts. An believed that this law would be individual commenter asserted that this preempted by the Bureau’s proposal and 713 U.S. Courts, ‘‘Federal Judicial Caseload rule does not implicate freedom of asserted that such a result would not be Statistics 2016,’’ (June 2016), available at http:// contract because consumers are in the public interest (or for the www.uscourts.gov/statistics-reports/federal- powerless to refuse terms imposed upon judicial-caseload-statistics-2016; Exec. Comm. of the Bd. of the N.Y. Cty. Lawyers’ Ass’n, ‘‘Task Force them. 715 563 U.S. 333 (2011). on Judicial Budget Cuts Report,’’ (Jan. 18, 2014), 716 Id. (quoting Moses H. Cone Memorial Hospital available at https://www.nycla.org/siteFiles/ 714 Gutierrez v. Wells Fargo Bank, N.A., 730 F. v. Mercury Constr. Corp., 460 U.S. 1, 24 (1983)). Publications/Publications1516_0.pdf. Supp. 2d 1080, 1082 (N.D. Cal. 2010). 717 Utah Code 70C–3–14.

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protection of consumers) because it Commenters have been unable to Thus, in the Bureau’s view, the would contradict the determination of identify empirical sources that would specific marginal costs that are the Utah legislature.718 permit an estimate of the extent of any attributable to the class rule are justified pass-through effect in consumer and in the public interest because of the Response to Comments and Findings financial products and services as a resulting benefits in the form of The Bureau has carefully considered whole or for specific markets.720 protection of consumers (chiefly the comments received on the proposal However, despite the lack of conclusive deterrence, and where non-compliance and further analyzed the issues raised in quantifiable data on this issue, the has not been deterred, remediation of light of the Study and the Bureau’s Bureau has carefully analyzed it at each consumer harm along with a more level experience and expertise. Based on all stage of the rulemaking process as playing field). The Bureau finds that the of these sources, the Bureau reaffirms its detailed in the Study, the proposal, this class rule would bring about better preliminary findings that the class rule public interest finding, and the Section compliance and make more remedies for is in the public interest because it will 1022(b)(2) Analysis below in Part VIII. non-compliance available to consumers. benefit consumers (for the reasons The Bureau finds that the risk of pass- Both of these may result in increased discussed above at Part VI.C.1), will through impacts is real, but believes that costs, but the Bureau finds that the costs level the playing field in the market for even if all costs of the rule are passed are necessary to make covered products consumer financial products and through to consumers that the overall generally safer and fairer for services, and will promote the rule of impact would be relatively modest on consumers.721 law—in the form of accountability any per-consumer basis. Indeed, the It is possible that, in certain markets, under and transparent application of the Section 1022(b)(2) Analysis finds that a particular provider may increase its law to providers of consumer financial the pass-through costs would be, on pricing so as to make its products products or services. As noted, no average, less than one dollar per account unaffordable for persons of more limited commenters disagreed with the Bureau’s per year. The Bureau further finds that means, or otherwise change its pricing findings with respect to leveling the these impacts do not negate the structure to attract fewer of these playing field in the market or promoting conclusion that the class rule is in the customers. Commenters raised concerns the rule of the law. The Bureau public interest. along these lines related to certain credit addresses commenters’ other arguments Furthermore, the Bureau disagrees and deposit products, for example. challenging the Bureau’s public interest that the general risk of pass-through However, the Bureau does not believe finding below. costs necessitates a conclusion that the that overall pricing across providers in Pass-through costs. With respect to class rule is not in the public interest. these markets would be so affected as to commenters that asserted that the class Rather, the Bureau believes, as it stated limit access to products or services. In rule is not in the public interest because in the proposal, that complying with several of the markets covered by the providers will pass through increased laws has costs, because exposure to Bureau’s Study, the Bureau found that costs of compliance activities or class litigation deters non-compliance many providers do not use arbitration litigation to consumers, the Bureau (or incentivizes compliance), these agreements today. As demonstrated by disagrees that the risk of a pass-through additional costs are justified. To the information gathered to estimate impact on consumers negates a finding incentivize such compliance there must prevalence in those markets for the that the rule is in the public interest. be meaningful consequences for non- Bureau’s impacts analysis in Part VIII The Bureau acknowledged in the compliance. Given the Bureau’s below, the Bureau believes the same is proposal and acknowledges again here findings, as discussed above, that few likely to be true of many other markets that there is a risk that some or consumers will invoke individual covered by the rule but outside the potentially even all such costs will be remedies (either through litigation or scope of the Study. In all of these passed through to consumers.719 arbitration) and that public enforcement markets, the pricing of providers who is not sufficient to enforce the relevant do not use arbitration agreements would 718 The commenter also stated that the rule would laws in light of the size of these markets be unaffected by the rule. conflict with similar provisions in other State laws. Moreover, even in markets where The commenter did not cite to other laws, however, and the limitations on public resources, and the Bureau has not identified other laws of this exposure to class action litigation will arbitration agreements are ubiquitous, type. Separately, a credit reporting industry serve as an effective compliance the Bureau does not believe that to the commenter stated that expanding the coverage to incentive. Accordingly, litigation and extent providers pass through costs, reach security freeze activity by consumer reporting agencies would be tantamount to a preemption of remediation costs generally are a they will do so in a way that materially State laws allowing consumers to place a security necessary component of the success of freeze on their credit reports, since, in its view, it the broader private enforcement 721 Some stakeholders have suggested that is the prerogative of the State legislatures to scheme. providers would incur costs that produce no determine whether to permit class actions under benefits by engaging in compliance management these State laws, whose requirements vary. activities that would not result in any changes in 719 As summarized above and in Section 10 of the for a limited time period. The Bureau’s proposal did the providers’ behaviors. According to this view, Study, the Bureau performed what it believes is the not make a preliminary finding that the Study providers would sustain an increase in costs in the most rigorous analysis of potential pass-through indicated that pass-through effects would not occur compliance function without any actual change in effects in the use of arbitration agreements in the if the proposal were adopted. In addition, the behavior or added compliance by, for example, consumer financial products and services context Bureau disagrees with commenters that assumed double or triple checking previous compliance by analyzing pricing patterns in the credit card that, if the Bureau did not generate an estimate of efforts. However, the Bureau would not expect a market after certain issuers dropped their a particular type of cost, this meant that the Bureau firm to waste money confirming that it already arbitration agreements as part of a settlement in an assumed or found that such a cost would not be complies when it receives no benefit in exchange antitrust case. The Bureau found no statistically passed through in the first instance. For example, for that investment. Compliance investments are significant evidence of changes in overall pricing the Bureau acknowledges that State class action generally risk-based, and if those activities identify among the issuers who dropped their agreements costs and costs of individual settlements may be as areas where there are consistently no errors relative to issuers who did not change their likely to be passed through to consumers as other detected, then firms may shift their efforts to other approach to arbitration. However, the Bureau costs that the Bureau was able to generate areas of higher risk. In addition, as the examples acknowledged in the Study and in the proposal that numerical estimates for. cited above suggest, class actions can assist firms in the results do not allow for conclusive 720 As noted above, commenters cited some locating areas where their compliance efforts may determinations with respect to the likelihood of limited empirical evidence from markets for other be insufficient and allow them to focus their pass-through costs given that the settlement only types of products and services but largely relied on increased compliance efforts in areas where private required issuers to drop their arbitration agreements more general economic principles and reasoning. actions are most likely.

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shrinks their customer base. For commenters acknowledged, that credit discretion to approve class settlements example, in the automobile market, the unions do not rely heavily on arbitration that provide considerably less relief to Section 1022(b)(2) Analysis below in agreements. Furthermore, even for the consumers than may have been Part VIII estimates that the overall small percentage of credit unions that available if the case proceeded to trial annual increase in costs to the average do employ arbitration agreements, the and consumers prevailed.726 And on the firm is $17,049, and the Bureau does not fact that credit unions are member- rare occasion that a class action does expect any resulting price increase for owned—and the fact that most credit proceed to trial, the trial court must take automobile loans to be significant unions are small institutions—suggests into account due process considerations enough to price a substantial number of that credit unions are unlikely to face a when determining or reviewing damage consumers out of that market. As for the significant increase in the frequency of awards, which naturally leads to a commenter that suggested that the pass- class actions and thus unlikely to incur review of the defendant’s financial through costs from the class rule will a significant cost increase.723. Similarly, condition.727 cause providers to stop offering to the extent that creditors hold extra Innovation and availability of products to lower-value customers, the cash reserves or are unable to pass products. In response to commenters Bureau does not believe that the costs as through costs and therefore reduce that contended that the class rule would estimated in the Section 1022(b)(2) lending, the Bureau believes that this deter innovation, the Bureau notes that Analysis are large enough to cause this effect would be relatively modest and the implicit premise of this argument is to occur at an industry-wide level does not alter the conclusion that the that innovators will be prepared to (though it could, however, occur for class rule is in the public interest. engage in more legally risky behavior in certain individual providers). The Bureau also has considered the a regime in which they are exposed only To the extent that commenters such as comments that expressed concern that to the risk of individual arbitration or small-dollar lenders asserted that their rather than raising prices, companies litigation than in a regime in which they industry’s profit margins are so thin that could instead be forced out of business their products cannot be offered in a as a result of the class proposal. To the Cir. 1974), remains a factor to be considered by the extent these commenters were court when determining whether a class settlement legally compliant manner (including by is fair, reasonable, and adequate); New England complying with State usury and other concerned that a class action settlement Carpenters Health Ben. Fund v. First DataBank, pricing limitations), the Bureau believes could put a provider out of business, the Inc., 602 F.Supp.2d 277, 280 (D.Mass. 2009) (noting that such arguments essentially assert Bureau believes that risk is low.724 If that many courts in the 1st Federal appellate circuit paying full relief to consumers in a class have relied upon the test announced in Grinnell); that those products do not currently Girsh v. Jepson, 521 F.2d 153, 157 (3d Cir. 1975) comply with the law and thus the settlement would threaten a provider’s (adopting ‘‘ability of defendants to withstand a providers would likely be sued in class financial condition, that institution may greater judgment’’ as a factor to be considered), actions if their arbitration agreements have leverage to negotiate a settlement cited in Osher v. SCA Realty I, Inc., 945 F.Supp. that provides less than full relief. In 298, 304 (D.D.C. 1996) (trial court in D.C. Federal did not block class actions. To the circuit considering ability to withstand greater extent that is the case, the Bureau particular, Federal courts have broad judgment as a factor); In re: Jiffy Lube Securities believes that protecting consumers discretion to consider the financial Litigation, 927 F.2d 155, 159 (affirming trial court against products and services that do condition of the defendant as a factor approval of settlement taking into account the when determining whether a proposed solvency of the defendants); Swift v. Direct Buy, not comply with the law both benefits Inc., 2013 WL 5770633 at *7 (N.D. In. 2013) (trial consumers for the reasons explained class action settlement is fair, court in 7th Federal appellate circuit considering above in Part VI.C.1 and advances the reasonable, and adequate, as is required financial condition of defendant as a factor, based public interest. by Rule 23 of the Federal Rules of Civil on Grinnell); In re: Wireless Telephone Federal Cost Procedure.725 Courts have exercised that Recovery Fees Litig., 396 F.3d 922, 932 (8th Cir. To the extent that commenters 2005) (‘‘defendant’s financial condition’’ is a factor asserted that the possibility of a that a court must consider); Torrisi v. Tucson Elec. differential impact on other particular 723 The particular impact of the class rule on Power Co., 8 F.3d 1370, 1376 (9th Cir. 1993) small entities is addressed in the Final Regulatory (affirming consideration of defendant’s financial types of providers or their customers Flexibility Act Analysis below at Part IX. As condition as a predominant factor). negates a finding that the class rule is discussed in detail there, an exemption to the class 726 See, e.g., In re: Capital One TCPA Litig., 80 in the public interest, the Bureau rule for small entities would not reduce burden by F.Supp.3d 781, 790 (N.D. Ill. 2015) (court approving 722 any significant degree for most of the over 50,000 proposed $75.5 million settlement, despite disagrees. With regard to the small entities covered by the rule, while at the same particular economic structure of credit estimating that class recovery in a successful time would potentially create significant litigation would range between $950 billion and unions, as further discussed in the unintended market distortions. Further, the Bureau $2.85 trillion, because courts ‘‘need not—and section-by-section analysis of § 1040.3 notes that insurance may be another way for small indeed should not’’ reject a settlement solely in Part VII and in the Section 1022(b)(2) businesses to manage concerns about the because it does not provide full relief, ‘‘especially unpredictability of litigation costs. Insurance is . . . when complete victory would most surely Analysis below in Part VIII, the Bureau itself a cost, but it reduces exposure to a larger cost bankrupt the prospective judgment debtor’’). recognizes that to the extent credit that is incurred episodically by some insureds by 727 Courts must take into account the unions absorb increased costs as a result spreading those costs across a large base of reasonableness of the damages awarded at trial insureds. Some small businesses that participated including whether they are so severe and of the class rule, at least some of those in the SBREFA process indicated that they costs may be passed on to credit union oppressive as to be wholly disproportionate and maintained potentially useful coverage, although offending due process under the U.S. Constitution. members in the form of lower they indicated some uncertainty due to such factors These considerations naturally lead to analysis of dividends. It is also true, of course, that as ambiguous language in insurance contracts and a defendant’s financial condition as well. See, e.g., the credit union members will benefit caps on coverage against certain types of claims. United States, et al v. Dish Network LLC, Case No. SBREFA Report, supra note 419, at 23–24. 09cv3073 (C.D.Ill.) (Slip Op. of June 5, 2017 at 373– from those costs to the extent they 724 To the extent these commenters were 75, 427–28) (citing due process standards reflect increased levels of compliance or concerned that compliance with the law would put announced in St. Louis I.M. & S. Ry. Co. v. redress for wrongful or legally risky providers out of business, as discussed below, the Williams, 251 U.S. 63, 66–67 (1919), as a significant conduct. In any event, the Study rule would still be in the public interest even if factor in support of court’s decision to award certain providers could not offer their products if penalties and statutory damages totaling $280 indicated, and credit union industry they had to comply with the law. million for violations of telemarketing laws 725 See, e.g., County of Suffolk v. Long Island including the TCPA, based on detailed 722 To the extent that commenters argued instead Lighting Co., 907 F.2d 1295, 1323–24 (2d Cir. 1990) consideration of defendant’s financial condition, that the rule should exempt particular types of (affirming that ‘‘ability of the defendants to where plaintiffs had requested $2.1 billion and providers, those arguments are discussed in greater withstand a greater judgment,’’ announced in City defendants faced maximum exposure of over $727 detail below in the Section 1022(b)(2) Analysis. of Detroit v. Grinnell Corp., 495 F.2d 448, 463 (2d billion).

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face potential class action exposure. commenter that particularly focused on per-settlement data reflects the high That is at the heart of why the Bureau the effect of the rule on peer-to-peer number of settlements involving claims believes that, on balance, the rule is in lending, without taking a position on under statutes that cap the amount of the public interest. As the Bureau noted the liability of such peer lenders, the recovery in a class action (such as those in its proposal, not all forms of Bureau notes that the pre-dispute involving debt collection under the innovation necessarily benefit arbitration agreements of online lending FDCPA), which necessarily result in consumers. No commenters disagreed platforms, generally reference and lower gross relief to the class and with the Bureau’s preliminary findings protect only the platform, not the proportionally higher attorney’s fee noting that there are some types of individual lenders. awards, as discussed in detail below in innovation that disserve consumers and In response to commenters that this Part VI.C.2. Indeed, the Study broke the public and the Bureau reaffirms its asserted that the proposal would chill out the attorney’s fee percentages by preliminary findings in this regard. To innovation without providing any class size, which showed that as the size the extent innovations of these types corresponding benefit, the Bureau finds of the class settlement decreases, the would be discouraged, the Bureau that the class rule would produce proportion of the attorney’s fees relative believes such a result would be in the significant benefits, as noted throughout to the total relief awarded consumers public interest.728 the Section 1022(b)(2) Analysis, such as increases.731 Conversely, the Bureau notes, as it relief provided to consumers through The Bureau does not believe that stated in the proposal, that some class action settlements and deterring these data suggest that plaintiff’s innovation is designed to mitigate risk companies from future violations of the attorneys are being unjustly enriched, and that to the extent that the class rule law. The Bureau thus finds that the let alone call into question the overall would affect positive innovations of this impact of the class proposal on efficacy or value of class actions to the type, it would tend to facilitate them. innovation and the availability of public interest. Commenters did not No commenters disagreed with the products supports, rather than refutes, a dispute that it is time-intensive and Bureau’s preliminary findings in this finding that the class proposal would be expensive to litigate large-scale regard and the Bureau reaffirms them in the public interest because it would consumer class actions and that most here. incentivize providers to reach the right plaintiff’s attorneys would not take on The Bureau recognizes that there may balance between innovation in the such cases if they did not expect to be be some innovation that is designed to marketplace and consumer protection as paid for successful cases. In the typical serve the needs of consumers but that well as to encourage innovation leading individual case, an attorney will request leverages new technologies or to more efficient compliance. For all of a 33 percent or higher contingency from approaches to consumer finance in ways these reasons, the Bureau reaffirms its any funds that their client might that raise novel legal questions and, in preliminary findings, as elaborated here, receive.732 Indeed, and as is discussed that sense, carries legal risk. The Bureau that the class rule is in the public above, the class action procedure was believes that these innovators who interest both because of and designed to make it economical to create such products, in general, notwithstanding its impact on pursue small claims en masse. Further, consider a variety of concerns when innovation or the availability of no commenters suggested that class bringing their ideas to market and products in the marketplace for actions could be prosecuted on a pro se doubts that the innovators would be consumer financial products and basis especially given Federal Rule 23’s deterred from launching a new product services. requirement that representation be they would otherwise choose to launch Payments to plaintiff’s attorneys. adequate in order for a class to be because of the risk of class action Many commenters, including those from certified, and the Bureau found no exposure. But, even if at the margins, Congress, industry nonprofits, and support for this notion in the Study the effect of the class rule would be to individuals also criticized the class rule either. Thus, for class actions to make it deter certain innovations from occurring as not being in the public interest economical to pursue small claims en or to reduce the availability of certain because a substantial portion of class masse, they would need to provide fee products, the Bureau believes that, on action settlement funds goes to awards to attorneys, in part, to balance, that would be a reasonable cost plaintiff’s attorneys instead of to incentivize attorneys to invest time and to achieve the benefits of the rule for the consumers. As commenters noted and resources to litigate class actions on public and consumers. The Bureau the Study reflected, the amounts paid to behalf of individual consumers who believes that, in general, in a well- plaintiff’s attorneys from class action rationally do not litigate small functioning regulatory regime, entities settlements are substantial—a total of claims.733 Under this system, there is no must balance their desire to profit, such $424,495,451—for the 419 class as through innovation, with the need to settlements analyzed in a five-year 731 Study, supra note 3, section 8 at 34 tbl. 11. comply with laws designed to protect period, for an average of more than $1 Indeed, the Study showed that in many of the million per settlement.730 This amounts smaller cases, attorney’s fee awards were often consumers.729 With respect to the to 16 percent of gross relief awarded to higher than the amounts awarded to consumers. 732 E.g., Nora Freeman Engstrom, ‘‘Attorney 728 To the extent that the rule encourages consumers, and 21 percent of the Advertising and the Contingency Fee Cost compliance with relevant laws by deterring amounts actually paid to consumers, Paradox,’’ 65 Stan. L. Rev. 633, at 692 (2013) (‘‘For innovation that involves legally-risky behavior, the and are the averages more likely years, commentators have observed that Bureau nevertheless believes that the rule would be applicable to consumers. And while one contingency fees are remarkably sticky, hovering for the protection of consumers as well as discussed commenter emphasized per-settlement around 33 percent.’’). above in Part VI.C.1. 733 See Theodore Eisenberg, et al., ‘‘Attorneys’ 729 See Dan Quan, ‘‘Project Catalyst: We’re open attorney’s fees percentages from the Fees in Class Actions: 2009–2013,’’ (N.Y.U. Sch. of to innovative approaches to benefit consumers,’’ Study—with a mean of 41 percent and L. Law & Economics Res. Paper Series Working Bureau of Consumer Fin. Prot. Blog (Oct. 10, 2014), median of 46 percent—such data is less Paper No. 17–02, 2016) available at https://papers. _ https://www.consumerfinance.gov/about-us/blog/ relevant to the average consumer. This ssrn.com/sol3/papers.cfm?abstract id=2904194 (‘‘If were-open-to-innovative-approaches-to-benefit- fees are set too low, counsel will not receive fair consumers/ (‘‘Consumer-friendly innovation can compensation for their services to the class. Worse drive down costs, improve transparency, and make consumers through dangers such as hidden costs or yet, if fees are too low, then qualified counsel will people’s lives better. On the other hand, new confusing terms.’’). not bring these cases in the first place. Injured products can also pose unexpected risks to 730 Study, supra note 3, section 8 at 33 tbl. 10. parties will receive no redress and potential

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guarantee that plaintiff’s attorneys who including claims-made settlements, Thus, it is not surprising that the Study invest their time and money in such courts oversee the fairness and found that the overall attorney’s fee cases will receive any fee at all. In adequacy of fee awards in accordance percentages did not increase addition, as described in the summary with case law. Pursuant to these significantly when calculated as a of the comments above, many plaintiff’s precedents, courts are required to find percentage of amounts actually paid (21 attorneys commented in support of the that fee awards in settled class action percent) as compared to when class rule and explained the role that fee cases are fair.735 As part of that review, calculated as a percentage of the gross awards play in allowing them to pursue the courts also examine consumer relief awarded to consumers (16 class action relief on behalf of notice procedures and can consider percent). consumers that they would not potential claims rates. Further, in cases As to the commenters that noted that rationally pursue (and thus typically do in which attorney’s fee awards are plaintiff’s attorney fees are not pursue) on an individual basis. statutory, courts typically award the fees proportionately higher in smaller With respect to commenters that based on a reasonable number of hours settlements than in larger settlements, criticized the fact that plaintiff’s expended working on the case, the Bureau believes that this likely attorney fees are deducted from the multiplied by a reasonable rate and by reflects that there are certain minimum settlement amounts intended for a factor to compensate the plaintiff’s ‘‘fixed costs’’ to litigating a class action, consumers, the Bureau notes that legal attorneys for the risk they took (the which courts recognize as reasonable to representation has a cost and this cost ‘‘lodestar’’ method).736 Even in common recover, and also that a number of must be paid so that consumers can fund cases, courts typically require Federal consumer laws cap the amount achieve class relief. To the extent the plaintiff’s attorneys to justify their available for recovery in a class action. fees of plaintiff’s attorneys are paid by request for fees by submitting records of When these costs occur in a case that the beneficiaries of their services (and the number of hours that they worked ultimately provides smaller amounts of diminish the beneficiaries’ net recovery) on the case, so that the court can ensure relief to consumers, the percentage of that is not, in the Bureau’s view, an that the fee award is reasonable.737 attorney’s fees will necessarily be inappropriate allocation of costs. higher.738 In terms of hours, as noted Indeed, legal representation, like any 735 E.g., Newberg et al., supra note 65, at § 15. See above, courts often take into account the also, Order & Final Judgment at 1, Trombley v. other service, has a cost and is how National City Bank, No.10–00232, (D.D.C. Dec. 1, number of hours an attorney worked on most plaintiff’s attorneys—class or 2011), ECF No. 56 (‘‘Upon careful consideration of a class action case in awarding otherwise—are compensated. The the Revised Settlement Agreement, its subsequent attorney’s fees. The Bureau does not Bureau also notes that deduction of modifications, plaintiffs’ motion for final approval agree that the potential for consumer of the class action settlement, plaintiffs’ motion for plaintiff’s attorney fees from consumer an award of attorneys’ fees, reimbursement of finance cases in which plaintiff’s recoveries does not occur in all class expenses, and incentive awards to the attorney fees are high relative to the actions. Plaintiff’s attorney fees in class representative plaintiffs . . . and the entire record settlement amount or even more than action settlements can be based on herein, . . . the Court grants final approval of the the settlement amount compels a settlement as set forth in the parties’ Revised recovery from the ‘‘common fund’’ (in Settlement Agreement . . . .’’) (cited at 81 FR finding that those class actions do not which case the fees are subtracted from 32830, 32932 (May 24, 2016)); Memorandum Order protect consumers or are not in the the amount agreed to be paid to & Opinion at 2, In Re: Trans Union Corp. Privacy public interest. The Bureau finds that Litig., No. 1350, (N.D. Ill. Apr. 6, 2009) ECF No. such an outcome is uncommon, and consumers) or they can be awarded 591–2 (reducing requested attorney’s fees to 10 separate from the fund in cases where percent of recovery where ‘‘[m]ovants . . . notes that courts scrutinize these the underlying statute under which submitted extensive, yet flawed, documentation settlements like any other, rejecting claims were asserted provides for and declarations to support their requests for these them when they are not fair and 734 fees’’) (cited at 81 FR 32830, 32849 (May 24, 2016)). reasonable or approving them when attorney’s fees. Some commenters 736 Newberg et al., supra note 65, at § 15:38. See 739 suggested that even when attorney’s fees e.g., Order Granting Plaintiff’s Motion for Final they are. These cases still provide are awarded separate from the fund, the Settlement Approval & Granting Plaintiff’s company still has an incentive to reduce Application for Attorney’s Fees, Expenses, & 32830, 32931 (May 24, 2016)); Final Approval the amount of the fund in order to make Incentive Awards, Villaflor v. Equifax Info. Svcs., Order & Judgment at 3–4, In re: Chase Bank USA, L.L.C., No. 09–00329 (N.D. Cal. May 3, 2011), ECF N.A. ‘‘Check Loan’’ Contract Litig., No. 09–02032, room for the attorney’s fees. Assuming No. 177 (approving attorney’s fee application based (N.D. Cal. Nov. 19, 2012), ECF No. 386 (‘‘The Court this is true, as noted above, this is the on hours worked in case based on FCRA claim and further finds the requested service awards are fair cost of litigating class actions and it is request for statutory attorneys fees) (cited at 81 FR and reasonable, given the time and effort expended reasonable for that cost to be paid (even 32830, 32932 (May 24, 2016)); Order Granting: (1) by the recipients on behalf of the Class. Final Approval to Class Action Settlement; (2) Accordingly, Class Counsel is hereby awarded by consumers) when benefits are Award of Attorney’s Fees; and (3) Judgment of attorneys’ fees . . . to be paid from the common achieved in a class settlement. Dismissal at 7, Lemieux v. Global Credit & Settlement Fund . . . .’’) (cited at 81 FR 32830, Similarly, some commenters Collection Corp., No. 08–01012, (S.D. Cal. Sept. 20, 32931 (May 24, 2016)). criticized plaintiff’s attorney fee awards 2011), ECF No. 46 (analyzing attorney’s fee request 738 See, e.g., Theodore Eisenberg & Geoffrey P. in a settlement involving TCPA claims and a Miller, ‘‘Attorney Fees and Expenses in Class because they are based on the amount request for statutory attorney’s fees, under the Action Settlements: 1993–2008,’’ 7 J. Empirical available to be paid to the class, rather lodestar method and determining ‘‘[u]nder the facts Legal Stud. 248, at 279 (2010) (noting that class than the amounts that end up being paid presented in this case, the Court finds the amount action awards exhibit a strong ‘‘scale effect’’ in that out after consumers make claims. As of hours expended, Counsel’s billing rates, and the attorneys receive a smaller proportion of the positive multiplier of 1.46 to be reasonable,’’ recovery as the size of the recovery increases, and discussed above in Part VI.B.3, however, justifying payment of requested fees) (cited at 81 FR stating that this effect occurs because increased a significant number of consumer 32830, 32931 (May 24, 2016)). aggregation of claims leads to greater efficiency). finance class actions settlements 737 Federal Judicial Center, ‘‘Manual for Complex 739 E.g., Allen v. Bedolla, 787 F.3d 1218, 1224, 24; provide for automatic payments. With Litigation,’’ at § 21.724 (4th ed. Thomson West 165 Lab. Cas. P 36348, 91 Fed. R. Serv. 3d 1108, 2016). See, e.g., Order Awarding Attorneys’ Fees 24 Wage & Hour Cas. 2d (BNA) 1437 (9th Cir. 2015) respect to all class settlements, And Reimbursement of Expenses at 3–4, Faloney v. (emphasizing that warning signs such as the fact Wachovia Bank, N.A., No. 07–01455 (E.D. Pa. Jan. that the amount of attorney’s fee was three times wrongdoers will no longer be deterred out of fear 22, 2009), ECF No. 118 (granting an attorney’s fees higher than the amount paid to the class ‘‘does not of potential class action liability.’’). request in common fund case, noting that 6,372 mean the settlement cannot still be fair, reasonable, 734 See, e.g., Federal Judicial Center, ‘‘Manual for attorney hours had been billed, and that the fee or adequate’’); Harris v. Vector Marketing Corp., Complex Litigation,’’ at § 21.7 (4th ed. Thomson requested was based on a reasonable multiple of the 2011 WL 4831157, *4 (N.D. Cal. 2011) (‘‘This is not West 2016). resulting loadstar of $2,266,691) (cited at 81 FR Continued

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benefits to consumers, whether in the than awards in cases asserting claims to have reported the overall mean for form of injunctive relief or more limited under uncapped statutes or under attorney’s fees of all the cases analyzed compensation, and deter companies common law theories. The Bureau does as a percentage of payments.745 Instead, from violating the law, as discussed not believe that the existence of these the attorney’s fee data in that paper was above in Part VI.C.1. Indeed, the damages caps or the resulting reported for ‘‘claim types’’ that were prospect that a company might be relationship between attorney’s fees and subsets of claims under particular forced to pay attorney’s fees in a class consumer relief suggests that class statutes.746 The data was not reported action settlement deters violations of the actions for violations of these statutes for cases under each statute as a whole. law just as much as the prospect that a are not in the public interest. The Thus, the 75 percent figure appears to company might be forced to provide Bureau finds no evidence to suggest that be an estimate of the various relief to consumers. Given the limited class actions with lower recovery percentages data that were reported for resources of public enforcers, it is less amounts (and potentially relatively each claim type within the various likely that public enforcement would higher attorney’s fees) do not benefit statutes.747 The paper analyzed a set of devote resources to cases involving consumers in part because, as discussed class actions from a single Federal harms totaling relatively small amounts; above in Part VI.C.1, the Bureau believes district court concerning claims under thereby making private enforcement such class actions, like all class actions, the FDCPA, TCPA, FCRA, and EFTA. As more important for such cases. have a deterrent effect.741 noted above in Part VI.B.3 in a Further, certain statutes cap the total With respect to commenters that discussion of a separate study cited by amount of relief that can be awarded in questioned the accuracy of the Study’s commenters,748 many of those statutes a class action under that statute. For data as it pertained to attorney’s fees in cover activity that extends beyond consumer finance laws, these include class action settlements, the Bureau consumer financial services, to include the Expedited Funds Availability Act points out that the two competing nonfinancial goods or services that were (EFAA), EFTA, FDCPA, TILA (including studies cited by commenters covered neither included in the Study nor are the Consumer Leasing Act and the Fair many cases that would not be covered subject to the final rule.749 Indeed, of Credit Billing Act), and ECOA, which by this rule and were not covered in the those cases analyzed in the paper, only provides for punitive and actual Study. For example, the RAND study the FDCPA cases and a few of the TCPA damages but not statutory damages.740 cited by one commenter was a 1999 case debt call cases would likely involve Given the fixed costs of litigating, it is study of 10 cases that pre-dated CAFA, consumer financial products and therefore more likely that cases asserting and only four of the cases studied were services covered by this rule. For those claims under such capped statutes consumer finance cases.742 For cases, the relative proportion of would result in attorney’s fee awards comparison, the Bureau’s Study attorney’s fees to consumer payout does that are higher in relation to the amount analyzed 419 class action settlements, not appear inconsistent with what was of monetary relief awarded to the class all of them concerning consumer found in the Study for cases with financial products or services.743 smaller class settlements. to suggest that fees which exceed actual class Moreover, while one commenter cited Specifically, the paper analyzed 26 recovery are necessarily disproportionate or reflect the RAND study for the proposition that FDCPA class action settlements and a conflict of interest.’’); Koby v. ARS, 846 F.3d 1071 attorney’s fees were higher than relief found the proportion of attorney’s fees (9th Cir. 2017) (rejecting class settlement approved provided to consumers in three out of to cash relief to be between 62 percent by magistrate judge because there was no evidence that class members received any benefit from the 10 cases, two of those cases were small and 84 percent and the proportion of settlement and class members relinquished their settlements (each just under $300,000), attorney’s fees to cash payments to be 64 rights to seek damages on the same issue in any which as discussed above are more percent to 100 percent.750 Accordingly, other class action). likely to lead to situations in which the ratio of attorney’s fees to nominal 740 These caps can be summarized as follows: attorney’s fees are higher than consumer EFAA: Capped amount of lesser of $500,000 or 1 745 percent of net worth of creditor; capped amount is payout. Further, that study’s authors See the Section 1022(b)(2) Analysis below in Part VIII for a related discussion of attorney’s fees. in addition to any actual damages; punitive ultimately did not agree with the 746 damages are not expressly authorized. 12 U.S.C. conclusion that class actions produce For example, cases asserting claims under the 4010(a)(2)(B)(ii); FDCPA were divided into four claim-types: Bad large payouts for the attorneys at the affidavit; bad debt; formality; and litigation threat. EFTA: Capped amount of lesser of $500,000 or 1 expense of plaintiffs and consumers. Johnston, supra note 520, at 31. percent of net worth of the defendant; capped 747 Johnston, supra note 520, at 41. amount applies to statutory damages for ‘‘the same Instead, the authors opined that ‘‘[t]he 748 failure to comply’’; punitive damages are not wide range of outcomes that we found Shepherd, supra note 515, at 2, 13. expressly authorized. 15 U.S.C. 1693m(a)(2)(B). As in the lawsuits contradicts the view that 749 For example, as discussed more fully above regarding ‘‘no-injury statutes’’ in ‘‘Monetary Relief discussed in Appendix L of the Study, we did not damage class actions invariably produce cover cases related solely to violation of EFTA ATM Provided,’’ FCRA class actions can involve disclosure requirements. EFTA also authorizes little for class members, and that class merchants and employers. EFTA class actions in trebling of actual damages for certain claims under action attorneys routinely garner the this period were often ATM ‘‘sticker’’ claims that 15 U.S.C. 1693f(e); 744 no longer violate EFTA. As the proposal noted, the lion’s share of settlements.’’ rule would have no impact on such cases because FDCPA: Capped amount of lesser of $500,000 or With respect to a paper cited by they are either brought against merchants, or by 1 percent of net worth of defendant; capped amount several commenters as supporting the non-customers who do not have contractual is in addition to any actual damages; punitive conclusion that attorney’s fees are relationships with a provider. FDCPA class actions damages are not expressly authorized. 15 U.S.C. cover the collection of all types of debt, including 1692k(a)(2)(B); higher than shown by the Bureau’s debt that does not arise from a consumer financial TILA including CLA, FCBA: Capped amount of Study and ‘‘rarely less than 75 percent product or service (such as taxes, penalties and lesser of $1 million or 1 percent net worth of of the amount actually paid to fines), whereas the Study and the rule only covered creditor; capped amount is in addition to any actual consumers,’’ the paper does not appear collection of debt to the extent it was a collection damages; punitive damages are not expressly on a consumer financial product or service. Finally, authorized; prior to Dodd-Frank July 2010 DFA TCPA class actions often involve marketing 1416(a)(2), was $500,000. 15 U.S.C. 1640(a)(2)(B); 741 Indeed, some of the law firm alerts cited by communications unrelated to consumer finance. and the Bureau as examples of the deterrent effect of Such claims are often brought against a merchant ECOA: Does not authorize statutory damages, but class action settlements involve class actions or a company with whom the consumer otherwise rather actual damages, as well as punitive damages asserting claims under capped statutes. has no relationship (contractual or otherwise). up to $10,000, with combined amounts in a class 742 Hensler, et al., supra note 669, at 5, 14. 750 Johnston, supra note 520, at 31. That paper case subject to limit of lesser of $500,000 or 1 743 Study, supra note 3, section 8 at 3. also found the average nominal settlement in those percent of net worth of creditor. 15 U.S.C. 1691e(b). 744 Hensler et al., supra note 669, at 18. cases to be relatively low: $58,724.

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relief is consistent with that reported in review class action settlements for support for that view. Further, the the Study for settlements of $100,000 or fairness or reasonableness, there are nature of the examples submitted less which showed that the proportion numerous examples of courts that, in indicates that prosecutors and the courts of attorney’s fees to gross relief for such exercising their power to review class have uncovered and remedied such cases averaged 55.9 percent.751 The action settlements, found certain aspects abuses when they occurred. Indeed, in Study did not disaggregate the data with of settlements to be unfair or the example cited by one commenter respect to fee awards in relation to cash unreasonable.755 Commenters and that involved plaintiff’s attorneys who payout by size of settlement or type of commentators may debate whether an paid people to be lead plaintiffs, those claim, but the ratios likely would have attorney’s fee award in a particular case attorneys were criminally charged with been similar to what the paper found for is appropriate, but commenters have not racketeering, mail fraud, and bribery settlements of that size given the data put forth evidence to suggest that courts and pleaded guilty to numerous reported in the Study on the attorney’s cannot and do not effectively supervise charges.757 fees by size of settlement.752 As for class action settlements or attorney’s fee As to commenters that criticized comments that criticized high attorney’s awards or that they fail to do so in such plaintiff’s attorneys as ‘‘self-interested’’ fees in settlements that provided for cy a way that the entire class action in choosing to bring class action cases pres relief, the Study’s analysis of cash process is rendered faulty.756 that might benefit them personally payments to consumers did not include Similarly, some industry commenters through generation of large fee awards, any additional value of cy pres relief. put forward examples, prior to the the Bureau recognizes that plaintiff’s Indeed, the Study found relatively few period analyzed in the Study, of attorneys are unlikely to be motivated consumer finance settlements providing plaintiff’s attorneys who engaged in purely by altruism and may, indeed, for cy pres relief without also providing unlawful practices such as paying factor the potential to earn a fee into relief directly to consumers—28 out of individuals to serve as lead plaintiffs or their decisions about whether to pursue 419 analyzed. Had the Bureau included recruiting professional plaintiffs to serve a case. The Bureau does not agree that cy pres in its analyses, the attorney’s as lead plaintiffs in multiple cases. the pecuniary motives of the plaintiff’s fees ratios would have been even lower. However, no commenters submitted attorney in pursuing a class action on For these reasons, the Bureau finds that evidence to support that such abuses are behalf of absent class members the attorney’s fees awarded in cy pres widespread, nor is the Bureau aware of determine whether a case ultimately cases, when they occur, do not provides relief to consumers or is in the 755 undermine the findings that class See generally Newberg et al., supra note 65, public interest, much like the Bureau at § 13:61, citing many cases. See also In re would not consider a provider’s profit actions are in the public interest insofar Bluetooth Headset Products Liability Litigation, 654 as cy pres payouts are above and beyond F.3d 935, 947 (9th Cir. 2011) (describing possible motive as evidence of whether the the amounts reported by the Study.753 signs of collusion, such as ‘‘when counsel receive provider’s product or service complies Many of the commenters criticized a disproportionate distribution of the settlement, or with the law. when the class receives no monetary distribution In any event, plaintiff’s attorneys are the role of plaintiff’s attorneys in class but class counsel are amply rewarded’’ (quoting incentivized by the prospect of fee action settlements, asserting that they Hanlon v. Chrysler Corp., 150 F.3d 1011, 1021 (9th awards to pursue relief on behalf of often have improper conflicts of interest Cir. 1998)); Crawford v. Equifax Payment Services, Inc., 201 F.3d 877, 882, 45 Fed. R. Serv. 3d 811 (7th consumers in cases where individual with absent class members. However, Cir. 2000) (reversing settlement approval where it recoveries would be small and thus both judicial review of class action appeared plaintiffs’ counsel was ‘‘paid handsomely individual consumers and individual settlements, including the portion of to go away’’ and ‘‘the other class members received attorneys would not have a financial any settlement allocated to the nothing . . . and lost the right to pursue class relief.’’). Vought v. Bank of America, N.A., 901 F. motivation to proceed. By design, the attorneys, is required in part because of Supp. 2d 1071, 1100–01 (C.D. Ill. 2012) (stating that class vehicle groups individual claims the potential for such conflicts. Indeed, ‘‘[t]he terms of the settlement, despite the and thereby provides the plaintiff’s the Federal Judicial Center Manual superficially generous $500,000 cap, ended up attorney with the incentive to bring notes, with respect to class action being a zero-sum framework where the putative attorneys’ fees award cannibalized the funds that them.758 settlements, that ‘‘the parties or the The fact that a plaintiff’s would otherwise have gone to the class’’ and attorney was motivated to bring a class attorneys often have conflicts of interest denying approval). Sobel v. Hertz Corp., 2011 WL . . .’’ and instructs courts on how to 2559565, *13 (D. Nev. 2011) (denying approval in action case by the potential to earn a part because ‘‘the only components with any profit does not undermine the validity manage those conflicts.754 In other determinate—or on this record, determinable— of the case. Indeed, individual words, while the commenters are value are the attorneys’ fees, incentive payments, consumers are not generally qualified to correct that class actions can pose and to some extent the costs of notice and represent themselves in filing a class potential conflicts of interest between administration’’). True v. American Honda Motor Co., 749 F. Supp. 2d 1052, 1078 (C.D. Cal. 2010) action, so someone else must bring it for plaintiff’s attorneys and absent class (noting that ‘‘there is no certainty that class them. As long as courts continue to members, courts are explicitly aware of members will receive any cash payments or rebates these conflicts and, for those reasons at all,’’ then concluding ‘‘to award three million 757 Martha Graybow, ‘‘US Shareholder Lawyer among others, have procedures in place dollars to class counsel who may have achieved no financial recovery for the class would be Melvyn Weiss to Plead Guilty,’’ Reuters (Mar. 21, to review class action settlements. unconscionable’’). In re TJX Companies Retail Sec. 2008), available at http://www.reuters.com/article/ While many commenters expressed Breach Litigation, 584 F. Supp. 2d 395, 406 (D. sppage014-n20401632-oistl-idUSN204016322 their belief that courts do not adequately Mass. 2008) (‘‘Similarly, unscrupulous class 0080321; Business Day, ‘‘Lawyer Pleads Guilty in counsel may agree to conditions on a settlement— Securities Case,’’ N.Y. Times (July 10, 2007), such as a short timeframe in which to make claims available at http://www.nytimes.com/2007/07/10/ 751 Study, supra note 3, section 8 at 34 tbl. 11. or a burdensome claims procedure—in order to business/09cnd-bershad.html?hp. 752 Id. obtain additional concessions from the defendant 758 See, e.g., John C. Coffee, Jr., ‘‘Understanding 753 Id. section 8 at 4 n.5 and n.9. that purportedly increase the value created by the the Plaintiff’s Attorney: The Implications of 754 Federal Judicial Center, ‘‘Manual for Complex litigation and that support an enhanced fee Economic Theory for Private Enforcement of Law Litigation,’’ at § 13.14 (4th ed. Thomson West 2016). award.’’). Through Class and Derivative Actions,’’ 86 Colum. A separate section of that manual notes ‘‘[i]n 756 One commenter cited a study that the L. Rev. 669, at 677–679 (1986) (stating that, in the common-fund litigation, class counsel may be commenter claimed supports the proposition that context of class and derivative actions, ‘‘our legal competing with class members for a share of the judges are more likely to approve class settlements system has long accepted, if somewhat uneasily, the fund, thus placing a special fiduciary obligation on in cases where the claims are weak. Johnston, supra concept of the plaintiff’s attorney as an the judge because class members are unrepresented note 520, at 13. The Bureau has reviewed that Study entrepreneur who performs the socially useful as to this issue.’’ Id. § 14.231. and disagrees that it supports such a proposition. function of deterring undesirable conduct’’).

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review settlements and attorney’s fee district judge by slightly less than one that the mere possibility of obtaining awards for reasonableness and fairness, case per year, which the Bureau believes relief through a class action, or the there is a check on the self-interest of would be a minimal impact. Similarly, pendency of a putative class action, will plaintiff’s attorneys to ensure that it there are approximately 11,800 State materially affect the number of does not prevent consumers from court judges of general jurisdiction.762 consumers who seek to resolve benefitting from the class action Assuming the same number of complaints informally. Nor does the procedure. additional class actions are filed in State Bureau believe that class action Strain on the courts. A few courts as in Federal courts as a result of exposure or the pendency of a class commenters stated that the rule would the class rule 763 and that class actions action will reduce the frequency with encourage class action litigation and can be heard by these judges, each State which providers will agree to informal therefore strain the resources of the court judge would face an additional resolution. If anything, the Bureau court system. As noted above in Part 0.05 cases per year, or one case per believes the reverse to be true as VI.A, for the public interest standard, judge over the course of 20 years. The companies may be more likely to the Bureau considers benefits and costs Bureau finds that these increases per resolve complaints informally to reduce to consumers and firms, including more judge are so small that the increase in the risk that a consumer initiates a class direct consumer protection factors, and the number of class cases caused by the action and, if a putative class action is general or systemic concerns with class rule would not significantly pending, to reduce the likely class respect to the functioning of markets for impact the costs or efficiency of recovery as the class action settlement consumer financial products or services, administration of the Federal and State may deduct the amount of the the broader economy, and the court system. However, even if the company’s informal relief provided to promotion of the rule of law and entirety of the strain on the court system customers when calculating damages.764 accountability.759 The Bureau does not fell upon consumers and providers, as Federalism concerns. In response to believe that the impact of the rule on the explained below, the Bureau finds that the research center commenter that resources of the court system per se or the relatively small impact in the form contended that the class rule will to the extent it impacts non-consumer of additional class action cases is encourage ‘‘inverse federalism,’’ the product and service-related litigation is preferable to class action cases that Bureau notes that this argument rests on appropriately considered under this could have provided relief to consumers the premise that providers that face only standard; this impact does not fall under from violations of the law being blocked exposure to individual arbitrations or the Bureau’s purposes and objectives.760 by arbitration agreements or never filed litigation will not deem it necessary to To the extent any strain on the court at all. conform to the most protective State system could impact consumers To the extent that this small impact laws, whereas the availability of class bringing claims related to consumer on the court system occurs, the Bureau relief will result in compliance with financial products and services by, for finds that resolution of the additional such laws and have spillover effects on example, increasing court costs as well class cases will provide relief for other States. Thus, like the objection as the waiting time for court dates or consumers and the threat of liability in based on the impact of the rule on decisions, the Bureau has considered those cases will deter providers from innovation, this comment conceded the this impact in its public interest violating the law and therefore that the key predicates on which the class rule analysis. The Bureau has also impact on the court system is justified. rests—that class actions deter violations considered impacts on providers in In other words, the Bureau finds that a of the law. their claims related to consumer relatively small impact on the court The Bureau does not agree that to the financial products or services. In any system in the form of additional class extent the class rule increases event, the Bureau does not believe that action cases is preferable to class action compliance with the most protective strain on the court system to be a likely cases that could have provided relief to State laws and has spillover effects in or significant outcome of its rule. consumers from violations of the law other States such a result would The Bureau does estimate that there being blocked by arbitration agreements represent federalism in reverse. will be some increased class action or never filed at all. Accordingly, the Companies that operate in multiple litigation as a result of the class rule. impact on the court system from the States have a choice of either acting Indeed, the Section 1022(b)(2) Analysis class rule does not detract the Bureau’s differently in different States depending below in Part VIII estimates that there finding that the class rule is in the upon the permissiveness of State law or will be 3,021 additional Federal court public interest. acting uniformly in a manner consistent class actions over a five-year period, or Harm to relationships between with the most consumer-protective State 604 Federal cases per year. The Bureau customers and providers. As to law. The Federal system does not does not agree, however, that this commenters that contended that the presuppose that a company may choose increase in class action cases will class rule is not in the public interest to so cabin its exposure in certain States overburden the Federal court system. In because it would harm relationships (e.g., by entering into arbitration the most recent year for which data is between consumers and their financial agreements) so as to enable it to ignore available, there were 673 authorized institutions because the availability of the laws of more protective States. Thus, district court judgeships.761 class actions discourages informal if the result of the class rule is to cause Accordingly, the class rule would likely resolution of disputes, the Bureau does companies to comply with protective increase the case load of each Federal not agree. The Bureau does not believe State laws—and if, as a result, those companies choose to adopt the same 759 The Bureau uses its expertise to balance 762 Nat’l Ctr. for State Courts, ‘‘Number of competing interests, including how much weight to Authorized Justices/Judges in State Courts, 2010,’’ 764 For example, in 17 of the 18 Overdraft MDL assign each policy factor or outcome. (Court Statistics Project 2012), available at http:// settlements analyzed in the Study, the settlement 760 See, e.g., Nat’l Ass’n for Advancement of www.courtstatistics.org/∼/media/Microsites/Files/ amounts and class members were determined after Colored People v. FPC, 425 U.S. 662, 667–68 (1976). CSP/SCCS/2010/Number_of_Authorized_Justices_ specific calculations by an expert witness who took 761 United States Courts, Authorized Judgeships, and_Judges_in_State_Courts.ashx. into account the number and amount of fees that http://www.fjc.gov/history/home.nsf/page/research_ 763 For the basis for this assumption, see the had already been reversed based on informal categories.html http://www.uscourts.gov/sites/ detailed discussion in the Section 1022(b)(2) consumer complaints to customer service. Study, default/files/allauth.pdf (last visited Jun. 23, 2017). Analysis below in Part VIII. supra note 3, section 8 at 46 n.63.

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practices in States with fewer establish certain minimum standards that section 1028 of the Dodd-Frank Act restrictions—such an outcome would be which cannot be varied by contract, and provides the Bureau with authority to entirely consistent with the Federal State common law typically does not regulate arbitration agreements.771 To system. permit enforcement of contractual terms do so, the Bureau must find, consistent Impairment of freedom of contract. In that are unconscionable.769 The Bureau with the Study, that doing so is in the response to a group of State attorneys therefore finds that, to the extent the public interest and for the protection of general that contended that the class class rule has any impact on the consumers. For all of the reasons rule harms the public interest because it freedom of contract, that limited impact discussed herein, the Bureau finds that reduces parties’ freedom of contract, the to consumers and providers’ freedom of class rule meets the standard for the Bureau notes that consumer finance contract is justified by the consumer Bureau to exercise its section 1028 contracts are not negotiated; they are protection and other public interest authority. almost always standard-form contracts benefits of the class rule, discussed In response to commenters’ concerns that consumers may either choose to herein. Put another way, the regarding the legal uncertainty that may sign in order to obtain the product or commenters did not explain why follow from the class rule that may not. Further, the Study’s consumer consumers’ freedom to contract (for create potential liability for covered survey of credit card customers found products with form contracts) should providers, the Bureau does not believe that consumers did not mention dispute take precedence over their liberty to that the rule creates any uncertainty as resolution features as relevant to them engage with providers more likely to to the type of actions to which it would when shopping for credit cards and comply with consumer protection laws. apply. Rather, the Bureau believes that chose dispute resolution last on a list of Similarly, the Bureau believes that any the regulation text is clear that the final nine features that influenced their limited impact the class rule may have class rule applies to all State and decision of whether to choose a on consumers’ freedom of contract and, Federal class actions, as discussed more particular credit card.765 These findings in turn, consumers ability to avoid fully in the section-by-section analysis suggest that consumers do not consider contact with plaintiff’s attorneys, is to § 1040.4(a)(2) below in Part VII. To dispute resolution when obtaining justified for all the reasons discussed address any potential confusion, the consumer financial products.766 The herein. Bureau intends to develop a suite of survey further found that consumers Public policy concerning arbitration compliance materials for new part 1040, generally do not understand the and legal uncertainty. Lastly, with just as it has done with the other consequences of entering into a contract respect to commenters’ assertion that regulations it has issued. Nor does the that includes an arbitration the class rule contravenes public policy Bureau believe that the rule creates any 767 agreement. Thus, while it is true that and Supreme Court precedent uncertainty as to the scope of in certain covered markets the rule will culminating in AT&T v. Concepcion, the preemption under the Federal eliminate the option for consumers to Bureau notes that this assertion stems Arbitration Act, since the Supreme choose a contract on the basis of its from the general public policy Court has been quite clear that Congress dispute resolution procedures, the established by Congress in passing the can authorize exceptions to the FAA by Bureau does not view that as negatively Federal Arbitration Act. But the statute as Congress did in section 1028. impacting consumers’ freedom of Supreme Court has also acknowledged Moreover, to the extent that covered contract, in practice. Furthermore, to the that this general ‘‘ ‘liberal federal policy entities have the ability to challenge extent that the class rule affects the favoring arbitration agreements’ ’’ may legislation or rulemaking through the providers’ freedom of contract, the be overridden in specific instances litigation process or otherwise, there is Bureau notes that there are any number where ‘‘Congress itself has evinced an always some degree of uncertainty with of laws and regulations that take intention to preclude a waiver of respect to any statute or rulemaking. If precedence over the unfettered freedom judicial remedies for the statutory rights 770 the potential for that type of legal of contract in consumer finance. For at issue.’’ The Bureau further notes uncertainty discouraged the adoption of example, State usury laws limit the new legislation or regulations, new 769 interest than can be charged to E.g., Richard A. Lord, ‘‘Williston on legislation or regulations would rarely consumers who borrow money,768 State Contracts’’ at § 18.1 (Thomson Reuters, 4th ed. 2010) (‘‘[W]hile freedom of contract has been occur. For this reason, the Bureau finds and Federal consumer protection laws regarded as part of the common-law heritage . . . that the potential for legal uncertainty, courts of equity have often refused to enforce some if any, does not undermine a finding 765 agreements when, in their sound discretion, the Id. section 3 at 11–15. that the class rule is in the public 766 This also addresses the comment that agreements have been deemed unconscionable.’’). consumers do have a choice regarding whether to See also Gandee v. LDL Freedom Enters., Inc., 293 interest. enter into contracts with arbitration agreements. P.3d. 1197, 1199–1202 (Wash. 2013) (finding Impact on certain State laws. The The survey demonstrated that dispute resolution arbitration agreement unconscionable where agreement required arbitration to take place in Bureau disagrees with industry was not something most consumers considered at Orange County, California; contained provision commenter that asserted that the the time they acquired a product. In any event, the shifting all costs to losing party; and shortened Study showed that for some products, there was proposal was not in the public interest statute of limitations from four years to 30 days); almost no option for a consumer who did not want because of its potential effect on Utah’s Newton v. Am. Debt Services, Inc., 854 F. Supp. 2d an arbitration agreement. Id. section 2 at 6–26. 712, 722–27 (N.D. Cal. 2012) (same, where law authorizing class-action waivers in 767 Id. section 3 at 18. agreement was part of an adhesion contract; was closed-end consumer credit 768 E.g., Tex. Fin. Code Ann. § 302.001 (‘‘The inconspicuously located within the contract; contracts.772 As relevant here, the maximum rate or amount of interest is 10 percent deprived plaintiff of statutory rights; required Bureau has found that certain a year except as otherwise provided by law.’’); N.Y. plaintiff to arbitrate in Tulsa, Oklahoma; and gave Banking Law § 14-a (‘‘The maximum rate of interest defendant unilateral right to choose arbitrator, limitations on the use of pre-dispute . . . shall be sixteen per centum per annum.’’); among other things); Bragg v. Linden Research, Inc., arbitration agreements related to class Ohio Rev. Code Ann. § 1343.01 (‘‘The parties to a 487 F. Supp. 2d 593, 605–11 (E.D. Pa. 2007) (same, waivers are in the public interest and for bond, bill, promissory note, or other instrument of where agreement was included in a lengthy writing for the forbearance or payment of money at paragraph under the benign heading ‘‘General any future time, may stipulate therein for the Provisions;’’ consumer was required to advance a Hospital v. Mercury Construction Corp., 460 U.S. 1, payment of interest upon the amount thereof at any significant share of the fees; and venue was limited 24 (1983)). rate not exceeding eight per cent per annum to San Francisco, among other things). 771 Compucredit Corp. v. Greenwood, 132 S. Ct. payable annually, except as authorized in division 770 Gilmer v. Interstate/Johnson Lane Corp., 500 665 (2012). (B) of this section.’’). U.S. 20, 26 (1991) (citing Moses H. Cone Memorial 772 Utah Code 70C–3–14.

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the protection of consumers. As noted experience and expertise, and the that must be reported to the Bureau as above, the Bureau has determined that Bureau’s analysis—that a comparison of urged by some commenters in order to eliminating class actions reduces and the relative fairness and efficiency of better promote both statutory objectives. weakens consumer protections because individual arbitration and individual The Bureau is also finalizing its the remaining forms of dispute litigation was inconclusive and thus proposal to publish the reported resolution are insufficient. In addition, that a complete prohibition on the use records, with appropriate redactions, on as discussed in the Section 1022(b)(2) of pre-dispute arbitration agreements in the Bureau’s Web site. Analysis, the Bureau does not believe consumer finance contracts was not that a disclosure-focused regulation warranted. Accordingly, the class 1. The Monitoring Rule Is for the would address the market failure the proposal would not have prohibited Protection of Consumers Bureau has identified in this rule.773 covered entities from continuing to In the proposal, the evidence before Accordingly, these findings are equally include arbitration agreements in the Bureau, including the Study, was applicable where a State law authorizes consumer financial contracts generally; inconclusive as to the relative fairness the use of class waivers in arbitration providers would still have been able to and efficacy of individual arbitration agreements that apply to consumer include them in consumer contracts and compared to individual litigation. The financial products and services covered invoke them to compel arbitration in Bureau remained concerned, however, by this final rule, such as the Utah law court cases that were not filed as class that the historical record demonstrated does with respect to consumer credit actions. In addition, the class proposal the potential for consumer harm in the contracts.774 Based on the Bureau’s would not have foreclosed class use of arbitration agreements in the findings, even if such a law would arbitration; it would be available when resolution of individual disputes. conflict with the class rule to the extent the consumer chooses arbitration as the Among these concerns is that it allows providers to rely on class forum in which he or she pursues the arbitrations could be administered by waivers in arbitration clauses in the class claims and the applicable biased administrators (as was alleged in absence of the class rule, the class rule arbitration agreement permits class the case of NAF), that harmful is in the public interest and for the arbitration. arbitration provisions could be protection of consumers and affords However, in light of historical enforced, or that individual arbitrations consumers greater protections than such evidence that there have been serious could otherwise be conducted in an a State law. The Bureau also believes concerns about the fairness of thousands unfair manner. that a uniform approach to the conduct of past arbitration proceedings, and that The Bureau preliminarily found, covered by this rule across the States is the Study identified some fairness consistent with the Study, that the consistent with the goal of promoting concerns about certain current monitoring proposal would have consistency in compliance and a level arbitration agreement provisions and positive outcomes that would be for the playing field across the providers practices, the Bureau believed that it protection of consumers. Specifically, covered by the rule.775 was appropriate to propose a system to the Bureau preliminarily found that the It also bears noting that, as described facilitate monitoring and public collection of arbitration documents in Part VI.A above, a group of State- transparency regarding the conduct of would help the Bureau monitor how legislator commenters argued that the arbitrations concerning covered arbitration proceedings and agreements proposed class rule was in the public consumer financial products and evolve and to see if they evolve in ways interest precisely because Federal law services going forward. Specifically, the that harm consumers.776 The collection currently undermines States’ ability to Bureau proposed § 1040.4(b), which of arbitration claims would provide pass laws that will be privately would have required providers to transparency regarding the types of enforced, measure the efficacy of those submit certain arbitral records to the claims consumers and providers are laws, or observe their development. Bureau that the Bureau would then bringing to arbitration and would allow further redact, if necessary, and publish. D. The Bureau Finds That the the Bureau to monitor the raw number The Bureau preliminarily found this Monitoring Rule Is in the Public Interest of arbitrations. part of the proposal to be consistent and for the Protection of Consumers While the Study data identified only with the Bureau’s authority under hundreds of arbitrations per year filed As described above, in the proposal, section 1028(b) including finding that the Bureau preliminarily found—in with the AAA in selected markets, in this part was in the public interest and the period before the Study, there were light of the Study, the Bureau’s for the protection of consumers. The tens of thousands of arbitrations per Bureau made this preliminary finding year, largely filed by providers. For 773 Moreover, the Bureau has emphasized the after considering such countervailing instance, a large increase in the volume importance of the coverage of extensions of considerations as the costs and burdens consumer credit in the rule, as it did in the Study, of provider-filed claims identified by to providers. based on date gathered since the adoption of the the Bureau under the monitoring rule Utah law in 2006 by searching cases in Federal This section discusses the bases for courts including any cases in Utah Federal court or the preliminary findings, comments could suggest a need to monitor for in other courts based on choice of Utah law. received, and the Bureau’s further potential fairness issues associated with 774 The commenter suggested other States have analyses and final findings pertaining to large-scale debt collection arbitrations, similar laws but provided no citations to those laws the monitoring rule. Similar to the such as those historically filed by nor is the Bureau aware of any. providers before NAF and the AAA. The 775 As to the commenter concerned about Bureau’s analysis of the statutory potential preemption of States’ laws regarding elements pertaining to the class rule, collection of awards would provide security freezes, when a State law provides a this discussion first addresses whether private right of action and does not explicitly 776 As explained in Part VI.A the transparent prohibit class claims, then claims under that law the monitoring rule is for the protection application of laws has general benefits to society generally may be classable under Federal Rule 23 of consumers, and then addresses and is therefore a factor that the Bureau considers or an analogous State law. In such a situation, the whether the rule is in the public as a part of the public interest analysis. In this class rule provides that arbitration agreements interest. As discussed briefly in the section, however, ‘‘transparency’’ is used in a cannot be used to block class actions. However, different sense to refer to access for both the Bureau when a State law precludes class actions for findings and in the section-by-section and the public to information related to arbitrations violations of that State law, the class rule will not analysis of § 1040.4(b) below, the that serves to directly facilitate deterrence and alter that legislative decision. Bureau is expanding the list of records redress.

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insights into the types of claims that in arbitration agreements and and individual commenters wrote in reach the point of adjudication and the proceedings, such as fee-shifting general support of the Bureau’s way in which arbitrators resolve these provisions requiring the losing party in monitoring proposal. More specifically, claims. The collection of the arbitration to pay the fees of the the group of State attorneys general and correspondence on nonpayment of fees winning party. The same commenter nonprofit commenters supported the and non-compliance with due process expressed the concern that fee-shifting Bureau’s preliminary finding that the principles would allow the Bureau could harm consumers because the collection and publication of documents insight into whether, and to what major arbitration administrators would be valuable because it would extent, providers fail to meet the arbitral currently do not have any in forma help the Bureau and the public better administrators’ standards or otherwise pauperis provisions (which allow understand arbitration generally. The act in ways that prevent consumers from impoverished consumers to file academic commenters observed that the accessing dispute resolution. arbitrations without paying filing fees). past existence of NAF provided a case The Bureau also stated in the proposal Another consumer advocate commenter study on the need for the transparency that, more generally, the collection of contended that the proposal did not go that the Bureau’s monitoring proposal these documents would help the Bureau far enough, asserting that law-breaking would provide. The academic monitor consumer finance markets for companies are unlikely to provide commenters also suggested that NAF risks to consumers, potentially documents to the Bureau pursuant to may have stopped certain practices providing the Bureau and the public the proposed monitoring rule, and thus sooner had more information about the with additional information about the the rule might not accomplish the outcomes of its arbitration proceedings types of potential violations of Bureau’s goals. been publicly available earlier. consumer finance or other laws alleged On the other side, some industry commenters wrote in general opposition Responses to Comments and Final in arbitration, and whether any Findings particular providers are facing repeat to the Bureau’s monitoring proposal, claims or have engaged in potentially asserting that the record before the The Bureau has carefully considered illegal practices, and the extent to which Bureau did not warrant taking action the comments received on the providers may have adopted one-sided with regard to the fairness of arbitration monitoring proposal and further agreements in an attempt to avoid proceedings. One industry commenter analyzed the issues raised in light of the liability altogether by discouraging made several arguments in opposition to Study and the Bureau’s experience and consumers from seeking resolution of the monitoring proposal generally. First, expertise. Based on all of these sources claims in arbitration. Finally, the commenter asserted that the Study and for the reasons discussed above, in monitoring would allow the Bureau to found no evidence of harm in the proposal, and further below, the take action against providers that harm arbitrations that warranted the Bureau’s Bureau finds that requiring providers to consumers.777 intervention. Next, the commenter submit specified, redacted arbitral asserted that the Bureau did not meet its records and then publishing redacted Comments Received burden to show that monitoring and versions of these records will be for the Some commenters opposed the publication were in the public interest protection of consumers by helping the monitoring proposal, though they were and for the protection of consumers Bureau and the public monitor for the split on whether it was inadequate to because the Study’s assessment of AAA risks to consumers in the underlying protect consumers in light of concerns arbitrations did not show that consumer finance markets. about the fairness of arbitration or arbitration was unfair to consumers. The Bureau believes that such whether action by the Bureau was not Finally, the commenter asserted that monitoring is important to this ongoing risk assessment because the kinds of warranted at all. this must be so because the Bureau did On one side, a consumer advocate not propose to also regulate post-dispute fairness concerns that have been raised commenter suggested that the Bureau arbitration agreements. Another about some arbitration proceedings adopt what it deemed a stronger industry commenter asserted that, based historically could prevent consumers alternative to the monitoring upon its review of the Bureau’s from obtaining redress for legal violations and expose them to harmful proposal 778 in which it would identify consumer complaints database, practices in arbitrations filed against and ban a number of specific practices consumers are not experiencing unfairness in arbitration that warranted them. While the Bureau expects that the number of consumer-filed individual 777 In the proposal, the Bureau treated the the proposed monitoring rule. An question of whether the use of individual industry trade association commenter arbitrations will remain low for the arbitration in consumer finance cases is in the criticized the Bureau’s citation of NAF reasons discussed above, to the extent public interest and for the protection of consumers as an example of the risks posed by that arbitrations occur (and consumers as discrete from the question of whether some are precluded from proceeding in court), covered persons are engaged in unfair, deceptive, or individual arbitration to consumers as a abusive acts or practices in connection with their red herring on the grounds that NAF is it is in their interest that the proceeding use of individual arbitration agreements. The no longer an active risk to consumers as be fair. The Bureau believes that the Bureau emphasized in the proposal that it intended very few agreements currently specify monitoring rule is for the protection of to continue to use its supervisory and enforcement consumers because the awareness that authority, as appropriate, to evaluate whether NAF as an administrator, and that specific practices in relation to arbitration—such as consumers are free to seek a different certain basic information about disputes the use of particular provisions in agreements or administrator even if NAF is specified filed in arbitration will be available to particular arbitral procedures—constitute unfair, in the agreement. the public will tend to discourage unfair deceptive, or abusive acts and practices pursuant to By contrast, many commenters and unlawful conduct by provides of Dodd-Frank section 1031. 778 Many of the comments on this issue urged the supported the Bureau’s preliminary both consumer financial products and Bureau to adopt a total ban on arbitration finding that monitoring would have services and arbitral services. In the agreements in contracts for consumer financial positive outcomes for consumers and for event that transparency alone is not products and services. Those comments are the public. A group of State attorneys sufficient, the monitoring rule will also addressed above in Section VI.B. This section addresses only those comments that urge the general, nonprofit, individual, facilitate appropriate follow-up actions Bureau to take action regarding arbitration other Congressional, consumer advocate, by the Bureau and others to protect than a total ban and issues related to the class rule. academic, industry, consumer law firm, consumers.

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Specifically, the Bureau finds that the identify when consumers are harmed by provide additional information about monitoring rule is for the protection of providers’ nonpayment of fees. the types of issues that consumers and consumers for several reasons. It would The Bureau notes that the two providers face that are not or cannot be deter potential wrongdoers who would categories of documents it is adding to resolved informally, including those know that their practices, with respect what it had proposed will protect issues that appear to give rise to repeat to both their use of arbitration consumers by providing the Bureau and claims. This monitoring may facilitate proceedings and to their provision of the public further insights into the risks the ability of the Bureau and other consumer financial products and that the use of arbitration agreements actors to address emerging market services, will be made public and would may pose for consumers in the covered concerns for the protection of facilitate redress for related harms to consumer finance markets. The consumers. consumers. Additionally, the Bureau collection of answers to arbitral claims, As described above in Part VI.B.2, the finds that the rule will allow the Bureau required by new § 1040.4(b)(1)(i)(B), Bureau believes that the number of and the public to better understand will supplement the Bureau’s collection consumer-filed individual arbitrations is arbitrations that occur under arbitration of claims and awards and will provide likely always to be too low to provide agreements entered into after the additional insights by providing a more optimal levels of deterrence and redress compliance date and to determine balanced understanding of the facts (or for legal violations affecting groups of whether further action is needed to disputes regarding the facts) in an consumers, and thus that greater ensure that consumers are being arbitration proceeding, especially in advancements to the protection of protected. The materials the Bureau is cases where no award is issued. The consumers and public interest derive requiring providers to submit in collection of provider-filed motions in from the class rule. Nevertheless, the redacted form—similar to the AAA litigation in which they rely on Bureau notes, as described further materials the Bureau reviewed in the arbitration agreements (and the below, that some commenters expressed Study—will allow the Bureau to more collection of the underlying arbitration concern that the records from individual broadly monitor how arbitration agreements that are invoked in such arbitrations would trigger increased proceedings are conducted, what proceedings), as required by new scrutiny by regulators and increased provisions are contained in the § 1040.4(b)(1)(iii), will aid the Bureau in litigation risk with regard to the underlying arbitration agreements, and determining the frequency with which disputed conduct by the affected whether providers are taking steps to providers compel arbitration in financial services providers. The Bureau prevent consumers from being able to response to individual litigation claims agrees with these commenters’ seek relief in arbitration. as well as to monitor the content of underlying assumption that the arbitration agreements for reasons In particular, the Bureau finds, monitoring rule would tend to increase similar to those described above. The deterrence and redress for legal consistent with the Study, that the Bureau also finds that this collection, in documents the Bureau collects will violations but sees this as a positive conjunction with the other arbitral impact. This is, in fact, one of the provide the Bureau with different and records it will receive, will over time useful insights relevant to the above- purposes of the rule. help track whether such claims are In addition, if sunlight is not a mentioned assessment of risks to the ultimately heard in arbitration rather consumers. The collection of arbitration sufficient disinfectant to discourage than being dropped entirely, which unfair practices in connection with claims will provide transparency could in turn shed more light on the arbitration proceedings,781 the regarding the types of claims consumers extent to which consumers are deterred monitoring rule will better position the and providers are bringing to arbitration from pursuing individual claims more 779 Bureau to address conduct or practices and the number of arbitrations filed, generally because of arbitration that impede consumers’ ability to bring and the collection of awards will agreements.780 provide insights into the types of claims The Bureau further finds that the claims against their providers, for that reach the point of adjudication and collection of these documents will instance, if a particular company was the way in which arbitrators resolve enhance the Bureau’s ability to protect routinely not paying arbitration fees and these claims. The collection of thus preventing arbitrations against it consumers by monitoring consumer 782 arbitration agreements, when finance markets for risks to consumers. from proceeding. considered with other arbitral The collection of these documents will As noted in the proposal and above, documents, will allow the Bureau to provide another source of information to the Bureau intends to draw upon all of monitor the impact that particular help the Bureau and others understand its statutorily authorized tools to clauses in arbitration agreements have the markets in which claims are brought address conduct that harms consumers on consumers and providers, the more broadly and how consumers and that may occur in connection with resolution of those claims, and how providers interact. For example, the providers’ use of arbitration agreements. arbitration agreements evolve. Finally, collection of claims and awards will For example, the Bureau intends to as noted before, the collection of continue to use its supervisory and correspondence regarding nonpayment 780 The Bureau has no practical way to determine enforcement authority, as appropriate, of fees and non-compliance with due when a consumer was inclined to file some sort of to evaluate whether specific practices in process principles will allow the Bureau individual claim, in litigation or arbitration, but relation to arbitration—such as the use was deterred by the prospect of an arbitration of particular provisions in agreements or to understand the extent to which agreement. With the new requirement the Bureau providers do not meet the arbitral will be able to measure directly the extent to which 781 administrators’ fairness standards and to individual litigation filings are dismissed by a See Louis. D. Brandeis, ‘‘Other People’s provider-filed motion to compel arbitration, and the Money—and How the Bankers Use It’’ at 62 extent to which those consumers try to press their (Washington, National Home Library Foundation 779 See, e.g., Preliminary Results, supra note 150 claims in an individual arbitration proceeding. If ed., 1933) (‘‘Publicity is justly commended as a at 61; Study, supra note 3, section 5 at 9. Rapid few consumer-filed individual arbitrations are filed remedy for social and industrial diseases. Sunlight changes in the number of claims might signal a after the dismissal of individual litigation cases is said to be the best of disinfectants; electric light return to large-scale debt collection arbitrations by dismissed pursuant to provider motions, an the most efficient policeman.’’). companies and potential consumer protection inference may be made that the net effect of 782 Study, supra note 3, section 5 at 66 n.110 issues, as had occurred in the past with NAF arbitration agreements is to discourage individual (identifying over 50 instances of nonpayment of (discussed above in Part II.C). claims. fees by companies in cases filed by consumers).

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particular arbitral procedures— contain provisions that could harm quo. As set out in Part VI.B, the Bureau constitute unfair, deceptive, or abusive consumers, or the use of arbitration notes that the AAA data merely showed acts and practices pursuant to Dodd- agreements may evolve in other ways that (1) there were very few arbitrations, Frank section 1031. The Bureau expects that the Bureau cannot foresee, and (2) the data were inconclusive as to to pay particular attention to any particularly as the markets reacts to the whether individual arbitration provisions in arbitration agreements that adoption of the class rule. Finally, in proceedings lead to better outcomes might function in such a way as to response to the commenter that asserted than individual litigation. This data deprive consumers of their ability to that the Bureau’s citation of NAF was a alone does not support a finding that meaningfully pursue their claims. red herring, the Bureau’s citation of individual arbitration is fair, ipso facto. With regard to commenters that NAF was illustrative of what could Indeed, as discussed above, other AAA generally opposed the monitoring occur and not intended to suggest that data and Study analyses as well as proposal, the Bureau disagrees with NAF was still a problem. The broader historical information suggested comments suggesting that the Study commenter did not dispute the Bureau’s that continued monitoring is warranted provided no basis for the monitoring finding that NAF’s past practices were because consumer finance arbitration is proposal or that no consumer harm has problematic, that other administrators dynamic and continues to pose a been shown. As noted above in Parts II such as AAA may have identified potential ongoing risk to consumers.788 and III, the Study identified evidence of problematic practices such that they With regard to the commenter that multiple historical problems with the also altered their policies in response to suggested that, because the Bureau’s conduct of arbitration, including NAF’s settlement with the Minnesota proposal did not address post-dispute potential conflicts of interest involving Attorney General, and that a new arbitration, the Bureau must have a major arbitration administrator, administrator may replace NAF in the regarded arbitration as fair overall, the general fairness concerns about the future or current administrators may Bureau observes that section 1028 only filing of thousands of debt-collection change their standards. arbitrations across multiple In addition, as noted by other authorizes the Bureau to study and administrators, failure to pay fees by regulate the use of pre-dispute commenters, State monitoring and 789 some individual financial services publication laws have helped identify arbitration agreements. The Bureau providers, and at least sporadic use of and stop potentially problematic therefore did not analyze the use of particular clauses in arbitration practices. As set out in Part II.C, the post-dispute agreements and takes no agreements that raise fairness California law requiring the reporting of position on their fairness but notes that concerns.783 Additionally, the Study’s arbitration statistics led to the proceedings pursuant to an agreement analysis of pre-dispute arbitration investigations of arbitral administrators between parties who are aware of a agreements identified the prevalence of by city and State regulators,786 caused specific present conflict and jointly some provisions that may make NAF to stop administering consumer agree to resolve it through arbitration arbitration proceedings more difficult arbitrations, and may have led to rather than litigation may be different in for consumers.784 Further, the Study additional changes, such as the AAA’s nature than proceedings subject to pre- showed that, in the markets covered by voluntary moratorium on debt dispute arbitration agreements, which the Study, an overwhelming majority of collection arbitrations and JAMS’s are typically entered into by parties not arbitration agreements specified AAA or adoption of fairness standards.787 The necessarily anticipating future conflict JAMS as an administrator (or both), and Bureau believes that the facts set out and, in the context of consumer finance, both administrators have created above point to the importance of are often included in a larger form consumer arbitration protocols that collecting arbitration records and contract rather than being the subject of contain procedural and substantive publishing them. Based on the above, negotiations between the parties. As safeguards designed to ensure a fair the Bureau finds, as it set out in the such, the fact that the Study and process.785 While the Bureau believes proposal, that it is in the public interest proposal did not mention post-dispute that these safeguards currently apply to and for the protection of consumers for arbitration does not alter the Bureau’s the vast majority of consumer finance the Bureau to monitor providers’ use of arbitrations being conducted, this could arbitration agreements and arbitration 788 Some commenters seemed to suggest that change over time. Administrators, under section 1028(b) a Bureau rulemaking proceedings to determine if there are imposing limitations or conditions on arbitration including potentially new ones, may any changes in the overall volume in must be based only on data found in the Study. The decline to adopt or change the arbitrations, in the types of arbitrations Bureau interprets section 1028(b), in accord with safeguards in ways that could harm filed, in the outcome of arbitrations, or the plain text of the statute, to say that any findings consumers, companies may (and supporting the rulemaking must be ‘‘consistent in the prevalence of certain harmful with’’ the Study. Dodd-Frank Act, section 1028(b) currently do) select other arbitrators or clauses in arbitration agreements. (‘‘The findings in such rule shall be consistent with arbitration administrators that adopt In response to a commenter’s the study conducted under subsection (a).’’). different standards of conduct or assertion that the Study’s analysis of Moreover, the Bureau notes that the Bureau’s operate with no standards at all (e.g., a analysis of the AAA data did flag certain AAA arbitrations did not demonstrate problematic practices by providers in arbitration company may choose an individual as that arbitration was unfair to consumers, proceedings, such as the nonpayment of fees to an arbitrator who conducts the the Bureau disagrees that the monitoring delay consumer-filed proceedings. Study, supra arbitration according to his or her own rule must only be based upon note 3, section 5 at 34 n.69. (The Bureau has rules), arbitration agreements may similarly received consumer complaints involving demonstrated unfairness in the status entities’ alleged failure to pay arbitral fees.) The Study’s analysis of arbitration agreements also 783 See Study, supra note 3, section 4 at 2 n.3 and 786 Sam Zuckerman, ‘‘S.F. Sues Credit Card catalogued problematic clauses as discussed above, section 5 at 16–17 and n.29. Service, Alleging Bias: S.F. City Attorney Alleges and the Study recounted several fairness concerns 784 See generally id. section 2 at 40–44 Bias for Debt Collectors in Arbitration,’’ sfgate.com raised in the years preceding the study (identifying incidence in pre-dispute arbitration (Apr. 8, 2008) (‘‘The complaint cites forum statistics (enforcement actions against NAF, administrators clauses of, inter alia, confidentiality and non- showing that of 18,075 cases brought before one of adopting due process protocols, and fairness disclosure provisions, limits on substantive relief, its arbitrators from January 2003 to March 2007, a concerns regarding debt-collection arbitrations and cost and fee-shifting). total of 30 resulted in victories for consumers.’’). raised across multiple administrators as discussed 785 Id. section 2 at 34–40; see generally id. section 787 See AAA Press Release, supra note 102; JAMS in Part III above). 4. Policy on Consumer Arbitrations, supra note 140. 789 See Dodd-Frank, section 1028(c).

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overall findings on the fairness of pre- potential confidentiality concerns of would face disincentives to make dispute arbitration. providers, and the potential privacy explicit findings, publication would put With regard to the comment that the considerations affecting consumers and the onus on arbitrators to keep data in the Bureau’s consumer providers. arbitration fair, and providers would be complaint database proves that The Bureau summarizes comments on subject to further Bureau scrutiny. By arbitration is not unfair, the Bureau these preliminary findings and sets out contrast, other commenters argued that notes that its complaints function takes final findings in response to these such transparency was beneficial, for in informal complaints before the start comments below. many of these same reasons. For of formal dispute resolution such as Comments Received instance, academic commenters arbitration. The Bureau believes that a identified NAF as a case study on the low volume of complaints about The Bureau received three general importance of making arbitration arbitration in the consumer complaint categories of comments in response to records transparent, noting that NAF database is not dispositive of the the public interest factors addressing (1) kept its arbitration files private until the fairness of arbitration. Moreover, the consistent enforcement of consumer Minnesota Attorney General’s office monitoring rule does not rest on a laws; (2) issues relating to whether the obtained documents, and speculated finding that arbitration as it is occurring publication component of the that NAF may have been less likely to today is unfair but rather that there is a monitoring rule in particular was in the enter questionable agreements with significant risk that arbitration could public interest; and (3) privacy, certain debt collectors had it known its operate in the future in ways that are redaction, and related issues associated files would be made publicly available. injurious to consumers and that with the proposal. A trade association of lawyers Consistent enforcement of consumer monitoring will enable the Bureau to representing investors asserted that the laws. One consumer advocate mitigate that risk and to address it public has an interest in accessing commenter agreed generally that the should it occur. arbitral records and data. A nonprofit monitoring proposal was likely to With regard to the comment that law- commenter suggested that there was a breaking providers might not submit provide policymakers, including the Bureau, with additional information public interest in analyzing potential documents to the Bureau pursuant to issues with individual arbitration, citing the proposed monitoring rule, the that would enable it to develop better substantive policies for the consumer as examples secrecy, limited discovery, Bureau agrees that there is some risk of and arbitrator bias. non-compliance, but notes that this is finance markets. No commenter true of any regulation that the Bureau opposed to the intervention commented Another set of comments offered implements. The Bureau has no reason on this aspect of the Bureau’s differing views on the attention that to believe that any substantial number preliminary public interest findings. publication would draw to the of providers will not comply, such that Publication. Several comments underlying substantive claims, and the the Bureau should not implement the addressed whether publication in providers associated with them, set out monitoring rule. Further, the Bureau particular was in the public interest. in arbitration records. Some does not at this time believe that the risk One set of academic commenters, State commenters believed this added of underreporting by providers is likely attorneys general, and nonprofit attention—to business practices and to be severe enough that a different type commenters wrote in support of the particular providers—was unwarranted. of intervention is warranted, such as a monitoring proposal on the grounds that Several industry commenters asserted total ban on the use of pre-dispute it would improve transparency in that publication, and the accompanying arbitration agreements or standards for consumer finance markets. In addition, publicity as to business practices arbitration proceedings. As set out in a group of State attorneys general noted identified in arbitration records would Part VI.B, the Bureau is not adopting in their comment that publication of lead plaintiff’s attorneys to bring more either intervention instead of arbitral records would assist the Bureau frivolous litigation generally, including monitoring. Nevertheless, the Bureau and other regulators with analyzing additional class action lawsuits and will monitor efforts to comply with the arbitration outcomes and would help follow-on individual arbitrations. One reporting requirements of providers over regulators determine if additional industry commenter expressed concern which it has enforcement or supervisory regulation of arbitration was necessary. that the publication of records would authority. Academic commenters noted that, with subject providers to class actions the exception of California’s arbitration concerning non-compliance with the 2. The Monitoring Rule Is in the Public disclosure law, researchers only have monitoring rule if providers made errors Interest access to those case-level data and in redacting arbitration documents or if In the proposal, the Bureau also documents on arbitration proceedings pre-dispute arbitration agreements did preliminarily found that the monitoring that arbitral administrators permit non- not comply with the requirements of proposal would be in the public parties to see. These commenters noted proposed § 1040.4(a)(2)(i). Other interest. This preliminary finding was that access to more comprehensive industry commenters suggested that based upon several considerations, arbitration data would aid their work. providers would remove pre-dispute including the considerations pertaining Another set of commenters asserted arbitration agreements from contracts to the protection of consumers set out that making arbitral decision-making with consumers to avoid the increased above. The Bureau also considered more transparent to the general public exposure to litigation risk associated potential benefits stemming from the would have such negative impacts as to with publication. A commenter that is other public interest factors. negate a finding that publication is in an association of State regulators Consistent with the legal standard the public interest. One industry suggested that the publication would outlined above, in making its commenter argued that the Bureau lead to more class action litigation, preliminary findings, the Bureau also should not publish awards because which it contended would exacerbate analyzed potential tradeoffs under the transparency in the decision-making of the difficulties State bank examiners public interest factors such as the arbitrators would be detrimental to face in assessing the risks associated monitoring proposal’s potential arbitrators and providers. That is, with such class actions in their compliance burden on providers, the according to the commenter, arbitrators examinations. An industry commenter

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argued that the Bureau should not records shows the value of transparency financial regulators poses a threat to publish arbitration records because the in arbitration proceedings. consumer privacy. One of these industry Bureau’s consumer complaint database Several commenters also argued that commenters asserted that the collection already exists and serves the same the publication of claims and awards of even redacted information could be function in alerting the public to could help to facilitate the development combined with public information to re- potentially objectionable business of consumer protection law. A identify consumers. Other industry practices. Another industry commenter consumer advocate commenter argued commenters expressed concerns that suggested that important or relevant that the publication of arbitration monitoring and publication would information in arbitration records records is likely to help industry expose consumers to a risk of privacy should be pursued by the Bureau itself, understand what actions might violate and data security violations. Another not published for others to see and the law. Several consumer advocate industry commenter suggested that the exploit. commenters argued that the publication proposal would force consumers to Another group of commenters focused of arbitration records is likely to help expose their private data without on other negative impacts on financial consumer advocates and others advising consent. One trade association services providers besides increased consumers directly know what issues to commenter asserted that consumers in litigation risk, emphasizing that they pursue, in particular when they debt collection cases may not wish to viewed arbitral confidentiality as one of advocate on behalf of or advise low- have their personal finances publicly the main benefits of the process that income consumers. A consumer disclosed. (The trade association made would be harmed by the proposal. Some advocate commenter also argued that this comment in the context of opposing commenters were concerned that, the publication of arbitration records the class rule, but the Bureau construes without confidentiality, providers collected from providers would permit this as a comment on privacy concerns would be subject to reputational risks if consumers themselves to avoid harm by pertaining to publication). Finally, arbitrations filed against them were becoming aware of certain business another industry commenter expressed public. Some credit union and trade practices. skepticism about permitting government Privacy, redaction, and related issues. association commenters opposed the regulators to collect data because of a Several commenters focused on the publication proposal on the grounds lack of security at regulators, citing proposal’s provisions concerning that it would expose credit unions and examples such as a recent Office of the redaction of certain consumer their members to reputational risk, Inspector General report on the security information prior to submission of especially because allegations made in of the Bureau’s consumer complaint arbitral records. For example, some arbitral filings could be taken as fact. database and issues affecting other asserted that the proposal’s redaction 790 Other industry commenters further Federal regulators. provisions would be more burdensome Finally, several comments focused on complained that consumer data was to to providers than the Bureau estimated. the impact that the publication proposal be redacted but not information on An industry commenter asserted that would have on arbitral confidentiality. providers and their employees, the redaction of arbitration documents, Some commenters were concerned that, potentially compromising the privacy of as required by proposed § 1040.4(b)(3), without confidentiality, providers the provider’s employees. Other would be costly for credit unions, taking would be subject to reputational risks if industry commenters opposed the time and money that they could arbitrations filed against them were Bureau’s monitoring proposal on the otherwise use to serve their members. public. Some credit union and trade grounds that confidentiality was Relatedly, a credit union industry association commenters opposed the standard or customary in arbitration, commenter requested an exemption for publication proposal on the grounds and that the Bureau’s publication credit unions from this requirement that it would expose credit unions and proposal would undermine that. A because of the burdens the monitoring their members to reputational risk, commenter that is an association of proposal would impose on them. The especially because allegations made in State regulators also opposed the commenter stated that the estimate of arbitral filings could be taken as fact. publication rule on the grounds that it $400 per institution to redact Other industry commenters raised a may conflict with State laws on the documents in the proposal’s Section further concern that consumer data was confidentiality of arbitral records. 1022(b)(2) Analysis underestimated the to be redacted but not information on Other commenters contended that cost of a program to redact and submit providers and their employees, providers should not be able to maintain documents to the Bureau. potentially compromising the privacy of secrecy about their disputes with In contrast, other commenters agreed the provider’s employees. Other customers. A trade association of with the Bureau’s assessment of the industry commenters opposed lawyers representing investors burden of complying with the proposal publication on the grounds that contended that the public has an as being relatively low, but for different confidentiality was standard or interest in accessing arbitral records and reasons. A consumer advocate customary in arbitration, and that the data. Some academic and nonprofit commenter observed that the burden Bureau’s publication proposal would commenters referenced other types of under the monitoring proposal would be undermine that. A commenter that is an arbitrations where they asserted that minimal. An industry commenter association of State regulators opposed results are published with no ill effects argued that the burden would be low the publication rule on the grounds that (e.g., FINRA, labor arbitration, and because it predicted that providers it may conflict with State laws on the internet domain name disputes before would drop their arbitration agreements confidentiality of arbitral records. the Internet Corporation for Assigned in response to the risk of increased Other commenters agreed with the Names and Numbers, known as litigation exposure arising from Bureau that providers should not be ICANN). These commenters stated that publication and thus few would have to able to maintain secrecy about their publication would not deter or impede comply with the substantive the use of arbitration as a dispute requirements of this rule. 790 See Office of the Inspector General, ‘‘Security settlement mechanism; instead, they Second, several industry commenters Control Review of the CFPB’s Data Team Complaint Database’’ (2015), available at https:// asserted that the willingness of these asserted that the collection of both oig.federalreserve.gov/reports/cfpb-dt-complaint- administrators to publish arbitration public and non-public information by database-summary-jul2015.htm.

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disputes with customers in arbitration. will be better able to know whether the members of the public and other A trade association of lawyers arbitral decisions are applying the laws regulators with analyzing arbitration representing investors contended that consistently on an ongoing basis and outcomes and would help regulators the public has an interest in accessing whether any consumer protection issues determine if additional regulation of arbitral records and data. Some arise in those cases that may warrant arbitration is warranted. Just as Dodd- academic and nonprofit commenters further action by the Bureau. The Frank section 1028 called upon the referenced other types of arbitrations Bureau’s experience with the Study Bureau to publish a report on arbitration where results are published with no ill showed how the analysis of arbitral to Congress, the Bureau finds it is in the effects (e.g., FINRA, labor arbitration, records is likely to provide useful public interest to permit anyone to and internet domain name disputes information to policymakers and review records of arbitration before the Internet Corporation for insights into particular consumer proceedings to better understand the Assigned Names and Numbers, known financial products and services. workings of arbitration and its impact as ICANN). Thus, these commenters Publication. The Bureau finds that the on consumers. The Bureau believes that stated that publication would not deter publication rule will tend to promote the publication of claims will lead to or impede the use of arbitration as a confidence in the fairness of the transparency by revealing to the public dispute settlement mechanism; instead, arbitration system for covered markets the types of claims filed in arbitration the willingness of these administrators and in the functioning of the markets and whether consumers or providers are to publish arbitration records shows the themselves by promoting transparency filing them. The publication of answers value of transparency in arbitration and accountability generally, beyond will shed some light on the potential proceedings. the specific benefits discussed above for merits of these claims. The publication any individual consumers who are of awards will lead to increased Responses to Comments and Final victims of legal violations or unfair transparency by revealing how different Findings proceedings. While the impact will not arbitrators decide cases. The Bureau The Bureau has carefully considered be as substantial as the class rule given believes that publishing redacted the comments received on the the relatively small number of awards may generate public confidence monitoring proposal and further individual arbitrations currently, the in the arbitrators selected for a specific analyzed the issues raised in light of the logic is related in that the Bureau case as well as the arbitration system, at Study and the Bureau’s experience and believes that the availability of fair least for administrators whose awards expertise. Based on all of these sources, remedial mechanisms to enforce tend to demonstrate fairness and the Bureau finds that requiring compliance with the law will tend to impartiality. Publication of all of these providers to submit redacted arbitral create a more predictable, efficient, and arbitral records collectively could help records and publishing them in redacted robust regulatory regime for all educate the public and demonstrate the form is in the public interest. The participants. Thus, the Bureau believes extent to which arbitration results in fair Bureau finds that the monitoring rule is that the way that publication promotes processes and outcomes for consumers. in the public interest because, along the rule of law—in the form of In particular, the Bureau agrees with the with creating deterrence and facilitating accountability through transparent commenter that suggested that there is redress, as described above, it will allow application of the law to providers of a public interest in analyzing potential the Bureau to better evaluate whether consumer financial products or issues with individual arbitration, such the Federal consumer finance laws are services—contributes to the conclusion as limited discovery and arbitrator bias. being enforced consistently; promote that the rule is in the public interest. The publication of redacted awards confidence in a fair and efficient The Bureau finds that the publication will also signal to attorneys for arbitration system; and facilitate requirement is in the public interest consumers and providers which sorts of transparency and accountability in the because, as commenters observed, it cases favor and do not favor consumers, broader markets for consumer financial will promote transparency and insight thereby potentially facilitating better products and services. The Bureau also into the conduct of arbitration pre-arbitration case assessment and finds that the potential costs and proceedings. The Bureau believes that resolution of more disputes burdens of the monitoring rule creating a transparent system of informally.792 Publication may also help identified by commenters—including accountability is an important part of develop a more general understanding the cost of compliance and potential any dispute resolution system for among consumers of the facts and law privacy and confidentiality issues—are formally adjudicating legal claims. By at issue in consumer financial modest and do not overshadow the allowing the public access to redacted arbitrations. rule’s benefits to the public interest. documents about the conduct of The Bureau believes that publication Consistent enforcement of consumer arbitrations, the public will be able to will assist academic researchers with laws. The Bureau finds that the learn of and assess consumer allegations analyzing consumer arbitration. To date, monitoring rule is in the public interest that providers have violated the law because it will allow the Bureau to and, more generally, assess the degree to 792 The Bureau already publishes certain better evaluate whether the Federal which arbitrations may proceed in a fair narratives and outcomes data concerning consumer and efficient manner. By publishing the complaints submitted to the Bureau. The Bureau consumer finance laws are being has explained that it publishes this material enforced consistently. The public materials, the rule will also promote because it ‘‘believes that greater transparency of interest analysis is informed by one of greater transparency among consumers information does tend to improve customer service the purposes of the Bureau, which is to and other members of the public. The and identify patterns in the treatment of consumers, Bureau also believes that providers may leading to stronger compliance mechanisms and ‘‘enforce Federal consumer financial customer service.... In addition, disclosure of law consistently.’’ 791 As a consumer find the increased transparency arising consumer narratives will provide companies with advocate commenter pointed out, with from the Bureau’s publication of records greater insight into issues and challenges occurring the insight garnered from a fuller helpful to monitor best practices and across their markets, which can supplement their avoid potentially unfair conduct or own company-specific perspectives and lend more collection of arbitral records, the Bureau insight into appropriate practices.’’ Bureau of arbitration administrators. Consumer Fin. Prot., Disclosure of Consumer 791 See generally Dodd-Frank section 1021(b) The Bureau agrees with commenters Complaint Narrative Data, 80 FR 15572, 15576 (setting forth the Bureau’s purposes). that noted that publication would assist (Mar. 24, 2015).

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academic studies of arbitration 793 and providers and may create incentives for The Bureau further agrees with the Study were made possible only by providers to identify potentially safer commenters, as is noted above, that the voluntary participation of the AAA. practices. The Bureau agrees with NAF is a key case study demonstrating Such analyses will likely be made commenters that this will assist the the importance of transparency and how easier, and more widespread, if more development of persuasive reasoning, arbitral records can produce private and data were available on a regular basis, including arbitration and litigation public responses to potentially in a standard form, and regardless of the disputes, on issues of consumer problematic practices, and notes that the arbitral forum. financial protection. default for individual litigation is that The Bureau also finds that the While one commenter suggested the records, absent compelling reasons, are publication of records would lead to publication of awards would act as a available to the public.795 This is also greater transparency of the operation of disincentive for arbitrators to make the case with the practice of many the markets for consumer financial explicit findings, no evidence was arbitral administrators, including products and services. As noted by presented of this phenomenon. If this FINRA and the AAA (for certain types commenters, the publication of records were true, it would generally only be of cases). under the monitoring rule will permit known as a result of analyzing awards While one commenter expressed the consumers, regulators, consumer that have actually been published. Yet concern that providers that lose in attorneys, and providers to identify the Bureau is not aware of evidence of arbitration proceedings in which they trends that warrant further action. These such a disincentive reflected in are accused of violations of consumer groups routinely use public databases, arbitration awards made public by protection law may face more scrutiny such as online court records, decision FINRA and the AAA. The Bureau does from the Bureau than others, the Bureau databases, and government complaint agree with the commenter that finds that the loss of a single dispute databases (e.g., the Bureau’s complaint publication will further incentivize with one consumer does not necessarily database, various States’ arbitration arbitrators to keep arbitration fair. trigger such scrutiny, but to the extent disclosure requirements, and the FTC’s Arbitrators may feel more pressure this occurs it will benefit the public Consumer Sentinel database 794) today knowing that their decisions are more interest. The Bureau believes that any in conducting their work. likely to be scrutinized, and the Bureau risk of added scrutiny could result in The Bureau agrees with commenters believes that this awareness will have a more relief for consumers and better that asserted that the publication salutary effect on arbitrator decisions, business practices by providers deterred requirement would help consumer making them more likely to be fair. by the prospect of additional public advocates identify issues to pursue in With regard to the commenters enforcement or litigation in response to assisting consumers, and may help concerned that providers would be arbitral awards identifying certain consumers themselves to avoid harm by subject to reputational risks unless illegal business practices. becoming aware of certain business arbitrations were kept confidential, the The Bureau also believes that the practices. In these ways, the Bureau Bureau acknowledges the concern that publication portion of the rule is in the believes that the monitoring rule will publication may expose providers to public interest because it will increase improve the ability of a broad range of reputational risk to the extent that mere transparency and accountability with stakeholders to understand whether allegations made in arbitral statements regard to conduct in the underlying markets for consumer financial products of claim would be taken as fact. In consumer financial services markets. In and services are operating in a fair and response, the Bureau has drafted, as set contrast to commenters that viewed the transparent manner. out below in the section-by-section possibility of increased scrutiny by The Bureau further finds that the analysis of § 1040.4(b)(1)(i)(B), a regulators or plaintiff’s attorneys as a publication of arbitral records will help provision requiring providers to submit negative outcome from the monitoring draw attention to certain business answers as well as arbitral rule, the Bureau believes that the practices by providers. This is beneficial counterclaims to balance out one-sided increased transparency will tend to because it will help not just consumers accounts and mitigate any perceived increase consumers’ ability to seek but also providers understand what reputational risk. In any case, as is redress for legal violations, providers’ actions might violate the law. While not noted above, relatively few providers incentives for compliance, and general binding precedent, arbitral awards in may be subject to any form of public confidence in the orderly consumer finance cases (not currently reputational risk according to the operation of the markets. While these available to non-parties in most cases) Bureau’s estimate of the number of impacts are likely to be modest may provide an analysis of relevant law providers likely to submit records to the compared to the class rule given that the and facts that can assist others. Making Bureau. In addition, in the Bureau’s number of consumer-filed individual awards available may help consumers experience with publishing consumer arbitrations is so low, the Bureau still identify potentially harmful practices by complaints, reputational risk is not views them as supporting the adoption necessarily significant when there are of the publication portion of the rule. 793 See Drahozal & Zyontz, Empirical Study, low numbers of complaints; and the While some commenters were supra note 233, at 845 (reviewing 301 AAA Bureau does not estimate that any one concerned that the publication of consumer disputes); Drahozal & Zyontz, Creditor provider is likely to have a significant arbitral records may permit plaintiff’s Claims, supra note 233 (follow-on study analyzing collection claims by companies in AAA consumer number of arbitrations with public attorneys to identify potentially arbitrations). records. The reputational risk associated classable claims or claims that could be 794 Fed. Trade Comm’n, ‘‘Consumer Sentinel with arbitration is not unique— brought in individual arbitrations or Network,’’ https://www.ftc.gov/enforcement/ providers are already exposed to litigations, the Bureau does not find this consumer-sentinel-network (last visited Mar. 13, is necessarily a frequent result of 2017) (‘‘Consumer Sentinel is the unique reputational risk when complaints are investigative cyber tool that provides members of filed in litigation, given that such publication. As discussed in Part VI.B.3 the Consumer Sentinel Network with access to records are public by default. Further, millions of consumer complaints. Consumer the Bureau believes that the potential 795 See, e.g., Nixon v. Warner Communications, Sentinel includes complaints about: Identity Theft, benefits of transparency to consumers Inc., 435 U.S. 589, 597 and n.7 (1978) (noting that Do-Not-Call Registry violations, . . . Advance-fee historically courts have recognized a ‘‘general right Loans and Credit Scams, . . . [and] Debt Collection, and the public at large outweigh any to inspect and copy public records and documents, Credit Reports, and Financial Matters’’). potential reputational risk to providers. including judicial records and documents’’).

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above, class actions are more likely to of the class rule. As explained further in forecasting class action risk does not serve as a vehicle for adjudicating small- the Section 1022(b)(2) Analysis, the outweigh the benefits to consumers and dollar claims affecting large groups of odds that any one provider will be the public described above in consumers than are individual required to comply with the reporting connection with the monitoring rule, arbitrations. The Bureau also notes, as and redaction requirements in a given including the expressed interests of discussed above in Parts III and VI.B.3, year are quite low; out of the other State government commenters in that there are many differences between approximately 50,000 providers covered using published arbitration data to the few claims consumers bring in by the rule, the Bureau expects that each protect consumers. As noted above, if arbitration and those brought in class year less than 1,000 or so providers will there is additional class action litigation actions. To the extent that individual be involved in arbitration proceedings resulting from the publication of arbitral arbitrations do lead to class claims, or litigation motions relying on pre- awards, the Bureau believes that such however, the Bureau finds no evidence dispute arbitration agreements such that activity may benefit consumers and the that such suits would necessarily be they would be required to submit public interest. frivolous or meritless insofar as records to the Bureau. Moreover, the With regard to the comment that attorneys are prohibited by ethics and Study indicated that awards favoring suggested that the existence of the court rules from bringing such cases. consumers in individual arbitration are Bureau’s consumer complaint database For example, the Study identified uncommon.797 Given these small odds obviated the need for the publication of several arbitrations in which consumers and the modest burdens involved, the arbitral records, the Bureau disagrees were awarded relief by the arbitrators Bureau is skeptical that the monitoring that the complaint database serves the and many more that may have settled on rule would be the decisive factor in a same function. As discussed above, the terms favorable to the consumers.796 provider’s dropping of arbitration consumer complaints database lists Nor is there evidence that any agreements. In any case, to the extent complaints that typically occur prior to significant number of arbitrations that any providers would drop their pre- a consumer’s engagement with a formal involve consumers succeeding on dispute arbitration agreements due to dispute mechanism such as arbitration. claims that are frivolous or meritless. the publication requirement, the Bureau The Bureau’s consumer complaint With regard to the industry concludes that the publication function exists to ensure that commenter’s concern that the requirement is still in the public ‘‘consumers can be heard by financial publication requirement would subject interest. In particular, the Bureau companies, get help with their own providers to class actions concerning believes that transparency from the issues, and help others avoid similar provider compliance with the publication regime for those arbitrations ones.’’ 798 Any resolution of complaints monitoring rule itself, the Bureau will subject to it will provide benefits through the service is informal and does review records received from providers described above that will more than not serve as precedent for future to ensure compliance with offset the possible loss of access to disputes or as guidance for like § 1040.4(b)(3) before publishing them, arbitration under pre-dispute arbitration situations. By contrast, Bureau- and pursuant to new § 1040.4(b)(5) the agreements that some consumers may published arbitration records may Bureau will further redact the records to experience if any providers chose to contain awards that could serve as reduce re-identification risk. The remove their arbitration agreements. In useful guidance. And, as set out below Bureau notes that, in any case, this rule other words, the Bureau believes that in the Bureau’s Section 1022(b)(2) does not permit private claims for non- the public interest favors a more Analysis, unlike the complaint database, compliance with § 1040.4(b)(3). The transparent system, even at the potential the publication of arbitration records Bureau also believes that, given the low cost of forgoing some non-transparent will make public binding decisions on number of arbitrations identified by the arbitration. Indeed, to the extent that the merits of a case by a third party that Bureau in the Study, it is unlikely that consumers who would have brought can serve as a means by which the any given provider would make enough claims in individual arbitrations must public can better understand potential redactions (let alone redaction mistakes) bring them in court instead, where areas of non-compliance. to face class liability. As to the concern litigation documents are made public by With regard to the comment that that noncompliance of pre-dispute default, transparency would be important information derived from arbitration agreements with advanced. arbitration records should be pursued § 1040.4(a)(2)(i) may result in class With regard to the commenter by the Bureau itself, not published for action liability, the Bureau notes that concerned that publication would make others to see and exploit, the Bureau there is no private right of action for the work of State bank examiners more disagrees because it has, as is set out in non-compliance when this rule does not complicated, the Bureau disagrees that Part VI.B, limited enforcement and give rise to a private right of action. this is a reason not to publish arbitral supervisory resources and does not have With regard to the comment that records, as discussed above. In any the ability or authority to pursue every providers would remove pre-dispute event, for the reasons discussed above potential violation of law. Other State arbitration agreements from contracts in connection with the class rule, the and Federal regulators, or private with consumers because the publication Bureau believes that investment in attorneys, may be able to further of awards favoring consumers would compliance activities is the best way to increase provider exposure to litigation reduce class action risk; State bank 798 Bureau of Consumer Fin. Prot., ‘‘Consumer Complaint Database,’’ http:// risk, the Bureau believes it unlikely that examiners are well positioned to www.consumerfinance.gov/data-research/ the publication requirement will cause evaluate such compliance activities and consumer-complaints/ (last visited June 22, 2017) providers to remove pre-dispute encourage providers to take additional (‘‘By submitting a complaint, consumers can be arbitration agreements above and mitigation actions where warranted. The heard by financial companies, get help with their own issues, and help others avoid similar ones. beyond those that would do so because Bureau also believes that ease of Every complaint provides insight into problems that people are experiencing, helping us identify 796 See Study, supra note 3, section 5 at 32 (likely 797 Study supra note 3, section 5 at 13 (arbitrators inappropriate practices and allowing us to stop settlements); see also id. section 5 at 13 (arbitrators reached decisions in less than one third of cases them before they become major issues. The result: provided some kind of relief in favor of consumers’ with affirmative consumer claims and awarded Better outcomes for consumers, and a better affirmative claims in 32 disputes). consumers relief in only about one- fifth of those). financial marketplace for everyone.’’).

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investigate and pursue trends that they out below require providers to redact requirement because of the burdens it discover in the arbitration records on information that identifies consumers, would impose on credit unions, the the Bureau’s Web site.799 and also requires the Bureau to redact Bureau declines to do so for several Privacy, redaction, and related issues. additional information (as well as any reasons. Most importantly, the The Bureau finds that the potential costs private information the providers may commenter did not point to any unique and burdens on providers of the have inadvertently left unredacted) burden that a credit union would face monitoring rule will be sufficiently low before publishing any records to further in complying with the monitoring rule such that they are not a significant reduce the risk that consumers are that would warrant an exemption for factor weighing against the rule being in identified. credit unions. In fact, as the Study the public interest. As discussed in The Bureau acknowledges the showed,801 pre-dispute arbitration greater detail in the Section 1022(b)(2) concern expressed by commenters that agreements are not common in credit Analysis below, the Bureau expects that, even redacted information could be union products. Further, the Bureau unless the use of arbitration changes combined with publicly available determined, as set forth below, to not dramatically, the number of arbitrations information to re-identify specific adopt a blanket exemption from the rule subject to this part of the monitoring consumers, but the Bureau believes that for credit unions. Finally, while credit proposal would remain low. As noted the redactions required of providers unions may be nonprofit, member- above, most providers will have no under § 1040.4(b)(3) will substantially owned entities that may have fewer obligations under the monitoring reduce the availability of personal and incentives to engage in problematic proposal in any given year because most financial information. Further, to practices with their members, it is not address these concerns, the Bureau is providers do not face even one true that credit unions have never adopting § 1040.4(b)(5), which was not consumer arbitration in a year and violated the law and have never faced in the proposal and which requires the motions to compel arbitration in cases in response to their past violations Bureau to further redact other individual litigation are rare as the of the law.802 To the extent that credit 800 information to reduce even further any Study indicated. In any event, the unions enter pre-dispute arbitration burden of redacting and submitting risk of re-identification before it publishes the materials. agreements and engage in business materials for any given provider will be practices that result in arbitration relatively low when they did have an With regard to the comment that the publication proposal will result in the awards favoring consumers, the Bureau arbitration. While a few commenters concludes that they should be subject to suggested the Bureau’s estimates were exposure of private consumer data without consumer consent, the monitoring and publication too low, they neither offered alternative requirements. estimates nor identified items left out of § 1040.4(b)(3) requires the redaction of information identifying individual the Bureau’s estimates. With regard to the concern that the consumers, and new § 1040.4(b)(5) With regard to the comment that the loss of arbitral confidentiality would requires the redaction of additional data cost of complying with the rule would compromise the privacy of providers that could be used to re-identify be low because providers would drop and their employees, the Bureau notes individuals. The Bureau also notes that their arbitration agreements in response that § 1040.4(b)(3) requires the redaction no consumer or consumer advocates to the publication requirement, the of personal information of all submitted comments that suggested that Bureau disagrees that this is because the individuals, not just consumers. This the monitoring proposal created a publication requirement will induce would include providers’ employees concern with the disclosure of private providers to drop their arbitration unless the provider is an individual. In consumer data. As to the comment that addition, the Bureau will redact other clauses. As set out above, the cost to consumers in debt collection cases may providers is likely to be low because information to comply with applicable not wish to have their personal finances privacy laws, if necessary. relatively few will face individual publicly disclosed, the Bureau reiterates arbitrations and be required to submit its belief that the redactions it requires Confidentiality is not, as some documents to the Bureau. The Bureau of providers, along with the additional commenters suggested, standard or believes that the publication redactions to be made by the Bureau, custom in all arbitrations. As noted in requirement is unlikely to be a decisive will sufficiently reduce re-identification the Study and by some commenters factor in convincing providers to drop risk. above, other arbitral administrators their clauses. With regard to the comment that publish records by default, as set out The Bureau finds that the monitoring expressed skepticism about allowing above in the context of FINRA and AAA rule will minimize any adverse impact government regulators to collect private consumer arbitrations.803 The AAA, the to consumer privacy. The key potential data, the Bureau notes that the largest administrator of consumer concern identified by commenters is information it will receive from arbitrations, makes some consumer that consumers may fear that, by providers will generally be devoid of engaging in arbitration, the Bureau’s personal information to begin with, and 801 Study, supra note 3, section 2 at 14 (noting requirements may cause information the information the Bureau publishes that of the sample of 49 credit unions surveyed, just about them to be divulged. The Bureau four credit unions, representing 8.7 percent of will be redacted even further. While insured deposits in that sample, used arbitration does not believe that these concerns will data breaches are a general concern for agreements in consumer contracts). materialize because the final rules set any public institution, the data that the 802 See, e.g., Tina Orem, ‘‘12 Credit Unions Face Bureau will keep and publish will be Overdraft Suits,’’ Credit Union Times (Jan. 5, 2016), 799 Transparency into arbitral claims and awards redacted to reduce re-identification risk. available at http://www.cutimes.com/2016/01/05/ may aid other regulators and private attorneys 12-credit-unions-face-overdraft-suits. identify consumer harms. Otherwise, consumer The Bureau will also employ the same 803 See Study, supra note 3, section 2 at 51–52 harms may be hidden from the public. For instance, data security measures that it employs (‘‘Arbitration rules typically do not impose express as noted above, providers have filed motions to for other sensitive data that it currently confidentiality or nondisclosure obligations on compel arbitration even in individual litigation in maintains. parties to the dispute, although arbitrator ethics court. See Douglas v. Wells Fargo, BC521016 (Ca. rules do impose confidentiality obligations on the Super. Ct. 2013); Mokhtari v. Wells Fargo, With regard to the comments that arbitrator. Most arbitration clauses in the sample BC530202, (CA. Super Ct. 2013). suggested that the Bureau exclude credit were silent on confidentiality and did not impose 800 Study supra note 3, section 6 at 54–61. unions from the Bureau’s monitoring any nondisclosure obligation on the parties.’’).

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arbitrations available to the public,804 purposes and objectives of the Federal incorporates the Bureau’s exercise of its and maintains consumer rules that consumer financial laws, and to prevent authority in Dodd-Frank section permit it to publish consumer awards, evasions thereof. Section 1022(c)(4) 1022(c), the purpose of which is thus putting providers on notice that authorizes the Bureau to monitor for monitoring for risks to consumers in the their arbitration proceedings may risks to consumers in the offering or offering or provision of consumer become public.805 FINRA, the provision of consumer financial financial products or services, including arbitration administrator and self- products or services, including developments in markets for such regulatory organization for the securities developments in markets for such products or services. industry, has long published all products or services. Section 1028(b) Section 1040.2 Definitions arbitration-related documents without states that the Bureau, by regulation, redactions. The Bureau finds that the may prohibit or impose conditions or Proposed § 1040.2 set forth definitions trend among administrators is to expand limitations on the use of an agreement for certain terms relevant to the public access to arbitration documents. between a covered person and a proposal. The Bureau received a number The Bureau agrees with the commenters consumer for a consumer financial of comments on those proposed terms that argued that the public has an product or service providing for and their definitions, as well as interest in accessing arbitral records and arbitration of any future dispute suggestions to define additional data, and the comments citing the between the parties, if the Bureau finds concepts. The Bureau is finalizing experience of other arbitration that such a prohibition or imposition of § 1040.2 with certain revisions from the administrators and State governments conditions or limitations is in the public proposal as discussed below. that publication does not deter or interest and for the protection of 2(a) Class Action impede the use of arbitration as a consumers. Section 1028(b) further dispute settlement mechanism. states that the findings in such rule shall The Bureau proposed to define the In any case, any expectation of be consistent with the study of pre- term class action because the confidentiality is lost to the extent dispute arbitration agreements substantive provisions of § 1040.4(a)(1) parties to an arbitration file arbitration conducted under section 1028(a). concern class actions. Proposed awards and other documents containing For the reasons described in Part VI § 1040.2(a) would have defined the term parties’ names and other information and below, the Bureau issues this final class action as a lawsuit in which one with a court, such as in an effort to rule pursuant to its authority as or more parties seek class treatment enforce an award. Finally, the Bureau described in § 1040.1(a), with findings pursuant to Federal Rule of Civil finds the publication of arbitration that are consistent with the Study Procedure 23 or any State process records will likely not result in conflict conducted under section 1028(a). The analogous to Federal Rule of Civil with State laws on the confidentiality of Bureau did not receive any comments Procedure 23. arbitral records, given the experience of on proposed § 1040.1(a) and is finalizing Some consumer advocates and public- other nationwide administrators, such this provision as proposed. interest consumer lawyer commenters as FINRA, that publish arbitration requested that the Bureau expand the 1(b) Purpose records by default. To the extent that definition of class action to include there is a conflict with State laws, the Proposed § 1040.1(b) stated that the other types of mass actions that the Bureau finds that publication would purpose of part 1040 is the furtherance commenters believed would have been still be in the public interest. of the public interest and the protection excluded from the proposed definition. of consumers regarding the use of While the commenters suggested VII. Section-by-Section Analysis agreements for consumer financial different approaches, they generally Section 1040.1 Authority and Purpose products and services providing for recommended that the definition be arbitration of any future dispute. This extended to cover two types of actions: The Bureau proposed § 1040.1 to set statement of purpose is consistent with (1) Actions in which one or more parties forth the authority for issuing the Dodd-Frank section 1028(b), which seek relief on a representative basis; and regulation and the regulation’s purpose. authorizes the Bureau to prohibit or (2) actions in which there is more than 1(a) Authority impose conditions or limitations on the one plaintiff but the plaintiffs do not Proposed § 1040.1(a) provided that use of pre-dispute arbitration seek relief on a representative basis (for the rule is being issued pursuant to the agreements if the Bureau finds that they example, mass joinder cases). One of the authority granted to the Bureau by are in the public interest and for the commenters, a public-interest consumer sections 1022(b)(1), 1022(c), and 1028(b) protection of consumers. Dodd-Frank lawyer, suggested that the Bureau of the Dodd-Frank Act. As the proposal section 1028(b) also requires the address this concern not by revising the noted, section 1022(b)(1) authorizes the findings in any rule issued under definition of class action, but by adding Bureau to prescribe rules and issue section 1028(b) to be consistent with the a provision to proposed § 1040.4 that orders and guidance, as may be Study conducted under section 1028(a), would prohibit providers from moving necessary or appropriate to enable the which directs the Bureau to study the to compel arbitration in a multiple- Bureau to administer and carry out the use of pre-dispute arbitration plaintiff action brought by a group of agreements in connection with the plaintiffs after they have been denied 804 See AAA, ‘‘Consumer Arbitration Statistics,’’ offering or providing of consumer class certification. The commenters https://adr.org/ConsumerArbitrationStatistics (last financial products or services. stated that some pre-dispute arbitration visited Jan. 27, 2017). For the reasons described above in agreements expressly prohibit these 805 AAA, Consumer Arbitration Rules,’’ supra Part VI, the Bureau believes that the types of mass actions separate from the note 137, at R–43(c) (‘‘The AAA may choose to publish an award rendered under these Rules; final rule is in the public interest and prohibition on class actions. The however, the names of the parties and witnesses for the protection of consumers, and commenters also noted that these types will be removed from awards that are published, that its findings are consistent with the of mass actions resemble class actions in unless a party agrees in writing to have its name Study. The Bureau did not receive any that they enable multiple consumers to included in the award.’’). The AAA also provides public access to arbitration demands and awards for comments on proposed § 1040.1(b) and obtain relief through a single lawsuit. all class arbitrations (including party names). See is finalizing this provision as proposed After considering the comments, the AAA, ‘‘Case Docket,’’ supra note 141. with one addition. Final § 1040.1(b) Bureau is finalizing § 1040.2(a) as

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proposed, with a technical edit to clarify the contract. The commenter stated that consumer’’ in the proposal’s definition that the definition of the term class the proposal acknowledged this issue by of pre-dispute arbitration agreement. action still applies even after class defining consumer to include an agent, The commenters asserted that the action status is obtained. When a court trustee, or representative acting on phrase is confusing and could certifies a class action, class action behalf of an individual, and requested potentially limit the rule’s application status is no longer sought but instead, that the definition be amended by in ways the Bureau did not appear to has been obtained. The Bureau declines adding ‘‘or otherwise purporting to intend, given that the Bureau stated to extend the definition of class action obligate, or limit the rights of, an elsewhere in the proposal that the to cover additional types of mass individual.’’ provisions of proposed § 1040.4 were actions. Although there may be The Bureau is finalizing § 1040.2(b) as intended to apply to pre-dispute similarities between class actions and proposed. Regarding the consumer arbitration agreements that were the mass actions referenced in these advocate’s concern that companies originally between consumers and comments, the Study did not analyze could contract with one another to entities other than providers. These these types of actions, and the relinquish a consumer’s right to commenters also stated that the phrase commenters did not provide any data or participate in a class action in a manner is redundant, because the substantive other evidence regarding the extent to that binds the consumer, the Bureau provisions in proposed § 1040.4 would which these types of actions enable believes that a company would only have applied only to providers; thus, in consumers to enforce their rights under have the legal authority to relinquish the commenters’ view, it is unnecessary Federal and State consumer financial the consumer’s rights if it were an also to limit the scope of the term pre- law. The Bureau also notes that it ‘‘agent, trustee, or representative acting dispute arbitration agreement to an intends the phrase ‘‘State process on behalf of’’ the consumer, and thus agreement between a provider and a analogous to Rule 23’’ to refer to any the company would be covered by the consumer. The consumer advocate State process substantially similar to the definition as proposed. The commenter commenter suggested that the Bureau various iterations of Federal Rule 23 did not explain how such a remove the phrase ‘‘between a provider since its adoption; the State process in relinquishment could happen and a consumer,’’ while the public- question need not precisely match otherwise. Accordingly, the Bureau interest consumer lawyer commenter Federal Rule 23. The Bureau further declines to revise the definition of requested that the Bureau replace the notes that the term class action refers to consumer in response to this concern. word ‘‘provider’’ with the phrase cases in which one or more parties seek The Bureau believes that, to the extent ‘‘person’’ as defined in Dodd-Frank class treatment regardless of when they that a consumer is party to an section 1002(19).807 seek class treatment; it is not intended arbitration agreement and a provider Additionally, the public-interest to be limited to cases filed initially as seeks to assert that agreement in a class consumer lawyer commenter suggested class actions. action involving a covered product, this that the Bureau amend proposed rule would apply. comment 2(d)–1 or add a new comment, 2(b) Consumer to clarify that the presence or absence of 2(c) Pre-Dispute Arbitration Agreement Section 1028(b) of the Dodd-Frank opt-out provisions does not affect Act authorizes the Bureau to prohibit or Proposed § 1040.2(d) would have whether an agreement is a pre-dispute impose conditions or limitations on the defined the term pre-dispute arbitration arbitration agreement under the rule. use of a pre-dispute arbitration agreement as an agreement between a According to this commenter, providers agreement between a covered person provider and a consumer (as separately sometimes argue that opt-out provisions and a ‘‘consumer.’’ Section 1002(4) defined in proposed § 1040.2(b) and make arbitration agreements fairer and defines the term consumer as an § 1040.2(c)) providing for arbitration of that a consumer’s failure to opt out individual or an agent, trustee, or any future dispute between the indicates the consumer’s assent to the representative acting on behalf of an parties.806 The Bureau derived its arbitration agreement’s terms. The individual. Proposed § 1040.2(b) would proposed definition from Dodd-Frank commenter did not say, however, why have incorporated the Act’s definition of section 1028(b), which, under certain it was necessary to clarify the definition consumer by stating that a consumer is conditions, authorizes the Bureau to of pre-dispute arbitration agreement on an individual or an agent, trustee, or regulate the use of agreements for this point. representative acting on behalf of an consumer financial products or services Additionally, several commenters individual. that provide for arbitration of future expressed concern that providers would An industry commenter stated the disputes between covered persons and seek to evade the rule if it was finalized proposed definition of consumer is consumers. Proposed comment 2(d)-1 as proposed by adopting a practice of sufficiently clear, and a consumer would have stated that the term amending their consumer agreements advocate commenter requested that the includes any agreement between a after a class action has been filed but Bureau finalize the definition of provider and a consumer providing for before certification to state that any consumer as proposed. The consumer arbitration of any future disputes claims related to the dispute that is the advocate commenter stated that the between the parties, regardless of its subject of the class action must be proposed definition was clear and easy form or structure, and provided resolved individually. These to apply and that including agents, illustrative examples of contract types. commenters were concerned that the trustees, and representatives acting on Both a consumer advocate and a definition of pre-dispute arbitration behalf of individuals would ensure that public-interest consumer lawyer agreement in proposed § 1040.2(d) was the rule protects important groups of commenter expressed concern about the limited to agreements providing for consumers. Another consumer advocate phrase ‘‘between a provider and a arbitration of any future dispute commenter expressed concern that between the parties because they were companies contracting with one another 806 As noted below, for ease of reference, the could agree to relinquish a consumer’s Bureau has re-numbered the definition of pre- 807 Dodd-Frank section 1002(19) defines ‘‘person’’ right to participate in a class action in dispute arbitration agreement in the final rule as as ‘‘an individual, partnership, company, § 1040.2(c). The definition of provider, which was corporation, association (incorporated or a manner that binds the consumer even § 1040.2(c) in the proposal, is § 1040.2(d) in the unincorporated), trust, estate, cooperative though the consumer was not a party to final rule. organization, or other entity.’’

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concerned that a dispute related to a Bureau has added this limitation into sections 1027 or 1029). The comment pending class action could be construed the definition of pre-dispute arbitration further clarifies that the requirements in as a ‘‘current dispute’’ between the agreement itself to reflect section § 1040.4 would apply, however, to the consumer (who is presumably an absent 1028(b), which authorizes the Bureau to use of any such pre-dispute arbitration class member) and the provider. One of regulate agreements ‘‘for a consumer agreement by a different person that the commenters, a public-interest financial product or service’’ providing meets the definition of provider, when consumer lawyer, predicted that for arbitration of any future dispute the pre-dispute arbitration agreement providers might stop using pre-dispute between the parties. was entered into after the compliance arbitration agreements and instead Second, the Bureau has replaced the date. adopt ad hoc agreements requiring phrase ‘‘between a provider and a New comment 2(c)–1.ii illustrates this arbitration of particular disputes that consumer’’ with the phrase ‘‘between a concept with an example. Comment have given rise to class actions.808 covered person as defined by 12 U.S.C. 2(c)–1.ii states that an automobile dealer Additionally, a consumer advocate 5481(6) and a consumer.’’ The Bureau is that provides consumer credit is a commenter requested that the Bureau persuaded that defining pre-dispute covered person under Dodd-Frank clarify that the definition of pre-dispute arbitration agreement as an agreement section 1002(6)—and such a person’s arbitration agreement includes ‘‘between a provider and a consumer,’’ contracts may contain pre-dispute delegation provisions, which are as in the proposal, is unnecessary and arbitration agreements as that term is agreements to delegate to arbitration potentially confusing as to the intended defined in § 1040.2(c). Yet an decisions regarding threshold issues scope of the rule. Specifically, as stated automobile dealer that is excluded from concerning an arbitration agreement in the proposal, the Bureau had the Bureau’s rulemaking authority in (such as enforceability).809 intended that the substantive provisions circumstances described by Dodd-Frank After consideration of the comments, in proposed § 1040.4 apply to providers section 1029 would not be required to the Bureau is finalizing the definition of as defined in proposed § 1040.2(c) when comply with the requirements in pre-dispute arbitration agreement with they are relying on arbitration § 1040.4, because those requirements modifications as described below.810 agreements in contracts for consumer apply only to providers, and such Final § 1040.2(c) defines pre-dispute financial products and services that automobile dealers, while they are arbitration agreement as an agreement were originally between consumers and covered persons, are excluded by between a covered person as defined by persons who were excluded from the § 1040.3(b)(6) and therefore are not 12 U.S.C. 5481(6) and a consumer definition of provider in accordance providers under § 1040.2(d). The providing for arbitration of any future with proposed § 1040.3(b). The Bureau requirements in § 1040.4 would apply, dispute concerning a consumer believes the phrase ‘‘between a however, to the use of the automobile financial product or service covered by consumer and a covered person as dealer’s pre-dispute arbitration § 1040.3(a). The final rule’s definition of defined by 12 U.S.C. 5481(6)’’ addresses agreement by a different person that pre-dispute arbitration agreement this concern and more closely reflects meets the definition of provider, such as mirrors Dodd-Frank section 1028(b), the Bureau’s intention. The Bureau also a servicer, or purchaser or acquirer of which authorizes the Bureau, if certain notes that, while the term ‘‘covered the automobile loan, where the conditions are met, to regulate ‘‘the use person’’ is broader than the term agreement was entered into after the of an agreement between a covered ‘‘provider,’’ the final rule’s use of the compliance date. person and a consumer for a consumer term ‘‘covered person’’ does not expand To clarify the relationship between financial product or service providing the universe of persons subject to the the definition of pre-dispute arbitration for arbitration of any future dispute rule’s requirements. That is because the agreement and delegation provisions, between the parties.’’ rule’s substantive requirements—the the Bureau is adding comment 2(c)–2 to Final § 1040.2(c) reflects two requirements imposed by § 1040.4(a)(1), the final rule.811 Comment 2(c)–2 modifications from the proposal. First, (a)(2), and (b), discussed below—apply clarifies that the term pre-dispute the final rule’s definition contains a new only to ‘‘providers.’’ arbitration agreement as defined in limitation: Pre-dispute arbitration New comment 2(c)–1 further clarifies § 1040.2(c) includes delegation agreements must be agreements this concept. Comment 2(c)–1.i explains provisions, which the comment providing for arbitration of any future that, while § 1040.2(c) defines ‘‘pre- identifies as agreements to arbitrate dispute ‘‘concerning a consumer dispute arbitration agreement’’ as an threshold issues concerning the financial product or service covered by agreement between a covered person arbitration agreement, which may § 1040.3(a).’’ This limitation is already and a consumer, the rule’s substantive sometimes appear elsewhere in a built into the operation of the rule requirements, which are contained in contract containing or relating to the 812 because § 1040.4 only applies to pre- § 1040.4, apply only to ‘‘providers.’’ arbitration agreement. The Bureau dispute arbitration agreements Comment 2(c)–1.i notes further that, believes that the definition of pre- concerning consumer financial products while ‘‘covered persons,’’ as that term is dispute arbitration agreement in or services. Nonetheless, for clarity, the defined in Dodd-Frank section 1002(6), § 1040.2(c) includes delegation includes persons excluded from the provisions because such provisions are 808 This commenter also recommended that the Bureau’s rulemaking authority under agreements between covered persons Bureau revise § 1040.4(a)(1) and (a)(2) to address Dodd-Frank sections 1027 and 1029, the and consumers providing for arbitration this concern. However, for the reasons described requirements contained in § 1040.4 below in its response to this comment, the Bureau would not apply to any such persons 811 As noted above, the commenter also does not believe that the revisions to either are entering into a pre-dispute arbitration recommended that the Bureau revise proposed necessary. § 1040.4 to prohibit providers from relying on 809 The commenter also recommended that the agreement because they are not delegation provisions. New comment 2(c)–3 Bureau revise § 1040.4 to prohibit providers from ‘‘providers,’’ by virtue of § 1040.2(d) addresses how delegation provisions relate to the relying on delegation provisions. (stating that persons excluded under Bureau’s rule. 810 For ease of reference, the Bureau has re- § 1040.3(b) are not providers) and 812 This comment is consistent with Rent-A- numbered this definition in the final rule as § 1040.3(b)(6) (excluding any person to Center West, Inc. v. Jackson, 561 U.S. 63, 68 (2010) § 1040.2(c); the definition of provider, which was (stating that ‘‘[t]he delegation provision is an proposed § 1040.2(c), is § 1040.2(d) in this final the extent not subject to the Bureau’s agreement to arbitrate threshold issues concerning rule. rulemaking authority including under the arbitration agreement.’’).

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of any future dispute concerning a communications with the class.814 The Bureau did not receive comment consumer financial product or service— Regarding the public-interest consumer on proposed comment 2(d)–1 and is namely, disputes over threshold issues lawyer’s concern that providers would finalizing the proposed comment, concerning the arbitration agreement for respond to the rule by abandoning pre- renumbered as comment 2(c)–3, as such a consumer financial product or dispute arbitration agreements and proposed. adopting ad hoc agreements requiring service. Accordingly, § 1040.4(a)(1) 2(d) Provider prohibits a provider from relying on a arbitration of particular disputes that delegation provision entered into after have given rise to class actions, the Dodd-Frank section 1028(b) the compliance date with respect to any Bureau believes that, to the extent that authorizes the Bureau to prohibit or aspect of a class action that concerns a providers adopt such agreements to impose conditions or limitations on the covered consumer financial product or bind putative class members, the use of a pre-dispute arbitration service until such time as the case is precedents described above would agreement between a ‘‘covered person’’ determined not to be a class action. This apply. And to the extent that providers and a consumer. Section 1002(6) defines interpretation is consistent with adopt such agreements to bind their the term covered person as any person jurisprudence recognizing delegation consumers before a class action is filed that engages in offering or providing a provisions as arbitration agreements for against that provider, the Bureau consumer financial product or service purposes of the FAA.813 believes that those types of agreements and any affiliate of such a person if such The Bureau intends this interpretation are plainly pre-dispute arbitration affiliate acts as a service provider to that to apply even if the delegation provision agreements under § 1040.2(d), because person. Section 1002(19) further defines is contained in a separate provision of they concern a future dispute. person to mean an individual, the contract. In accordance with the Regarding the public-interest partnership, company, corporation, Supreme Court’s decision in Jackson, consumer lawyer commenter’s concern association (incorporated or delegation provisions are themselves about opt-out provisions, the Bureau unincorporated), trust, estate, cooperative organization, or other arbitration agreements that the Bureau does not believe that it is necessary to entity. has the authority to regulate under clarify that the presence or absence of an opt-out provision does not affect Throughout the proposal, the Bureau section 1028(b). That section authorizes used the term provider to refer to the the Bureau to ‘‘prohibit or impose whether an agreement is a pre-dispute arbitration agreement within the entity to which the requirements in the conditions or limitations on the use of proposal would have applied.815 an agreement between a covered person meaning of § 1040.2(c). The Bureau believes that it is clear that, where a pre- Proposed § 1040.2(c) would have and a consumer for a consumer defined the term provider as a subset of financial product or service providing dispute arbitration agreement includes an opt-out provision, and the consumer the term covered person. Specifically, for arbitration of any future dispute proposed § 1040.2(c) would have between the parties.’’ A delegation has not opted out, there remains a governing pre-dispute arbitration defined the term provider to mean (1) a provision in a consumer contract for a person as defined by Dodd-Frank consumer financial product or service is agreement to which the Bureau’s rule would apply. section 1002(19) that engages in offering an ‘‘agreement between a covered or providing any of the consumer person and a consumer for a consumer financial products or services covered financial product or service providing 814 See, e.g., O’Connor v. Uber Techs., Inc., No. 13–3826, 2013 WL 6407583, at *7 (N.D. Cal. Dec. by proposed § 1040.3(a) to the extent for arbitration of any future dispute’’ 6, 2013) (defendant communicated improperly with that the person is not excluded under pertaining to threshold issues class where it sought approval of arbitration proposed § 1040.3(b); or (2) an affiliate concerning the arbitration agreement; agreement after class action was filed); Balasanyan of a provider as defined in proposed thus, section 1028(b) authorizes the v. Nordstrom, Inc., Nos. 11–2609, 10–2671, 2012 WL 760566, at *4 (S.D. Cal. Mar. 8, 2012) (denying § 1040.2(c)(1) when that affiliate would Bureau to prohibit or impose conditions employer’s motion to compel arbitration based on be acting as a service provider to the or limitations on the use of such arbitration agreement adopted by defendant after provider with which the service provisions. class action was filed on the ground that agreement provider is affiliated consistent with the The Bureau believes it is not was an improper communication with class); In re Currency Conversion Fee Antitrust Litig., 361 F. meaning set forth in 12 U.S.C. necessary to revise the definition of pre- Supp. 2d 237, 250–254 (S.D.N.Y. 2005) (denying 5481(6)(B). dispute arbitration agreement to address defendants’ motion to stay litigation pending Proposed comment 2(c)–1 would have the commenters’ concern that providers arbitration based on arbitration agreements adopted clarified that a provider as defined in will seek to evade the rule by amending through change-in-terms notices that did not inform class members of lawsuit, on the ground that the proposed § 1040.2(c) that also engages consumer agreements after a class action agreements were improper communications with in offering or providing products or has been filed (but before certification) class); Carnegie v. H&R Block, Inc., 687 N.Y.S.2d services not covered by proposed to state that any claims related to the 528, 533 (N.Y. Sup. Ct. 1999) (ordering that § 1040.3 must comply with this part dispute that is the subject of the class arbitration agreements in loan contracts entered into with consumers after filing of class action only for the products or services that it action must be resolved individually. could not be enforced, on the basis that agreements offers or provides that would be covered The Bureau believes that, under existing were improper communications with putative class by proposed § 1040.3. The proposed precedents, courts would not enforce members); Powertel v. Bexley, 743 So. 2d 570, 577 comment would have illustrated this such agreements. Courts have routinely (Fla. Dist. Ct. App. 1999) (affirming trial court’s denial of motion to compel arbitration and ruling concept by noting that a merchant that held arbitration agreements adopted that arbitration agreements adopted through transmits funds for its customers would after a class action has been filed, but change-in-terms notice after filing of class action be covered pursuant to proposed before certification, unenforceable as were unconscionable). Cf. Balasanyan v. § 1040.3(a)(7) with respect to the unconscionable or as improper Nordstrom, Inc., 294 FRD. 550, 574 (S.D. Cal. 2013) (holding that where, after class action was filed, transmittal of funds, but the same employer began requiring new employees to sign an 813 See Jackson, 561 U.S. at 70 (‘‘An agreement to arbitration agreement, new employees who signed 815 For example, proposed § 1040.4(a)(1) would arbitrate a gateway issue is simply an additional, that agreement may be excluded from class, because have prohibited a provider from seeking to rely in antecedent agreement the party seeking arbitration company was not communicating improperly with any way on a pre-dispute arbitration agreement asks the federal court to enforce, and the FAA class members but ‘‘engaging in standard practice entered into after the compliance date in a class operates on this additional arbitration agreement that many companies engage in when hiring new action related to a covered consumer financial just as it does on any other.’’). employees’’). product or service.

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merchant generally would not be provider as defined in § 1040.2(d)(1). ‘‘any binding alternative dispute covered with respect to its sale of For example, if an affiliate of a merchant resolution process’’ and stated that this durable goods to consumers, except as excluded by § 1040.3(b)(6) services definition would provide clarity and provided in 12 U.S.C. 5517(a)(2)(B)(ii) consumer credit extended by the limit evasion. The industry commenter or (iii).816 merchant, the affiliate servicer may did not recommend a specific definition Other than a comment from an meet the definition of provider in of ‘‘arbitration’’ but stated that a industry commenter, which stated that § 1040.2(d)(1) even though the merchant definition would ensure compliance the proposed definition of provider was is not a provider. The comment also with the regulation. sufficiently clear, the Bureau received emphasizes that the rule applies to The Bureau declines to add a no comments on this proposed affiliated service providers in certain definition of ‘‘arbitration’’ to § 1040.2. provision.817 The Bureau is finalizing circumstances even when they are not While neither commenter stated why the definition of provider largely as themselves offering or providing a they believed a definition of arbitration proposed, except for minor technical consumer financial product or service. would either prevent evasion or revisions.818 For ease of reference and as As stated in the proposal, the improve compliance, the Bureau noted previously, the Bureau has also definition of the term ‘‘person’’ under believes that the relevant evasion re-numbered this definition in the final section 1002(19) of the Dodd-Frank Act concern would be that providers would rule as § 1040.2(d); the definition of pre- includes an individual, partnership, create a binding alternative dispute dispute arbitration agreement, which company, corporation, association resolution (ADR) process that is similar was § 1040.2(d) in the proposal, is (incorporated or unincorporated), trust, to arbitration but that uses a different § 1040.2(c) in the final rule. Having not estate, cooperative organization, or other name, and that such an arrangement received any comment, the Bureau is entity, and the term ‘‘entity’’ readily could harm consumers were a court to also finalizing proposed comment 2(c)– encompasses governments and conclude that it would not be covered 1, renumbered as comment 2(d)–1, as government entities. Even if the term by this rule. The Bureau believes that proposed, with minor updates to align were ambiguous, the Bureau, based on any such evasion attempts would fail. the comment with changes to its expertise and experience with The Bureau is aware that there has been § 1040.3(a)(7) to which the comment respect to consumer financial markets, extensive litigation on the question of refers and to clarify that the references believes that interpreting the term to whether a particular ADR process is to Dodd-Frank section 1027 refer to the encompass governments and arbitration, in part because the FAA activity of extending consumer credit. government entities would promote does not define the term. Most circuits The Bureau is also adding comment consumer protection, fair competition, apply a ‘‘Federal common law’’ 2(d)–2 to clarify that a person is a and other objectives of the Dodd-Frank standard that looks to whether provider if it meets either prong of the Act. Further, as stated in the proposal, disputants empowered a third party to definition of provider in § 1040.2(d)(1) the Bureau believes that the terms render a final and binding decision and (2). In particular, even if an ‘‘companies’’ or ‘‘corporations’’ under settling their dispute.820 Two circuit affiliated service provider does not meet the definition of ‘‘person,’’ on their face, courts apply the relevant State law, as the definition of provider in cover all companies and corporations, long as that law does not frustrate the § 1040.2(d)(2), because it provides including government-owned or purposes of the FAA.821 The Bureau services to a person who is excluded -affiliated companies and corporations. believes these precedents are broad from the rule under § 1040.3(b) and who In addition, even if those terms were enough to capture any ADR process that thus is not a provider, the affiliated ambiguous, the Bureau believes based entities could implement in an effort to service provider still could be a on its expertise and experience with evade the rule, but the Bureau will respect to consumer financial markets nonetheless monitor the market for any 816 As stated in the proposal, the Bureau intends that interpreting them to cover attempts by providers to evade the phrase ‘‘that engages in offering or providing government-owned or -affiliated application of this rule in this manner. any of the consumer financial products or services A consumer lawyer commenter covered by § 1040.3(a)’’ to clarify that the proposal companies and corporations would would apply to providers that use a pre-dispute promote the objectives of the Dodd- requested that the Bureau add to arbitration agreement entered into with a consumer Frank Act. Accordingly, while the § 1040.2 a definition of ‘‘business of for the products and services enumerated in Bureau has chosen to exempt certain insurance’’ that would cross-reference proposed § 1040.3(a). The Bureau also intends this the definition of ‘‘business of phrase to convey that, even if an entity would be government entities under a provider under proposed § 1040.2(c) because it § 1040.3(b)(2), the term provider is insurance’’ in Dodd-Frank section 822 offers or provides consumer financial products or broad enough to encompass such 1002(3). The commenter also services covered by proposed § 1040.3(a), it would entities to the extent that they are not not be a provider with respect to products and 820 819 See, e.g., Bakoss v. Certain Underwriters at services that it may provide that are not covered by otherwise excluded from the rule. Lloyds of London Issuing Certificate No. 0510135, proposed § 1040.3(a). 707 F.3d 140 (2d Cir. 2013) (affirming district 817 Comments on Possible Additional A consumer advocate commenter also court’s application of Federal common law standard commented on this proposed definition. However, Definitions that ‘‘if the parties have agreed to submit a dispute these comments related more directly to the rule’s Several commenters requested that for a decision by a third party, they have agreed to coverage mechanism. For this reason, the Bureau arbitration’’). summarizes and responds to these comments in the the Bureau define additional terms 821 See Portland General Electric Co. v. U.S. Bank section-by-section analysis for § 1040.3, below. relevant to this rulemaking that the Trust Nat’l Ass’n, 218 F.3d 1085 (9th Cir. 2000) 818 In the commentary to the definition of Bureau did not propose to define. (applying Oregon law); Hartford Lloyd’s Insurance provider, the Bureau has corrected the cross- A public-interest consumer lawyer Co. v. Teachworth, 898 F.2d 1058 (5th Cir. 1990) reference to transmitting funds coverage, which is commenter and an industry commenter (applying Texas law). in § 1040.3(a)(7), and has clarified when that 822 Dodd-Frank section 1002(3) states that the coverage would apply. The Bureau also has requested that the Bureau define the term business of insurance means the writing of shortened the definition in § 1040.2(d)(1) to refer to term ‘‘arbitration.’’ The public-interest insurance or the reinsuring of risks by an insurer, an ‘‘activity’’ covered by § 1040.3(a), so that the consumer lawyer commenter suggested including all acts necessary to such writing or terms governing which activities are covered appear reinsuring and the activities relating to the writing in § 1040.3(a). Finally, the Bureau has deleted the that the Bureau define ‘‘arbitration’’ as of insurance or the reinsuring of risks conducted by second usage of the phrase ‘‘as defined in paragraph persons who act as, or are, officers, directors, (c)(1)’’ from the proposed definition, as only one 819 See supra section-by-section analysis of agents, or employees of insurers or who are other usage of that phrase is needed. § 1040.3(b)(2). persons authorized to act on behalf of such persons.

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requested that the Bureau adopt provider’s obtaining legal advice based loans or issuing credit cards), activities commentary stating that certain on the facts in a particular case.827 related to that consumer lending (such contractual arrangements similar to An industry commenter requested as providing referrals, servicing, credit guaranteed asset protection (GAP) that the Bureau define ‘‘account’’ and monitoring, debt relief, and debt waiver arrangements are not the ‘‘pre-dispute.’’ The commenter did not collection services, among others, as ‘‘business of insurance.’’ 823 The recommend specific definitions for well as the purchasing or acquiring of commenter stated that these revisions these terms but stated that they would such consumer loans), and extending are needed because judges and litigants help ensure compliance with the and brokering those leases that are regulation. The Bureau believes it is often deem such arrangements to be the consumer financial products or services unnecessary to define either of these business of insurance, when, in the because they are similar to automobile terms. In the final rule, two provisions— loans. Storing money includes storing commenter’s view, they are not. If § 1040.3(a)(5) and (a)(6)—use the term funds or other monetary value for considered the business of insurance, account. However, these provisions consumers (such as providing deposit such arrangements would be exempt cross-reference TISA and EFTA accounts). Moving money includes from the rule under Dodd-Frank section respectively and their implementing providing consumer services related to 1027(m).824 If not, part 1040 could regulations, both of which define the the movement or conversion of money apply to pre-dispute arbitration term.828 Thus, the Bureau believes it (such as certain types of payment agreements in contracts for such unnecessary to define those terms here. processing activities, transmitting and arrangements where charges incurred by While § 1040.4(b)(3)(vi) uses the term exchanging funds, and cashing checks). consumers pursuant to such ‘‘account number,’’ the Bureau does not Proposed § 1040.3(a) described the arrangements are included in the cost of believe that the commenter was products and services in these core credit.825 indicating confusion over this term or consumer financial markets that the The Bureau declines to add to that there is confusion about this Bureau proposed to cover in part 1040. concept. The Bureau believes it is Each component is discussed separately § 1040.2 a definition of ‘‘business of unnecessary to define the term pre- below in the discussion of each insurance’’ that cross-references the dispute because the term is only subsection of § 1040.3(a), along with a Dodd-Frank Act’s definition of that relevant in the context of the term pre- summary of comments received on each term. The Bureau also declines to add dispute arbitration agreement, which component, the Bureau’s response to commentary stating that contractual § 1040.2(c) already defines. these comments, and any changes the arrangements similar to GAP waiver Bureau is making to the subsection in Section 1040.3 Coverage and agreements are not the business of the final rule.829 Exclusions From Coverage The Bureau notes that insurance. The Bureau understands that both banks and nonbanks may provide a number of State courts and State As discussed above, Dodd-Frank the products and services described in banking regulators have determined that section 1028(b) authorizes the Bureau to § 1040.3(a). As discussed in the section- debt cancellation or suspension issue regulations concerning agreements by-section analysis of ‘‘provider’’ (see products such as those described by the between a covered person and a § 1040.2(d) above), below in this commenter are not insurance.826 consumer ‘‘for a consumer financial section, and in the Bureau’s Section However, whether a particular debt product or service’’ providing for 1022(b)(2) Analysis, a covered person cancellation arrangement involves the arbitration of any future disputes that under the Dodd-Frank Act who engages business of insurance may vary based may arise. Accordingly, the Bureau in offering or providing a product or on the particular facts and proposed § 1040.3 to set forth the service described in proposed products and services to which circumstances. The Bureau believes that § 1040.3(a) generally is subject to the proposed part 1040 would apply. proposal, except to the extent an whether a product involves the business Proposed § 1040.3(a) generally would of insurance is best ascertained by the exclusion in proposed § 1040.3(b) have provided a list of products and applies to that person. Proposed services that would be covered by the § 1040.3(b) thus described exceptions to 823 In a typical GAP waiver arrangement, a lender proposal, while proposed § 1040.3(b) agrees, for an additional charge, to forgive some or proposed § 1040.3(a). Each proposed all of any remaining debt following a covered loss. would have provided limited exception is discussed separately below, For example, where a waiver covers automobile exclusions. along with a summary of comments The Bureau proposed to cover a theft, the lender would forgive the amount of any received related to each proposed difference between the remaining balance on the variety of consumer financial products exception, the Bureau’s response to consumer’s automobile loan and the payout by the and services that the Bureau believed consumer’s automobile insurance company these comments, and any changes the are in or tied to the core consumer following the theft of the consumer’s automobile. Bureau is making to the subsection in 824 financial markets of lending money, Section 1027(m) explains that the Bureau may the final rule. not define as a financial product or service, by storing money, and moving or regulation or otherwise, engaging in the business of exchanging money—all markets covered 3(a) Covered Products and Services insurance. in significant part in the Study. Lending 825 The Bureau’s Proposal See § 1040.3(a). money includes, for example: Most 826 See, e.g., First Nat’l Bank of E. Arkansas v. types of consumer lending (such as As set forth above, the Bureau’s Eubanks, 740 F. Supp. 1427 (E.D. Ark. 1989) rulemaking authority under Dodd-Frank (holding that bank did not engage in the business making secured loans or unsecured of insurance when it entered into debt cancellation section 1028(b) generally extends to the agreements); Automotive Funding Group, Inc. v. 827 See also the section-by-section analysis for use of an agreement between a covered Garamendi, 7 Cal. Rptr. 3d 912 (Cal. Ct. App. 2003) § 1040.3(a)(1), below, which discusses additional person and a consumer for a ‘‘consumer (holding that an automobile lender’s debt comments the Bureau received concerning life financial product or service’’ (as defined cancellation program was not insurance); 7 Tex. insurance policy loans. in Dodd-Frank section 1002(5)). Admin. Code 12.33(b)(3) (Texas rule adopted in 828 See 12 CFR 1030.2(a) (defining ‘‘account’’ for 2003 providing that State banks’ debt cancellation purposes of Regulation DD); 12 CFR 707.2(a) and suspension agreements are governed by the (defining ‘‘account’’ for purposes of National Credit 829 Following that discussion, an illustrative set of Texas Administrative Code and applicable Union Administration’s rule implementing TISA); examples of persons providing these products and provisions in the Finance Code and not State 12 CFR 1005.2(b)(1) (defining ‘‘account’’ for services is included in the introduction of the insurance laws). purposes of Regulation E). section-by-section analysis to § 1040.3(b).

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However, as discussed in the section-by- To effectuate this approach, the trade association of consumer lawyers, a section analysis of proposed Bureau specifically proposed in consumer advocate, and an individual § 1040.3(b)(5), Dodd-Frank sections § 1040.3(a) that proposed part 1040 commenter stated in their comments 1027 and 1029 830 exclude certain generally would have applied to pre- that the scope of coverage should be activities by certain covered persons, dispute arbitration agreements for the broadened to reach all consumer such as the sale of nonfinancial goods products or services listed in proposed financial products and services that may or services, including automobiles, from § 1040.3(a) to the extent they are be regulated by the Bureau in the Dodd- the Bureau’s rulemaking authority in consumer financial products or services Frank Act.834 These commenters certain circumstances.831 as defined by 12 U.S.C. 5481(5). As generally believed that consumers of In exercising its authority under proposed comment 3(a)–1 would have financial products and services do not Dodd-Frank section 1028, the Bureau explained, that statutory provision knowingly and voluntarily enter into proposed to cover consumer financial generally defines two types of consumer arbitration agreements, which often products and services in what it financial products and services. The cover a broad range of claims, and as a described as the core markets of lending first type is any financial product or result, arbitration agreements should be money, storing money, and moving or service that is ‘‘offered or provided for regulated wherever they occur in exchanging money. Accordingly, the use by consumers primarily for Bureau-regulated markets without Bureau did not propose to cover every personal, family, or household limitation. type of consumer financial product or purposes.’’ The second type is a A public-interest consumer lawyer service as defined in Dodd-Frank financial product or service that is commenter supported the proposal’s section 1002(5), particularly those delivered, offered, or provided in references to other laws and regulations outside these three core areas. As the connection with the first type of to define scope, as this would ensure proposal explained, Bureau intends to consumer financial product or service. that the scope of coverage in the continue to monitor other markets for Comments Received proposal would evolve as those laws consumer financial products and and regulations are updated to address services in order to determine over time A number of consumer advocates, developments in the relevant markets. whether to revisit the scope of this rule. nonprofits, consumer law firms, and The commenter stated that this feature In addition, the Bureau structured the industry commenters identified specific of the proposal would be particularly proposed scope provisions to use a products or services that, in their view, important for African American number of terms derived from existing, should or should not be covered; these communities the commenter represents, enumerated consumer financial comments are addressed in relevant which, in its view, are often a target for protection statutes implemented by the subsections of the section-by-section novel, and sometimes exploitative, 833 Bureau in order to facilitate compliance. analysis below. Some industry consumer financial products and In so doing, the Bureau expected that commenters challenged areas of services. This commenter also suggested the coverage of proposed part 1040 proposed coverage, on the basis that that for clarity the Bureau noted this would have incorporated relevant future their industry was either not analyzed, feature in the official interpretations to changes, if any, to the enumerated or not sufficiently analyzed, in part or part 1040. A consumer advocate consumer financial protection statutes all of the Study. Those comments are commenter also supported the Bureau’s and their implementing regulations and discussed in the analysis of comments proposed incorporation of definitions to provisions of title X of Dodd-Frank on the Study above in Part III. found in other regulations that may later In addition, the Bureau received referenced in proposed § 1040.3(a). For be amended, noting the availability of several comments more generally example, the proposal noted that notice-and-comment rulemaking for addressing its overall proposed such amendments would allow changes that the Bureau had proposed approach to scope of coverage that commenters on those potential changes regarding the definition of an account focused on three core markets and its to address the relevance and application with regard to prepaid products under frequent reliance on already-enumerated Regulation E would have, if adopted, of part 1040.835 terms in Federal consumer financial In addition, a consumer advocate and affected the scope of proposed laws. One consumer advocate agreed 832 a public-interest consumer lawyer also § 1040.3(a)(6). with the Bureau’s proposed approach to expressed concern in their comments delineating the scope of coverage, 830 12 U.S.C. 5517 and 5519. that persons who provide services to which, in its view, would reduce 831 However, as also discussed in greater detail in providers covered by the proposal (but uncertainty and assist the Bureau and the section-by-section analysis of proposed who are not themselves providers) § 1040.3(b)(5) and clarified in comments 2(c)–1 and courts in administration of the rule. could escape the reach of the proposal. 2(c)–1.i to the final rule, even where the person Three public-interest consumer lawyer In particular, these commenters asserted offering or providing a consumer financial product commenters believed the proposed or service may be excluded from coverage under the that if a covered provider failed to coverage was extensive. Nonetheless, a regulation, for instance because that party is an comply with the proposal’s requirement automobile dealer extending a loan in to insert a contract provision preventing circumstances that exempt the automobile dealer Truth in Lending Act (Regulation Z), 81 FR 83934 from the rulemaking authority of the Bureau under (Nov. 22, 2016); 82 FR 18975 (Apr. 25, 2017) Dodd-Frank section 1029, the rule would still apply (setting effective date of April 1, 2018 for most 834 This other consumer advocate also noted, to providers of other consumer financial products provisions). See also Prepaid Accounts Under the however, that the rule should cover at least those or services (such as servicers or debt collectors) in Electronic Fund Transfer Act (Regulation E) and the products and services in the proposal because, in connection with the same consumer financial Truth in Lending Act (Regulation Z), 82 FR 29630 their view, consumers have been subjected to product or service offered or provided by the entity (June 29, 2017) (proposal seeking comment on arbitration agreements in most, if not all, of those excluded from the Bureau’s rulemaking authority whether the effective date should be further markets. Other consumer advocate comments (such as the automobile loan referenced above). delayed). similarly indicated that arbitration agreements were 832 The Bureau did adopt changes to that 833 In addition, a consumer advocate also urged common in consumer finance markets. regulation in a final rule issued in October 2016 the Bureau to cover real estate brokerage and title 835 This commenter also stated in its comment that, when it takes effect, will expand the types of insurance because arbitration agreements in those that the rule should cover all types of mortgage products that are considered accounts and that markets are, in their view, common and have the settlement services, and not just mortgage brokering would be subject to proposed § 1040.3(a)(6), as is effect of suppressing claims. Having not sought or mortgage lending. Having not sought notice and discussed below. See Prepaid Accounts Under the notice and comment, the Bureau declines to add comment, the Bureau declines to add these markets Electronic Fund Transfer Act (Regulation E) and the these markets to the rule. to the rule.

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reliance on the arbitration agreement in behalf of the creditor may be a service describes some of the covered products a class action (proposed § 1040.4(a)(2)), provider, but also would be covered and services using the term then the service provider might attempt directly (see § 1040.3(a)(10)(iii)). To the ‘‘providing.’’ For example, to rely on the arbitration agreement of extent this commenter was, in effect, § 1040.3(a)(1)(i) covers an extension of the provider in a class action against the seeking an expansion in the proposed consumer credit under Regulation B. service provider because another scope of coverage to reach persons who Accordingly, the Bureau believes it is provision of the rule, prohibiting are not offering or providing a covered important to clarify that offering such a invocation of an arbitration agreement consumer financial product or service product also is covered by the rule. in a class action (proposed and are not an affiliated service provider The Bureau is adopting comment § 1040.4(a)(1)) would not apply. to persons offering or providing a 3(a)–1 to § 1040.3(a) as proposed to explain the two general categories of The Final Rule covered consumer financial product or service, the Bureau does not believe consumer financial products or services The Bureau is finalizing the rule such an expansion in scope of coverage defined in the Dodd-Frank Act. In consistent with the overall approach it is warranted. Nevertheless, the Bureau addition, in response to comments had set forth in the proposal to defining shares the commenter’s concern described below in the section-by- a broad but specific scope of coverage regarding a situation in which a person section analysis of § 1040.3(a)(3), the within the core markets of storing, provides services to a provider that had Bureau also is adopting comment 3(a)– lending, and moving money. The failed to comply with this rule, and 2 concerning the rule’s coverage of Bureau continues to believe that this relies on the provider’s non-compliant mobile phone applications and online approach will facilitate compliance with arbitration agreement. The Bureau access tools for covered products. the rule and its administration. The believes that this problem can be 3(a)(1) Bureau recognizes, however, that the addressed through means other than The Bureau believed that the proposal use of arbitration agreements for other adding unaffiliated service providers to should apply to consumer credit and consumer financial products or services the coverage of this rule. For example, related activities including collecting on not covered by the final rule consumers may assert that the consumer credit. Specifically, proposed nonetheless has a potential to cause arbitration agreement in this example § 1040.3(a)(1) would have included in harm to consumers. As stated in the was invalid or unenforceable for its the coverage of proposed part 1040 proposal, the Bureau therefore plans to failure to comply with the Bureau’s monitor the impact of arbitration consumer lending under the ECOA, as rule.836 agreements in these other markets. implemented by Regulation B, 12 CFR Based upon this monitoring, the Bureau The Bureau is also making minor part 1002, and various supplemental may consider adjusting the scope of technical revisions to the introductory activities related to that lending, while coverage of the rule in the future, paragraph of § 1040.3(a). First, because the related activity of debt collection whether by adjusting an existing the definition of pre-dispute arbitration would have been covered by proposed category of coverage or by adding a new agreement in § 1040.2(c) already refers § 1040.3(a)(10). category of coverage, consistent with its to agreements concerning the consumer In particular, proposed § 1040.3(a)(1) rulemaking obligations and authority financial products and services listed in would have covered specific consumer including Dodd-Frank section 1028. § 1040.3(a), it is not necessary to repeat lending activities engaged in by persons In addition, the Bureau believes that the term ‘‘pre-dispute arbitration acting as ‘‘creditors’’ as defined by the references in the scope of coverage agreement’’ when describing the Regulation B, along with the related § 1040.3 to existing laws and regulations provisions relating to coverage and activities of acquiring, purchasing, is sufficient to signal that the coverage exclusions from coverage in § 1040.3(a). selling, or servicing such consumer is determined based upon the content of Second, the Bureau also is replacing the credit. Proposed § 1040.3(a)(1) would those laws, as they exist now and as term ‘‘generally applies’’ from the have broken these covered consumer they may evolve in the future through proposal with the phrase ‘‘except for financial products or services into the amendments or new interpretations. persons when excluded from coverage following five types: (i) Providing an Because this is how any regulation pursuant to § 1040.3(b).’’ The Bureau is ‘‘extension of credit’’ that is ‘‘consumer defining scope would function when it adopting this change to indicate that credit’’ as defined in Regulation B, 12 incorporates citations to existing laws, although a product or service may be CFR 1002.2; (ii) acting as a ‘‘creditor’’ as the Bureau does not believe it is listed in § 1040.3(a), a person described defined by 12 CFR 1002.2(l) by necessary to adopt a specific comment in § 1040.3(b) nonetheless will not be ‘‘regularly participat[ing] in a credit 837 to this effect, as one commenter subject to the rule. Finally, the decision’’ consistent with its meaning in suggested. Bureau has added language to clarify 12 CFR 1002.2(l) concerning ‘‘consumer With regard to the commenter that that the rule applies to both the offering credit’’ as defined by 12 CFR 1002.2(h); sought broader coverage of service and provision of any product or service (iii) acting, as a person’s primary providers, the Bureau does not believe described in § 1040.3(a) when such business activity, as a ‘‘creditor’’ as a change is necessary to address this offering or provision is a consumer defined by 12 CFR 1002.2(l) by commenter’s concern. To the extent a financial product or service in the ‘‘refer[ring] applicants or prospective 838 service provider is providing or offering Dodd-Frank Act. Section 1040.3(a) applicants to creditors, or select[ing] or a covered consumer financial product or offer[ing] to select creditors to whom service, then the class rule 836 See, e.g., Cal. Civ. Code § 1608 (providing that a contract is void if any component of consideration requests for credit may be made’’ (§ 1040.4(a)(1)) prohibits that service is unlawful), 1667(1) (defining unlawful to include consistent with its meaning in 12 CFR provider from relying upon any a contract that is ‘‘contrary to an express provision 1002.2(l); (iv) acquiring, purchasing, or arbitration agreement entered into after of law’’). selling an extension of consumer credit the compliance date, regardless of 837 But see comment 2(c)–1 (clarifying that the covered by proposed § 1040.3(a)(1)(i); or whether the service provider itself had rule applies to providers even when they are relying on pre-dispute arbitration agreements entered into (v) servicing an extension of consumer entered into the agreement (see by another person that is not subject to the rule). comment 4–2). For example, a debt 838 See 12 U.S.C. 5481(5) (defining the term financial product or service that is ‘‘offered or collector collecting consumer credit on consumer financial product or service to include a provided’’ in specified circumstances).

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credit covered by proposed which would have facilitated on coverage (or exclusion) of specific § 1040.3(a)(1)(i). The Bureau describes compliance with proposed part 1040. types of consumer credit and related and responds to the comments in As indicated in the proposal, the activities. categories (i) and (ii), (iii), and (iv) and Bureau had considered covering Two public-interest consumer lawyer (v), respectively, below. consumer credit under two statutory commenters and a consumer advocate schemes: TILA and ECOA, as well as expressed support for the proposal’s 3(a)(1)(i) and (ii) their implementing regulations. The defining covered consumer credit based The Bureau’s Proposal Bureau believed, however, that using a upon the coverage in Regulation B single definition would have been implementing ECOA, rather than what Proposed § 1040.3(a)(1)(i) would have simpler and thus it proposed to use the they viewed as a narrower universe of covered providing any ‘‘extension of Regulation B definitions under ECOA consumer credit transactions covered by credit’’ that is ‘‘consumer credit’’ as because they are more inclusive. For Regulation Z implementing TILA. One defined by Regulation B, 12 CFR example, unlike the TILA and its of the public-interest consumer lawyers 1002.2.839 In addition, proposed implementing regulation (Regulation Z, noted the ECOA-based coverage would § 1040.3(a)(1)(ii) would have covered 12 CFR 1026.2(17)(i)), ECOA and be broader than TILA-based coverage, acting as a ‘‘creditor’’ as defined by 12 Regulation B do not include an and importantly, in its view, reach CFR 1002.2(l) by ‘‘regularly exclusion for credit with four or fewer persons with roles in the decision to participat[ing] in a credit decision’’ installments and no finance charge. approve or deny credit beyond only the consistent with its meaning in 12 CFR Regulation B also explicitly addresses person extending the credit. This 1002.2(l) concerning ‘‘consumer credit’’ participating in credit decisions, and as commenter also stated that ECOA as defined by 12 CFR 1002.2(h). This discussed below in the section-by- coverage would reach certain activities coverage proposed in § 1040.3(a)(1) section analysis to proposed in relation to credit extended to would have reached creditors whether § 1040.3(a)(1)(iii), loan brokering. consumers by merchants that are not they approve consumer credit The Bureau further noted in the subject to TILA. In the view of the transactions and extend credit, or they proposal that in many circumstances, consumer advocate, ECOA-based participate in decisions leading to the merchants, retailers, and other sellers of coverage is important because the denial of applications for consumer nonfinancial goods or services alternative—TILA-based coverage— credit. ECOA has applied to these (hereinafter, merchants) may act as could incentivize companies to try to activities since its enactment in the creditors under ECOA in extending avoid coverage by reducing the number 1970s, and the Bureau believes that credit to consumers. While such of installments or embedding a finance entities are familiar with the application extensions of consumer credit would charge into the purchase price in order of ECOA to their products and services. have been covered by proposed to render the credit not subject to TILA. Regulation B, which implements ECOA, § 1040.3(a)(1), exemptions proposed in A consumer lawyer also stated that, defines credit as ‘‘the right granted by a § 1040.3(b) would have excluded certain based on his experience counseling creditor to an applicant to defer merchants from coverage.841 On the members of the armed forces, the payment of a debt, incur debt and defer other hand, if a merchant creditor were proposal is important because it would its payment, or purchase property or not eligible for any of these proposed extend its protections to products and services and defer payment exemptions with respect to a particular services, such as loans secured by therefor.’’ 840 By proposing to cover extension of consumer credit, then, as automobiles and other personal extensions of consumer credit and indicated in the proposal, proposed part property, that are not reached by participation in consumer credit 1040 generally would have applied to regulations implementing the MLA’s decisions already covered by ECOA, as the merchant with respect to such restrictions on arbitration agreements. implemented by Regulation B, the transactions. For example, the Bureau Finally, another public-interest Bureau expected that participants in the believed merchant creditors consumer lawyer stated that the consumer credit market would have a significantly engaged in extending proposed broad coverage of consumer significant body of experience and law consumer credit with a finance charge credit, including short-term loans, is to draw upon to understand how the often would have been ineligible for particularly important, as these proposal would have applied to them, these exemptions.842 products are used at higher rates by Comments Received African Americans. 839 As is explained in proposed comment Comments concerning mobile wireless 3(a)(1)(i)–1, Regulation B defines ‘‘credit’’ by The Bureau received a number of third-party billing. A few comments reference to persons who meet the definition of comments on in its proposed approach focused specifically on a passage in the ‘‘creditor’’ in Regulation B. Persons who do not to covering extensions of consumer proposal’s section-by-section analysis in regularly participate in credit decisions in the credit in proposed § 1040.3(a)(1). For ordinary course of business, for example, are not which the Bureau had noted that mobile creditors as defined by Regulation B. 12 CFR the most part, these comments focused wireless third-party billing could be 1002.2(l). In addition, by proposing to cover only subject to proposed § 1040.3(a)(1)(i) to credit that is ‘‘consumer credit’’ under Regulation 841 See 81 FR 32830, 32879–84 (May 24, 2016), the extent that providers pass on B, the Bureau was making clear that the proposal and the discussion of § 1040.3(b) below. charges to consumers for goods or would not have applied to business loans. 842 As indicated in the proposal, certain 840 12 CFR 1002.2(j). See also 12 CFR 1002.2(q) automobile dealers would have been exempt, services provided by third parties. Some (Regulation B provision defining the terms ‘‘extend however, under proposed § 1040.3(b)(5) when they comments specifically supported credit’’ and ‘‘extension of credit’’ as ‘‘the granting are extending credit with a finance charge in treatment of mobile wireless third-party of credit in any form (including, but not limited to, circumstances that exclude the automobile dealer billing as credit. For example, a credit granted in addition to any existing credit or from the Bureau’s rulemaking authority under credit limit; credit granted pursuant to an open-end Dodd-Frank section 1029. In addition, certain small consumer advocate commenter stated credit plan; the refinancing or other renewal of entities would have been exempt under proposed that the use of these platforms to impose credit, including the issuance of a new credit card § 1040.3(b)(5) in other circumstances, such as those charges for goods or services that in place of an expiring credit card or in substitution specified in Dodd-Frank section 1027(a)(2)(D). A consumers did not authorize (which for an existing credit card; the consolidation of two merchant that is a government or government or more obligations; or the continuance of existing affiliate also would have been exempt in often is called cramming) is a serious credit without any special effort to collect at or after circumstances described in proposed § 1040.3(b)(2). consumer protection problem and that maturity’’). Id. at 32873 n.449. arbitration agreements impede

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consumers harmed by these practices The consumer advocate stated its commenter cited to a prior statement of from seeking relief. However, an support for coverage of any life the Federal Reserve Board indicating industry trade association commenter insurance policy loans that are not the that policy loans were not credit asserted that mobile wireless providers business of insurance. The industry transactions because they were ‘‘in when they provide such billing trade association commenters asserted, effect, using the consumer’s own platforms do not extend consumer however, that the Bureau unnecessarily money,’’ i.e., the accrued cash value.849 credit within the meaning of proposed created uncertainty for the insurance Finally, one commenter asserted that § 1040.3(a)(1)(i).843 The commenter market by insinuating that there are State regulation of policy loans is noted that extending credit entails the loans administered by insurers that are sufficiently comprehensive that a granting of a right to defer payment of not in business of insurance. These Bureau assertion of authority over the a debt, and asserted that mobile wireless commenters requested that the Bureau product would violate the McCarran- providers do not grant the consumer the confirm life insurance policy loans are Ferguson Act,850 a Federal law right to defer payment for the categorically excluded from the rule specifically directed at the regulation of nonfinancial goods or services of the because they are always the business of insurance, which, in its view, prohibits third party in such situations. In this insurance, so that there is no Federal regulation of State-regulated commenter’s view, the right to defer uncertainty regarding the potential insurance products absent a specific payment for those goods or services is impact of the rule on them. In support authorization from Congress.851 granted, if at all, only by the provider of of their arguments, they pointed to a those goods or services (i.e., the third number of ways in which, in their view, The Final Rule party). As a result, in this commenter’s State law and State regulators treat The Bureau is adopting view, the mobile wireless third-party policy loans as the business of § 1040.3(a)(1)(i) and (a)(1)(ii) as billing product or service is merely a insurance. These commenters proposed, with minor edits to more billing platform, and not itself a credit emphasized that many States have clearly signify how the coverage of these granting process that would cause it to adopted a model policy loan interest provisions is tied to established terms in be covered under this proposed rate bill issued by the National Regulation B. For example, subsection. This commenter urged the Association of Insurance Commissioners subparagraph (i) is revised to emphasize Bureau to reconsider its position that (NAIC),846 and a number of States also that it only applies to persons who are the proposed categories of coverage specifically require that policy loan ‘‘creditors’’ under Regulation B. By would reach mobile wireless third-party features be included in insurance proposing to cover extension of billing platforms. contracts. They also noted that State ‘‘consumer credit,’’ the proposal had Comments concerning life insurance insurance regulators typically review already implicitly incorporated the term policy loans. An association of State policy loan features of insurance ‘‘creditor,’’ which is part of the insurance regulators, two insurance contracts and that the NAIC has adopted definition of ‘‘credit’’ in Regulation industry trade associations, a financial accounting principles governing these B.852 Nonetheless, the Bureau believes services industry trade association, and transactions that are applied by the scope of subparagraph (i) is clearer a consumer advocate specialized in insurance regulators.847 One commenter if the regulation text explicitly states insurance matters in their comments all further urged that Regulation B should that it only applies to creditors as took issue with the observation in the be construed as excluding policy loans defined in Regulation B. The Bureau proposal’s Section 1022(b)(2) Analysis just as they had been excluded from also notes that Regulation B defines the that an impact on life insurance policy Regulation Z when there was no term ‘‘creditor’’ as covering persons 848 loans 844 was unlikely but not entirely independent obligation to repay. This regularly engaging in the activities certain because whether life insurance described in 12 CFR 1002.2(l) in the policy loans would be covered by the association asked whether the proposal would ordinary course of business. Because the proposal would depend on the facts and cover insurance. Products that are the business of insurance are excluded from the Bureau’s title X term ‘‘regularly’’ is included in the circumstances determination of whether authority, and § 1040.3(b)(6) incorporates that definition of ‘‘creditor’’ in Regulation B, they are the ‘‘business of insurance’’ exclusion by reference. In addition, one consumer that term will have the meaning given under Dodd-Frank section 1002(15)(C)(i) law firm stated in its comment that the proposed by Regulation B, and persons not 845 business of insurance exclusion should not apply and 1002(3). to contractual commitments of automobile lenders regularly engaged in those activities in to waive any loan amount in excess of the collateral the ordinary course of business will not 843 See also the section-by-section analysis of value in the event of destruction or damage to the be covered by § 1040.3(a)(1)(i)–(ii). In § 1040.3(a)(7) and (a)(8) below (discussing other automobile. This comment cited an opinion from a issues raised by the industry trade association State insurance regulator declining to regulate these addition, in subparagraphs (i) and (ii), commenter, concerning uncertainty about the debt cancellation or suspension products. The the Bureau is placing terms that are application of the rule to mobile wireless third- Bureau notes that the consumer law firm derived directly from Regulation B in party billing and advocating for an exemption to commenter did not identify in its comment any quotes to improve clarity. The Bureau ensure these products or services are not reasons why contractual commitments of discontinued to the detriment of consumers § 1). automobile lenders might be the business of 844 The Bureau understands that a life insurance insurance, or why there was uncertainty over that of credit). This commenter believed this exclusion policy loan is generally a transaction in which the question. also should apply to the definition of consumer insurer of a life insurance policy that has an 846 Nat’l Ass’n Ins. Comm’rs, ‘‘Model Policy Loan credit under Regulation B, and thus that such loans accumulated cash value provides money to the Interest Rate Bill, An Act to Regulate Interest Rates would therefore not be covered by proposed insured, and this amount is paid to the insurance on Life Insurance Policies,’’ Model Regulation § 1040.3(a)(1). company with interest either through payments Service (Apr. 2000), available at http:// 849 46 FR 20848, 20851 (Apr. 7, 1981). made by the insured or as a deduction by the www.naic.org/store/free/MDL-590.pdf. 850 15 U.S.C. 1012(b). insurer from the cash value or payable benefits 847 Nat’l Ass’n Ins. Comm’rs, ‘‘Statement of 851 This commenter also noted that Dodd-Frank under the policy. See Nat’l Ass’n Ins. Comm’rs, Statutory Accounting Principles,’’ No. 49. section 1027(m) prohibits the Bureau from ‘‘Life Insurance Buyer’s Guide,’’ at 4 (2007) 848 This commenter cited to the exclusion of such ‘‘defin[ing] as a financial product or service, by (describing loan features on insurance with a cash a product from the definition of credit in Regulation regulation or otherwise, engaging in the business of value), available at http://www.naic.org/ Z. See 12 CFR 1026.2 comment 2(a)(14)–1(v) insurance.’’ documents/prod_serv_consumer_lig_lp.pdf. (explaining that ‘‘[b]orrowing against the accrued 852 12 CFR 1002.2(j) (defining ‘‘credit’’ as certain 845 Comments on insurance matters focused cash value of an insurance policy or a pension rights granted by a ‘‘creditor’’). See also 12 CFR almost exclusively on the potential coverage of life account, if there is no independent obligation to 1002.2(h) (defining ‘‘consumer credit’’ by insurance policy loans. One industry trade repay’’ is excluded from Regulation Z’s definition incorporating the defined term ‘‘credit’’).

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believes these revisions will provide insurance regulators regulate or own nonfinancial goods or services,857 greater certainty as to the scope of these supervise aspects of this product. The proposed § 1040.3(a)(1)(iii) would only subparagraphs. Bureau therefore believes that the have applied to persons providing these As to the comments addressing comments, taken as a whole, supported types of referral or selection services as whether mobile wireless third-party the estimate the Bureau had made in the their primary business.858 Thus, as billing providers extend consumer Section 1022(b)(2) Analysis in the proposed comment 3(a)(1)(iii)–1 would credit, as noted above, because this rule proposal, that any impact on this have clarified, a merchant whose borrows defined terms from an existing product is unlikely, whether because primary business activity consists of the regulation, providers can look to these loans would be determined to be sale of nonfinancial goods or services interpretations of ECOA and Regulation the business of insurance, or for other generally would not have fallen into this B for the particular circumstances as reasons, such as laws precluding the use category. Proposed § 1040.3(a)(1)(iii) they may arise. It is beyond the scope of arbitration agreements.854 The would not have applied, for example, to of this rulemaking to specify or describe Bureau’s Section 1022(b)(2) Analysis in a merchant that refers the consumer to the details of the circumstances that are this final rule therefore confirms this a creditor to help the consumer covered by ECOA and Regulation B. estimate. Contrary to the request of purchase the merchant’s own Moreover, regardless of whether mobile industry commenters, the Bureau does nonfinancial goods and services.859 wireless third-party billing providers are not believe it would be appropriate to Comments Received granting the consumer a right to defer delete that observation in the impacts payment, there are other potential bases analysis, as the observation does not With regard to proposed for coverage, such as transmitting or reflect a determination of coverage. In § 1040.3(a)(1)(iii)’s treatment of persons exchanging funds under § 1040.3(a)(7) any event, the Bureau confirms that providing creditor referral or selection or payment processing under when these products constitute the services as their primary business, § 1040.3(a)(8). In addition, if the third business of insurance, they are not several commenters, including party is the one granting the consumer subject to this rule, and thus the rule consumer advocates, consumer law a right to defer payment in does not violate the McCarran-Ferguson firms, public-interest consumer lawyers, circumstances described in Act. and a nonprofit, stated that lead § 1040.3(a)(1)(i), and the mobile wireless generators for consumer credit products provider is billing for and collecting 3(a)(1)(iii) should be explicitly covered because those payments, these billing activities The Bureau’s Proposal these persons can steer consumers to of the mobile wireless provider may harmful consumer credit products. A involve the servicing of consumer credit Proposed § 1040.3(a)(1)(iii) would consumer advocate added in its covered by § 1040.3(a)(1)(v). have covered persons who, as their comment that it assumed that these lead The Bureau also acknowledges the primary business activity, act as generators would have been covered by comments from the association of State ‘‘creditors’’ as defined by Regulation B, the proposal based on the coverage in insurance regulators and the industry 12 CFR 1002.2(l), by referring this provision of persons regularly trade associations that expressed consumers to other ECOA creditors and/ engaged in consumer credit referrals or concern over a statement in the Bureau’s or selecting or offering to select such creditor selection as their primary Section 1022(b)(2) Analysis in the other creditors from whom the business. This commenter stated that proposal that did not rule out the consumer may obtain ECOA credit. the final rule should include a possibility that the proposal could cover Regulation B comment 2(l)–2 describes clarification making this assumption some life insurance policy loans. As the examples of persons engaged in such explicit, otherwise, the commenter was Bureau noted in its Section 1022(b)(2) activities.855 Regularly engaging in these concerned that lead generators that sell Analysis in the proposal, however, the activities generally makes a person a a list of leads to creditors may claim that Bureau did not believe such coverage creditor under Regulation B, 12 CFR the mere act of selling leads does not was likely.853 As the commenters 1002.2(l). Thus proposed constitute ‘‘referring’’ or ‘‘selecting’’ a recognized, and as stated in § 1040.3(a) § 1040.3(a)(1)(iii) would only have creditor to make an offer within the of the final rule, the final rule only applied to persons who are regularly meaning of Regulation B. covers products that are defined as engaging in these activities.856 A consumer lawyer also stated that, consumer financial products and Because the Bureau did not generally based on his experience counseling services under the Dodd-Frank Act, propose to cover activities of merchants members of the armed forces, the which, in its section 1002(15)(C)(i), to facilitate payment for the merchants’ proposed coverage concerning excludes the ‘‘business of insurance.’’ consumer credit referrals is important The Bureau is not interpreting the term 854 With regard to the comment that the Bureau because these activities are not reached business of insurance in this final rule, should in this rule construe the definition of credit and observations in the Bureau’s in Regulation B similarly to Regulation Z, the 857 As noted above, however, the proposal would impacts analysis regarding a low Bureau was not proposing to interpret Regulation B have applied to merchant creditors engaged likelihood of impact on life insurance in this rule and does not do so in the final rule. significantly in extending consumer credit with a 855 finance charge. policy loans should not be construed as Regulation B comment 2(l)–2 states: ‘‘Referrals to creditors. For certain purposes, the term creditor 858 Transmitting or payment processing in similar a determination of coverage of any includes such persons as real estate brokers, circumstances also generally would not have been particular product or service. The automobile dealers, home builders, and home- covered by paragraphs (7) and (8) of proposed Bureau recognizes that commenters improvement contractors who do not participate in § 1040.3(a), as discussed in the section-by-section have provided relevant information on credit decisions but who only accept applications analysis of those provisions in the proposal. 81 FR and refer applicants to creditors, or select or offer 32830, 32876–77 (May 24, 2016). See also below. how State insurance laws and State to select creditors to whom credit requests can be 859 As the proposal noted, however, if the made.’’ merchant regularly participates in a consumer 853 81 FR 32830, 32917 (May 24, 2016) (indicating 856 The Bureau also had proposed a more specific credit decision as a creditor under Regulation B, the that life insurance policy loans were unlikely to be exemption for activities that are provided only merchant would have been subject to the proposal affected by the proposal). See also id. at 32933 occasionally. See proposed § 1040.3(b)(3) and the under proposed § 1040.3(a)(1)(ii) unless the appendix B (indicating that three cases against life section-by-section analysis thereto, 81 FR 32830, merchant was subject to one of the exemptions in insurance companies were excluded from the 32882–83 (May 24, 2016), and the discussion below proposed § 1040.4(b). 81 FR 32830, 32874 n.454 impacts analysis). on § 1040.3(b)(3) in the final rule. (May 24, 2016).

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by regulations implementing the MLA’s stated in the proposal. In particular, the 3(a)(1)(iv) and (v) restrictions on arbitration agreements. Bureau believes that the term incidental Proposed § 1040.3(a)(1)(iv) and (v) Two consumer advocates and a more clearly denotes the relationship would have covered certain specified public-interest consumer lawyer also between the creditor referral or selection types of consumer financial products or urged the Bureau to remove the activity and the underlying business ‘‘primary business’’ limitation in services when offered or provided with activity that the Bureau is not seeking to respect to consumer credit covered by proposed § 1040.3(a)(1)(iii). One of the cover in this rule.862 consumer advocate commenters proposed § 1040.3(a)(1)(i). First, asserted that this limitation was a The Bureau also is making proposed § 1040.3(a)(1)(iv) would have loophole that would allow companies conforming changes to comment covered acquiring, purchasing, or engaged in credit referrals or creditor 3(a)(1)(iii)–1 and providing an example selling an extension of consumer credit selection to restructure their business to of incidental merchant referral or that would have been covered by avoid coverage of the rule. The other selection activity that would be proposed § 1040.3(a)(1)(i). In addition, consumer advocate commenter asserted excluded, even if performed regularly proposed § 1040.3(a)(1)(v) would have that a company can have more than one by a merchant who therefore may meet covered servicing of an extension of primary business and thus the proposed the definition of the term creditor in consumer credit that would have been exclusion was confusing. Finally, the Regulation B. covered by proposed § 1040.3(a)(1)(i). With regard to servicing, the Bureau did public-interest consumer lawyer With regard to the commenters commenter stated that the rule should not propose a specific definition but seeking coverage of consumer credit cover merchants providing credit noted in proposed comment 3(a)(1)(v)– referrals (including automobile dealers, lead generators under proposed 1 other examples where the Bureau has medical providers and others) even § 1040.3(a)(1)(iii), the Bureau is not defined servicing: For the postsecondary when their primary business activity is including an express reference to lead student loan market in 12 CFR 1090.106 the sale of nonfinancial goods or generation in the final rule. As noted and the mortgage market in Regulation services to consumers. above, the Bureau believes that basing X, 12 CFR 1024.2(b). consumer credit coverage on a The Bureau received one comment on The Final Rule longstanding regulation implementing its proposal to cover acquiring, The Bureau is finalizing proposed an enumerated consumer protection law purchasing, or selling an extension of § 1040.3(a)(1)(iii) and its associated (i.e., Regulation B), including its consumer credit in proposed commentary with certain technical provisions covering referral or creditor § 1040.3(a)(1)(v). A consumer advocate edits 860 and a change to the scope of selection activity, facilitates compliance expressed support for covering those this provision. In particular, final with this rule and reduces uncertainty who acquire credit extended by others. § 1040.3(a)(1)(iii)(C) excludes from the over the scope of this rule. As a result, The commenter cited the example of coverage of § 1040.3(a)(1)(iii) creditor any person engaged in lead generation indirect automobile finance companies referral or selection activity by a would be covered by the rule whenever that acquire loans from automobile creditor that is incidental to a business their activities fall into one or more of dealers in circumstances where the activity that is not covered by Dodd-Frank Act excludes the dealer the coverage categories in § 1040.3(a), § 1040.3(a). from the Bureau’s rulemaking authority. including § 1040.3(a)(1)(iii), which is As explained in the proposal, the The commenter stated that, in its view, linked to existing coverage in Bureau’s goal in proposing a primary acquirers and purchasers of consumer business limitation on § 1040.3(a)(1)(iii) Regulation B. Whether a person is debts risk harming consumers if they was to exclude from coverage merchants engaged in creditor referral or selection fail to pass along information about the that are facilitating payment for their services within the meaning of debt to debt collectors or subsequent own nonfinancial goods or services in Regulation B is a matter of application purchasers. transactions with consumers through, of that regulation based on the relevant The Bureau received some comments for example, creditor referrals or facts and circumstances.863 The Bureau concerning its proposal to cover the selection activities.861 The Bureau believes that extending the final rule servicing of consumer credit in specifically requested comment on its beyond Regulation B to separately cover proposed § 1040.3(a)(1)(v). A consumer proposed approach to this issue. In light ‘‘lead generation,’’ a term that has no advocate and a public-interest consumer of the comments asserting that the term definition in existing law, could lawyer expressed support for how this primary business may have an uncertain introduce the very uncertainty that the proposed coverage would reach third- meaning in this context, the Bureau Bureau seeks to prevent by relying on party servicers of consumer credit believes that using the term incidental Regulation B to define the scope of extended by medical providers. In would more clearly accomplish the goal coverage. Having not sought notice and addition, many commenters addressed comment, the Bureau is not defining the Bureau’s request for comment on 860 For clarity, the Bureau is adding the term ‘‘lead generation’’ in this rulemaking. whether the Bureau should add ‘‘consumer credit’’ to clarify that is the type of credit referral and selection activity that triggers language explicitly covering furnishing coverage, is moving the term ‘‘creditor’’ to later in 862 The Bureau also believes that covered persons information to consumer reporting the provision and making associated edits, is may be more familiar with the term ‘‘incidental,’’ agencies. These commenters, including placing defined terms in Regulation B in quotes for which is used in a separate but related context in consumer advocates, nonprofits, public- clarity, and is dividing the components of Regulation B. See 12 CFR 1002.3(c)(1) (defining the § 1040.3(a)(1)(iii) into subparagraphs (A), (B) and term ‘‘incidental credit’’). interest consumer lawyers, consumer (C). 863 For example, some lead generators may take law firms, and a research center urged 861 81 FR 32830, 32874 (May 24, 2016). The credit applications from consumers. See Fed. Trade the Bureau to add language explicitly public-interest consumer lawyer commenter stated Comm’n, ‘‘Follow the Lead’’ Workshop, Staff covering furnishing information to that the rule should cover merchant credit referrals Perspective,’’ at 4 (Sept. 2016), available at https:// consumer reporting agencies.864 Some such as those made by automobile dealers to a www.ftc.gov/system/files/documents/reports/staff- third-party financing company. The Bureau perspective-follow-lead/staff_perspective_follow_ declines to cover such referrals and instead is the_lead_workshop.pdf. See also section-by-section 864 These comments are discussed in more detail maintaining the general goal of excluding merchant analysis of § 1040.3(a)(3) below (discussing in the section-by-section analysis of § 1040.3(a)(4) referrals. comments on lead generators more broadly). below.

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of these commenters urged that with the industry commenter’s view initial term of at least 90 days and either furnishing should be covered in that only activities that always occur in of the following two characteristics: (1) particular when carried out in the course of servicing can be treated as The lease is the ‘‘functional equivalent’’ connection with the servicing of an part of servicing in this rule. This rule of an automobile purchase finance extension of consumer credit. A covers servicing regardless of whether a arrangement and is on a ‘‘non-operating consumer advocate urged the Bureau to servicer engages in furnishing. When a basis’’ within the meaning of Dodd- cover certain types of electronic funds servicer does furnish on a consumer Frank section 1002(15)(A)(ii); or (2) the transfer activity, including those credit account it services, that lease qualifies as a ‘‘full-payout lease involving payments on loans.865 In furnishing is part of the servicing.867 In and a net lease’’ within the meaning of contrast, an industry trade association any event, to the extent a servicer is the Bureau’s Larger Participant commenter argued that furnishing is not furnishing, its furnishing activities must rulemaking for the automobile finance part of servicing because servicing can comply with FCRA, and the Bureau market.868 The Bureau believed that the occur without furnishing. This believes this coverage will promote proposal should reach brokering or commenter asserted that if the Bureau increased compliance by better ensuring extending consumer automobile leases, were to cover furnishing by servicers, a remedy for any FCRA non- consistent with the definition of that the burdens of the rule would create a compliance. The Bureau also disagrees activity in the Bureau’s larger disincentive to engage in furnishing, that considering furnishing to be a part participant rulemaking for the and the corresponding reduction in of servicing for purposes of this rule automobile finance market. The furnishing would be detrimental to the would create a disincentive for servicers proposal noted that the Bureau had overall credit reporting system insofar to engage in furnishing. The Bureau is explained in that prior rulemaking that, as fewer instances of credit activity not aware, for example, of any from the perspective of the consumer, would be reported. difference in the level of furnishing many automobile leases function Another industry trade association between servicers on accounts with similarly to financing for automobile stated in its comment that entities arbitration agreements and servicers on purchase transactions (which generally affiliated with merchants often engage accounts without arbitration would have been covered by proposed in servicing of consumer credit agreements, nor did commenters § 1040.3(a)(1)) and have a similar impact extended by such merchants. In the provide any data suggesting such a on the consumer and his or her well- view of this commenter, the rule’s difference. being.869 exclusions for merchants engaging in With regard to the industry trade With regard to the proposed coverage certain types of credit transactions (see association that requested an exemption of automobile financing, an industry proposed § 1040.3(b)(4)–(5)) should also for merchant affiliates, the Bureau does trade association whose members apply to affiliates of these merchants as not believe an exemption is warranted. participate in vehicle financing asked well. This commenter explained its Regardless of a firm’s motivation for whether the rule would cover understanding that the decision to use utilizing an affiliate for servicing of an automobile club memberships. an affiliate for servicing, rather than the extension of consumer credit (as The Bureau also received a few merchant itself, is typically made for opposed to having the originating comments from consumer advocates on reasons, such as tax, cash flow, and creditor handle servicing in-house), that proposed § 1040.3(a)(2). One consumer other considerations, that have nothing affiliate must comply with applicable advocate supported coverage of to do with consumer access to remedies laws in its servicing activities, and the automobile financing including leasing and do not affect consumers. Bureau believes that consumers should contracts. The commenter cited several The Bureau is adopting have an effective remedy for any risks of harm that consumers face in this § 1040.3(a)(1)(iv) and (v) as proposed. violation of those laws. Any asymmetry market and several examples that the With regard to comments that requested in coverage between servicing by commenter asserted illustrate the that the Bureau separately cover merchants and merchant affiliates is a importance of class actions in this furnishing of information on covered function of the statutory exclusion for market.870 Two other consumer consumer credit accounts to a consumer merchants pursuant to Dodd-Frank reporting agency, the Bureau reiterates section 1027(a)(2), and not a policy 868 12 CFR 1001.2(a). As the proposal noted, in determination by the Bureau that the 2015 the Bureau finalized its larger participant rule that it did not propose to identify for automobile financing. Defining Larger furnishing separately as a covered rule should never apply to consumer Participants of the Automobile Financing Market product or service because it believes financial product or service activity and Defining Certain Automobile Leasing Activity these activities are commonly carried related to merchants. The Bureau as a Financial Product or Service, 80 FR 37495 (Jun. 30, 2015). That rule explains the Bureau’s approach 866 believes that merchant affiliates engaged out by servicers. With regard to to defining extending or brokering automobile comments that requested that the in servicing should be covered for the leasing in accordance with the Bureau’s authority Bureau cover processing of funds same reasons that it believes servicing under the Dodd-Frank Act. Id. The provision at 12 transfers to make payments on by unaffiliated servicers and servicing of CFR 1001.2(a)(1) covers leases of an automobile where the lease ‘‘[q]ualifies as a full-payout lease consumer credit accounts, the Bureau any type of consumer credit should be covered. and a net lease, as provided by 12 CFR 23.3(a), and similarly believes these activities also has an initial term of not less than 90 days, as are commonly carried out by servicers. 3(a)(2) provided by 12 CFR 23.11 . . . .’’ 81 FR 32830, The Bureau therefore believes that when 32874 n.457 (May 24, 2016). Proposed § 1040.3(a)(2) would have 869 these activities are carried out by As noted in the proposal, an automobile as extended coverage to brokering or defined in 12 CFR 1090.108(a), means any self- servicers in connection with servicing extending consumer automobile leases propelled vehicle primarily used for personal, activity, they would be part of the as defined in 12 CFR 1090.108, which family, or household purposes for on-road servicing activity covered by transportation and does not include motor homes, applies to leases of automobiles with an recreational vehicles, golf carts, and motor scooters. § 1040.3(a)(1)(v). The Bureau disagrees 81 FR 32830, 32874 n.456 (May 24, 2016). 867 See, e.g., Defining Larger Participants of the 870 This commenter also suggested that 865 This comment is discussed in more detail in Student Loan Servicing Market, 78 FR 73383, 73400 automobile industry opposition to regulation of the section-by-section analysis of § 1040.3(a)(7) (Dec. 3, 2013) (noting that supervision of student consumer arbitration agreements has not always below. loan servicing would examine servicing-related existed. The commenter cited what it described as 866 81 FR 32830, 32874 (May 24, 2016). activities, such as furnishing). a statement from 2000 by a national automobile

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advocates urged the Bureau to expand Frank section 1002(15)(A)(ii), and Comments Received this proposed coverage beyond leases of consider whether to amend this rule to Two public-interest consumer lawyer automobiles to include leases for other reach those transactions at a future time. commenters expressed support for the types of property. They contended that With regard to the question from an proposal’s coverage of debt relief insofar as the proposal would cover industry trade association concerning services. These commenters pointed to consumer credit financing a purchase of coverage of automobile club consumer harms they believe these goods but not consumer leases of those memberships, such memberships are products have caused, and supported same types of goods, the proposal could not per se covered by the rule, as the the proposal to cover debt relief not incentivize some creditors to restructure Bureau believes that they would only for unsecured credit, but also for these transactions as leases, and thereby generally be nonfinancial goods or secured credit (including mortgage relief avoid coverage of the rule. One of these services. This does not necessarily services) and non-credit debts. One commenters asserted that there are mean, however, that the rule would commenter said this breadth of coverage many leases of personal property that would help to prevent circumvention are the functional equivalent of never apply to claims concerning such but did not explain how. purchase finance arrangements within products or services. For example, claims concerning the marketing of One public-interest consumer lawyer the reach of the Bureau’s authority commenter urged the Bureau to cover under Dodd-Frank section ‘‘add-on’’ products or services by general credit counseling in the rule. 1002(15)(A)(ii) and they should be lenders in connection with extending The commenter asserted that credit covered by this rule. The commenter consumer credit could ‘‘concern’’ the counselors can play an important role in referred to ‘‘rent-to-own’’ leases of real loan, within the meaning of § 1040.4(a) consumers’ decisions regarding estate (which it stated are often long- or (b), depending on the facts and consumer credit and are therefore a part term contracts), recreational vehicles, circumstances of the claim. of this core market. Another public- furniture, electronics, alarm systems, 3(a)(3) interest consumer lawyer commenter and solar panels, and stated a belief that asserted that these credit counseling these transactions can create risk of The Bureau’s Proposal services often target low-income harm to consumers. The Bureau is adopting § 1040.3(a)(2) As stated in the proposal, the Bureau individuals. Neither commenter offered as proposed. As discussed in the believed that the proposal should cover a suggestion for how the Bureau can proposal, the Bureau has identified the debt relief services, such as services that define this market. market for automobile leases as a offer to renegotiate, settle, or modify the Many commenters, including 872 significant one to millions of consumers terms of a consumer’s debt. Proposed consumer advocates, nonprofits, public- and concluded that it is part of the core § 1040.3(a)(3) would have included in interest consumer lawyers, consumer consumer finance market for lending the coverage of proposed part 1040 law firms, and a research center money that the Bureau proposed to providing services to assist a consumer advocated to expand the scope of cover in this rule. The Bureau did not with debt management or debt coverage to reach a particular kind of propose to cover forms of consumer settlement, modifying the terms of any credit counseling—credit repair leasing other than automobile leasing. extension of consumer credit covered by services. These commenters asserted The Bureau notes that it is unclear from proposed § 1040.3(a)(1)(i), or avoiding that many scams are perpetrated on the comments urging expansion to other foreclosure. With the exception of the consumers in the guise of credit repair forms of leasing, which industry reference to an extension of consumer services. Some of these commenters comments did not address, what the credit covered by proposed noted that some credit repair services impact of expanding coverage to reach § 1040.3(a)(1)(i), these terms would have include neither debt relief nor the all forms of personal property leasing derived directly from the definition of provision of consumer reports to under Dodd-Frank section this consumer financial product or consumers and thus would not be 1002(15)(A)(ii) would be. The Bureau service in Dodd-Frank section covered by the proposal. In addition, an also notes, with regard to concerns that 1002(15)(A)(viii)(II).873 The Bureau industry commenter described ongoing lack of coverage under the rule would noted that some consumer debts are not problems that third-party credit repair incentivize providers to restructure consumer credit, which the Bureau companies were creating for consumer credit transactions as leases, that the proposed to cover in proposed reporting agencies. rule’s coverage of merchants extending § 1040.3(a)(1)(i). As a result, as Some commenters, including credit is limited anyway 871 and that a explained in proposed comment 3(a)(3)– consumer advocates, nonprofits, variety of other tax, accounting, 1, proposed § 1040.3(a)(3)(i) would have consumer law firms, and others, also insurance, and legal title or ownership reached debt relief services for all types urged that the scope of coverage of the considerations may affect structuring of consumer debts, whether arising from rule be expanded to include certain decisions. In any event, the Bureau can secured or unsecured consumer credit other services that the Bureau can monitor developments in the provision transactions, or consumer debts that do regulate as financial advisory services of any consumer leases under Dodd- not arise from credit transactions. pursuant to 12 U.S.C. 5481(15)(A)(viii). These commenters referred to a wide industry trade association (which did not file 872 81 FR 32830, 32874–75 (May 24, 2016). range of services, including ‘‘lead comments on this proposal). According to this 873 12 U.S.C. 5481(15)(A)(viii)(II). For examples of generation’’ by providing information to commenter, the letter stated that the trade the types of services that would have fallen within facilitate the marketing of a variety of association ‘‘does not support or encourage the use this proposed coverage, the proposal (at 32875 types of consumer financial products or of mandatory binding arbitration in any contract of n.458) identified the following Bureau enforcement adhesion, whether a motor vehicle franchise actions: Complaint at ¶ 4, Consumer Fin. Prot. services beyond consumer credit; and contract between a manufacturer and dealer or a Bureau v. Meracord, LLC, No. 13–05871 (W.D. technological applications that collect consumer contract.’’ Wash. Oct. 3, 2013); Complaint at ¶ 4, Consumer personal financial information of 871 As the impacts analysis in the proposal noted, Fin. Prot. Bureau v. Global Client Solutions, No. 14– consumers to facilitate delivery of the Bureau believes that merchants rarely offer the 06643 (C.D. Cal. Aug. 25, 2014); Complaint at ¶¶ type of credit financing that would subject them to 8–14, Consumer Fin. Prot. Bureau v. Orion advice on matters of consumer finance, the rule in the first place. 81 FR 32830, 32917 (May Processing, LLC, No. 15–23070 (S.D. Cal. Aug. 17, whether budgeting, managing credit, or 24, 2016). 2015). otherwise. Some of these commenters

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noted that lead generators can steer only through telemarketing. The Bureau Accordingly, the Bureau is adopting consumers to harmful products or believes that credit repair providers comment 3(a)–2 to clarify that when a services, and that all of these products often offer these services via online, person is a provider, the technological and services can expose consumers to radio, billboard, or television tools they provide in connection with data breaches. A consumer law firm advertising platforms, which do not the covered product, such as internet or commenter asserted that unless the necessarily involve inbound or mobile phone apps, also are covered. Bureau’s proposal specifically covered outbound telemarketing, and thus does This comment applies to all of the lead generators, they could enter into not believe it necessary or appropriate covered products and services in their own arbitration agreements with to limit the coverage to telemarketing. § 1040.3(a). consumers and shield themselves from Accordingly, for the sake of clarity, the For the reasons described in the class actions, even when they were Bureau is adding comment 3(a)(3)(ii)–1 proposal and reiterated above, the final generating leads for a covered product to confirm that § 1040.3(a)(3)(ii) rule adopts § 1040.3(a)(3) and comment or service.874 includes in the coverage of this rule 3(a)–1 as proposed, renumbers them as credit repair products or services not The Final Rule § 1040.3(a)(3)(i) and comment 3(a)(3)(i)– covered by the TSR solely because they 1, adds § 1040.3(a)(3)(ii) and comment The final rule adopts proposed were not the subject of telemarketing as 3(a)(3)(ii)–1 to cover credit repair § 1040.3(a)(3) as proposed, with an defined in 16 CFR 310.2(gg). With services, and adds comment 3(a)–2 as addition to cover providing products or regard to the commenters that urged an described above. services ‘‘represented to remove expansion of coverage to include lead derogatory information from, or generators, including for credit repair 3(a)(4) improve, a person’s credit history, credit services, the Bureau notes that the case The Bureau’s Proposal record, or credit rating.’’ The Bureau cited by a consumer advocate As explained in the proposal, the requested comment on the possibility of commenter actually alleged that the Bureau believed that the proposal separately covering credit repair defendant company was itself providing should apply to providing consumers services and is making this change credit repair services.877 The coverage with consumer reports and information because it shares commenters’ concerns in § 1040.3(a)(4) would reach credit specific to a consumer from consumer over the potential for consumer harm in repair services. To the extent a person reports, such as by providing credit the credit repair market.875 In its is not offering or providing a product or scores and credit monitoring.878 experience and expertise, the Bureau services described in § 1040.3(a), Specifically, proposed § 1040.3(a)(4) believes credit repair services can have however, the Bureau declines to cover would have included in the scope of an important influence on consumers’ them separately as a lead generator for proposed part 1040 providing directly to participation in the core consumer the reasons discussed above in a consumer a consumer report as credit market, and can create significant connection with § 1040.3(a)(1)(iii). risks of harm to consumers when not With regard to coverage of other types defined by the FCRA, 15 U.S.C. provided in a legally compliant manner. of services that commenters 1681a(d), a credit score, or other Therefore, the Bureau believes that characterized as financial advisory information specific to a consumer from credit repair services are an appropriate services, the Bureau did not propose in such a consumer report, except when form of credit counseling services to this rulemaking to cover financial such consumer report is provided by a include in the scope of coverage in the advisory services generally. At this time, user covered by 15 U.S.C. 1681m solely final rule. the Bureau is not expanding the in connection with an adverse action as The final rule’s description of credit coverage of this rule to include these defined in 15 U.S.C. 1681a(k) with repair services is based on the products or services. The Bureau will respect to a product or service not description of credit repair services in continue to monitor the use and impact covered by any of paragraphs (1) the Telemarketing Sales Rule (TSR), through (3) or paragraphs (5) through of arbitration agreements in the 879 which the Bureau, together with the provision of financial advisory services (10) of proposed § 1040.3(a). FTC, enforces.876 Unlike the TSR, as part of its overall role in monitoring As the proposal noted, the FCRA, however, this coverage would not be consumer finance markets. The Bureau enacted in 1970, defines which types of limited to credit repair services offered businesses are consumer reporting also may determine at a future time that 880 coverage of other forms of credit agencies. Consumer reporting 874 This commenter noted an example of a lead counseling would be warranted. agencies are the original sources of generator that had done so, and sought to rely on The Bureau also recognizes that any consumer reports as defined by the 881 its arbitration agreement in a class action filed number of consumer financial products FCRA. In general, the consumer against it for alleged harms arising from the product reporting agencies provide consumer or service that was the subject of the leads or services it is not covering in this rule generated. See Rodriguez v. Experian Services Corp. may involve the collection of the reports to ‘‘users’’ of these reports (9th Cir. 15–56660) (in which the commenter is co- personal financial data of consumers, within the meaning of the FCRA who counsel). giving rise to a risk of a data breach and may in turn provide the consumer 875 See, e.g., Bureau of Consumer Fin. Prot., reports or information derived from the ‘‘Consumer Advisory, ‘‘How can I avoid a credit potentially identity theft. However, the repair scam?,’’ available at http:// Bureau in this rule is not seeking to www.consumerfinance.gov/askcfpb/1343/how-can- cover providers merely based on their 878 81 FR 32830, 32875–76 (May 24, 2016). 879 i-recognize-credit-repair-scam.html (last visited Jun. collection of consumer financial data. As stated in the proposal, the Bureau believed 1, 2017); Complaint, Consumer Fin. Prot. Bureau v. that it is appropriate to propose covering not only Prime Marketing Holdings, No. 16–7111 (C.D. Cal. At the same time, the Bureau recognizes services that provide ‘‘monitoring’’ of consumer Sept. 22, 2016) (enforcement action under the that the collection of such data in credit report information, but also that provide such Telemarketing Sales Rule). See also section-by- connection with a service or product information on a one-off basis. That is, the nature section analysis of § 1040.3(a)(4) (reciting numerous covered by the rule is important to and source of the underlying information is what enforcement activities against credit repair should define this scope of coverage, and not the organizations). include within the scope of this rule. frequency with which the information is provided 876 16 CFR 310.4(a)(2); see, e.g., Complaint at ¶¶ to the consumer. 81 FR 32830, 32875 n.462 (May 60–80, Consumer Fin. Prot. Bureau v. Prime 877 Complaint at Count III, Rodriguez v. Experian 24, 2016). Marketing Holdings, No. 16–7111 (C.D. Cal. Sept. Cred. Svcs. Corp., No. 15–3553 (C.D. Cal. May 12, 880 15 U.S.C. 1681a(f). 22, 2016). 2015). 881 15 U.S.C. 1681a(d).

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reports to consumers.882 The consumer 1022.72; when a consumer receives including its provision for disgorgement reporting agencies also provide materially less favorable terms for of all revenues as statutory damages,889 consumer reports directly to consumers. consumer credit based on the creditor’s to credit monitoring and credit The proposal stated that the Bureau use of a consumer report; or in education products and services, these believed that defining this scope of connection with transmission of results commenters urged that credit coverage by reference to a statutorily of reinvestigation of a dispute from a monitoring and credit education defined type of underlying information, consumer reporting agency to a products and services be exempt a consumer report, would help consumer pursuant to the FCRA.886 entirely from the rule or at least from providers better understand which types Proposed § 1040.3(a)(4) would not CROA claims. The credit reporting of products and services are covered, have covered users of consumer reports industry commenters asserted that if and thus facilitate compliance with part who provide those reports or necessary, an exemption could be 1040 as proposed.883 information from them to consumers limited to consumer reporting agencies Proposed § 1040.3(a)(4) therefore solely in connection with adverse action (CRAs) providing these products or would have applied to consumer notices with respect to a product or services so as to distinguish them from reporting agencies when providing such service that is not otherwise covered by the credit repair activities offered by products or services directly to proposed § 1040.3(a). For example, a businesses which are not affiliated with consumers, as well as to other types of user of a consumer report providing a CRAs, which are the businesses these entities that deliver consumer reports or consumer with a copy of their credit commenters believed Congress intended information from consumer reports report solely in connection with an CROA to cover.890 The commenters directly to consumers. For example, adverse action taken on an application challenged the Bureau’s view in the proposed § 1040.3(a)(4) would have for employment would not have been proposal that the fact that the FTC covered not only credit monitoring covered by proposed § 1040.3(a)(4). administers CROA would be a basis for services that monitor entries on a Comments Received not excluding CROA claims involving consumer’s credit report on an ongoing credit monitoring from the rule. In their basis, but also a discrete service that One consumer advocate urged the view, the fact that the Bureau does not transmits a consumer report as defined Bureau to revise the proposed language administer CROA suggests that the by the FCRA, a credit score, or other to refer to the term ‘‘consumer file Bureau should be reluctant to apply its information from a consumer report disclosure’’ from FCRA, and to cover rule to it. directly to a consumer.884 Such discrete products or services provided by In particular, two industry services may be provided at the affiliates of consumer reporting agencies commenters asserted that the Bureau consumer’s request or as required by to account for recent case law that might either failed to make findings that law, such as via a notice of adverse otherwise cause confusion or be applying the rule to credit monitoring action on a consumer credit construed to narrow the scope of would be for the protection of application; 885 in connection with a coverage from what the proposal consumers and in the public interest or risk-based pricing notice generally intended. improperly shifted the burden to required under Regulation V, 12 CFR A credit reporting industry industry to establish that applying the commenter and a credit reporting rule to credit monitoring does not meet 882 industry trade association, with support 15 U.S.C. 1681m. those legal standards in Dodd-Frank 883 from several Members of Congress and As the proposal noted, to the extent a future section 1028. A nonprofit commenter Bureau regulation were to further interpret the another industry trade association, also objected more broadly to the definition of consumer report under 15 U.S.C. urged the Bureau to structure the rule to 1681a(d), or other terms incorporated into that Bureau’s preliminary view in the avoid creating class action exposure definition such as a consumer reporting agency, 15 proposal that it would be more under the CROA for credit monitoring U.S.C. 1681a(f), the definition in the implementing appropriate for issues such as these, regulation would be used, in conjunction with the or credit education products and which concern particular statutes with statute, to define this component of coverage of this services. CROA was enacted in 1996 for proposal. 81 FR 32830, 32875 n.465 (May 24, 2016). high statutory damages, to be dealt with the purpose of ensuring that prospective 884 See also Press Release, Bureau of Consumer by the Congress and the courts. The buyers of services from credit repair Fin. Prot., ‘‘CFPB Orders TransUnion and Equifax nonprofit stated that because the Bureau to Pay for Deceiving Consumers in Marketing Credit organizations can make informed was exercising discretion to fashion the Scores and Credit Products’’ (Jan. 3, 2017), available decisions and are protected from unfair rule and determine how it should apply, at https://www.consumerfinance.gov/about-us/ or deceptive practices.887 CROA newsroom/cfpb-orders-transunion-and-equifax-pay- that the Bureau would be the requires, for example, that credit repair deceiving-consumers-marketing-credit-scores-and- appropriate body to determine how to credit-products/; Press Release, Bureau of organizations’ products and services use Consumer Fin. Prot., ‘‘CFPB Fines Experian $3 develop exemptions. certain disclosures; that any written These industry commenters asserted Million for Deceiving Consumers in Marketing contracts including a performance Credit Scores’’ (Mar. 23, 2017), available at https:// that CROA, which regulates contracts, www.consumerfinance.gov/about-us/newsroom/ guarantee, an estimate of service disclosures, and other practices of credit cfpb-fines-experian-3-million-deceiving-consumers- completion or length, a cancellation repair organizations,891 does not apply marketing-credit-scores/ (enforcement actions right, and a three-day waiting period alleging deceptive practices in connection with, before these products and services can among other activities, providing credit scores to 889 15 U.S.C. 1697g(a)(1) (providing for damages consumers). be provided; and that consumers only in the event of a CROA violation in an amount that 885 See, e.g., 15 U.S.C. 1681j(a) (FCRA provision be charged after any service has been is the greater of actual damages or any amount paid granting consumer right to free annual disclosure fully performed.888 In light of the to the credit repair organization). from consumer credit report file); 15 U.S.C. potential for application of CROA, 890 These commenters also requested that an 1681g(a) (mandating consumer reporting agency exemption also exclude identity theft products. As provide information from the consumer’s file to the discussed below, however, the Bureau declines to consumer upon request); 15 U.S.C. 1681g(f) 886 See, e.g., 15 U.S.C. 1681i(a)(6) (FCRA cover those products per se, whether they are (mandating consumer reporting agency provide provision mandating consumer reporting agency to offered on their own or bundled with credit consumer credit score to the consumer upon provide the consumer with notice of results of monitoring or credit repair products or services. request); and 15 U.S.C. 1681m(a) (FCRA provision reinvestigation of disputed information in the 891 In particular, CROA proscribes certain mandating that user of consumer report to provide consumer’s credit report file). practices and requires certain contractual adverse action notice that includes credit score, 887 See 15 U.S.C. 1679(b). provisions and disclosures for the purpose of among other information). 888 15 U.S.C. 1679 et seq. Continued

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to credit monitoring and credit to consumers because it refers to the able to use arbitration agreements to education services offered by CRAs credit repair organization dealing with prevent exposure to CROA liability.899 because these services do not meet the consumer reporting agencies, and yet Other commenters sought an definition of such services set forth in some credit monitoring providers are expansion of this category of coverage. CROA.892 However, the commenters themselves consumer reporting Specifically, several commenters, pointed to two Federal appellate court agencies.895 The commenters also including consumer advocates and decisions that have held that CROA may asserted that consumers would be advocacy groups, a research center, two apply to credit monitoring and credit inconvenienced by certain requirements trade associations of consumer lawyers, and a small business advocacy group education services respectively regarding providing guarantees and depending on the facts of the particular urged the Bureau to expand the obtaining consumer signatures,896 a product and how it is marketed.893 They coverage in proposed § 1040.3(a)(4) to prohibition on the provision of services include identity monitoring services also emphasized that the FTC, which is 897 the only agency charged with enforcing before consumers pay or are charged, that monitor and provide consumers CROA, has never taken an action under and a provision that the FTC and at least with information from sources other CROA against credit monitoring services one court has interpreted as requiring a than consumer reporting agencies. One and has in the past indicated in three-business-day waiting period of these consumer advocates noted that communications to Congress that it before services are provided.898 These identity monitoring services may would not be good consumer policy to commenters also stated the threat of monitor the internet for references to apply CROA to these products or CROA exposure under the rule would consumers’ personal financial services.894 The commenters also inhibit innovation in credit education information, citing a service provided explained that, given the industry’s products, citing market research that, in by a consumer reporting agency as an disagreement with the Federal appellate their view, supports the contention that example. This commenter asserted that court decisions noted above, credit consumers are much less willing to these services are related to the monitoring providers do not treat these subscribe to a product or service when protection of the financial assets and products and services as subject to faced with the CROA disclosures and financial reputation of the consumer, CROA, and instead arbitration waiting periods. and may monitor financial or banking agreements insulate them from exposure data of the consumer, bringing them The consumer reporting industry to class action suits. The commenters within the authority of the Bureau to trade association also asserted that indicated that there has been no regulate. proposed § 1040.3(a)(4) would create an litigation since 2014 involving the In response to the request for application of CROA to credit un-level playing field in the market of comment in the proposal on whether monitoring products. identity theft prevention products and the scope of coverage should be These commenters further asserted services. The commenter stated this expanded to include other activities of that exposure to class action liability for would occur because some products or consumer reporting agencies, many CROA violations could prompt services monitor information from a commenters, including consumer providers to stop offering credit consumer report as defined in FCRA, advocates, nonprofits, a consumer law monitoring services. This, the industry while others do not use such reports. In firm, and others, indicated that the commenters believe, would deprive the view of this commenter, by basing Bureau should do so. Several of these consumers of a product that is valuable coverage on whether the consumer comments expressed the view that and serves an important function of report as defined in FCRA is a source of consumer complaints concerning helping consumers prevent or mitigate information, the proposal would information in consumer credit files are the impact of identity theft, and could disadvantage those identity monitoring very common, and collective remedies under FCRA are important to addressing drive consumers to riskier products. products that rely upon that source of inaccurate consumer credit reporting They asserted that it would be infeasible information. This commenter cited a practices. An industry trade association for credit monitoring services to comply particular concern with how identity with several CROA provisions, the stated in its comment, however, that monitoring products that do not rely on arbitration agreements are not and could application of which they asserted also FCRA-defined information would be would be confusing or inconvenient for not be used in the context of consumer reporting agencies carrying out their consumers. For example, the 895 15 U.S.C. 1679c. In the commenter’s view, the commenters asserted that mandatory statutory duties. Therefore, the disclosure indicates that the credit repair commenter asserted that there is no disclosure language might be confusing organization is separate from the consumer reporting agency. Yet when consumer reporting support in the Study for this expansion ensuring that prospective buyers of services from agency affiliates are providing credit monitoring, of coverage and the Bureau lacks any credit repair organizations can make informed they are not separate. rationale for considering it. decisions and are protected from unfair or 896 15 U.S.C. 1679d. A number of consumer advocates, deceptive practices. See 15 U.S.C. 1679(b). 897 15 U.S.C. 1679b(b). nonprofits, and others also stated in 892 To support their position, they cited to Hillis 898 United States v. Cornerstone Wealth Corp., their comments that the final rule v. Equifax Consumer Servs. Inc., 237 FRD. 491 (N.D. Inc., 2006 WL 522124 (N.D. Tex. 2006) Ga. 2006). (unpublished Federal district court opinion should cover furnishing of information 893 See, e.g., Stout v. Freescore, LLC, 743 F.3d affirming FTC position that 15 U.S.C. 1679d to consumer reporting agencies. These 680, 687 (9th Cir. 2014), citing Helms v. requires both a three-day waiting period and comments indicated that the coverage of ConsumerInfo.com, Inc., 436 F.Supp.2d 1220, specified contract language). The consumer furnishing should be broader than the 1224–26 (N.D. Ala. 2005); Zimmerman v. Puccio, reporting agency commenter also stated that State proposal and not be limited to 613 F.3d 60, 72 (1st Cir. 2011) (‘‘[C]redit counseling laws concerning credit repair products may require aimed at improving future creditworthy behavior is longer waiter periods, such as five business days furnishing in connection with a the quintessential credit repair service.’’). Industry that are required under California and Florida laws. comments also described the Stout case as an A consumer reporting trade association commenter 899 The commenter did not explain how identity example of a class action that drove a defendant out noted that the California law includes monitoring products that do not rely on FCRA- of business. disgorgement-based damages provisions (as do defined information could be subject to CROA, 894 Letter from Donald S. Clark, Sec’y, Fed. Trade other credit services organization statutes in Texas which applies to products with the purpose of Comm’n, to Hon. Hon. Edward R. Royce (July 1, and New York), but that the Florida law excludes ‘‘improving any consumer’s credit record, credit 2005), attached to industry comment letter (same). consumer reporting agencies. history, or credit rating.’’ 15 U.S.C. 1679a(3)(A)(i).

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consumer credit transaction. One broadly, to information ‘‘derived from with or the remedial scheme established consumer advocate seeking this the consumer’s file.’’ 902 For example, by the statute creating that private right expansion noted that check collection, this would cover a person that obtains of action is against the public good.906 automobile leasing, and deposit information from a third-party who With regard to CROA specifically, as accounts can lead to furnishing. obtained or derived the information the proposal indicated, the Bureau’s from the consumer’s file.903 Study covered class actions involving The Final Rule The Bureau has carefully considered CROA and the Bureau has conducted After consideration of the comments, the comments relating to potential class pre-proposal outreach and research the Bureau is adopting revisions to liability for credit monitoring services concerning CROA. The Bureau proposed § 1040.3(a)(4) with minor under CROA, but does not agree that an subsequently received a number of wording modifications to clarify the exemption is warranted. In enacting industry comments, which are intended scope of coverage by referring CROA, Congress included a definition discussed above. These inputs did not not only to the provision to consumers of the term credit repair organization in provide evidence that CROA, on the of ‘‘consumer reports’’ and ‘‘credit the statute.904 The Bureau is not taking whole, fails to promote the public good scores’’ as defined in FCRA,900 but also a position on whether or when credit and protection of consumers. to other information derived from a monitoring products or services In adopting CROA, Congress sought to ‘‘consumer file,’’ as defined in FCRA. provided by consumer reporting protect consumers in the credit repair The Bureau also is making a minor agencies are subject to CROA.905 market as a whole, which it covered modification to the exception for certain However, based on its experience and comprehensively, with limited adverse action notices.901 expertise with respect to the credit exceptions.907 In the Bureau’s As discussed above, in proposed repair market generally, the Bureau experience and expertise, this market § 1040.3(a)(4) the Bureau sought to believes that if providers of credit has been fraught with products that cover credit monitoring as well as monitoring products or services are pose significant risks to consumers.908 services providing consumers with their subject to CROA because they are credit In the more than two decades since the credit reports or a credit score. These repair organizations, it is appropriate for enactment of CROA, the agencies types of products and services all this rule to apply to those products charged with enforcing the statute, the provide consumers with information without an exemption. FTC and State law enforcement officials, that ultimately originates from a At the outset, the Bureau notes that it have brought numerous CROA consumer reporting agency as defined in disfavors exemptions to the class rule enforcement actions.909 The Bureau’s FCRA. In response to the comments for claims under a particular statute. For suggesting that providing information to the Bureau to decide a Congressionally- 906 The Bureau disagrees with the industry a consumer from a ‘‘consumer file’’ as created private right of action does not commenters that the proposal shifted a burden to defined in FCRA should be separately them or that the Bureau has otherwise neglected to protect consumers would amount to make required findings in the rule in support of the covered, in an abundance of caution, the reconsideration by the Bureau of coverage of credit monitoring products and Bureau is revising the terminology in legislative policy choices. Further, the services, including CROA claims to which they may the final rule to clarify this activity is Bureau is concerned about taking be subject. As is discussed above in Part VI, the covered by § 1040.3(a)(4). The Bureau is Bureau has made findings regarding the application actions that would be construed as of laws with private remedies to covered products clarifying that § 1030.3(a)(4) covers allowing companies to avoid complying and services and has found such application to be providing information derived from a with applicable law. Indeed, such a in the public interest and for the protection of consumer’s ‘‘file,’’ which FCRA, 15 result would be contrary to the goals of consumers. These findings apply to CROA, which U.S.C. 1681a(g), defines as ‘‘all of the is one such law. The Bureau solicited comment on this rulemaking including deterring its preliminary findings in the proposal. The Bureau information on [the] consumer recorded violations of the law and promoting the has carefully considered those comments, including and retained by a consumer reporting rule of law. And for the reasons comments raising concerns with the application of agency . . .’’ discussed below, the Bureau does not particular statutes in class actions. And for the However, the Bureau is not adopting reasons discussed herein, the Bureau disagrees that believe commenters have presented these findings are undermined with respect to the consumer advocate commenter’s persuasive evidence that compliance providers of credit monitoring by the potential suggestion of referring to a ‘‘consumer application of CROA to them. Comments regarding file disclosure,’’ as that is not a defined 902 The phrase ‘‘derived from’’ is consistent with other particular statutes are discussed in Part VI. In term in FCRA and relying on that term existing regulations implementing certain FCRA addition, in the Bureau’s Section 1022(b)(2) Analysis, the Bureau discusses the potential could raise doubt over the coverage of provisions. See 16 CFR 682.1(b) (defining coverage of FTC rule on disposal of consumer report alternative raised by industry trade associations of products or services whose information information and records by reference to information excluding a broad set of statutes—those that comes from a consumer’s ‘‘file’’ but not ‘‘derived from’’ such materials). provide for statutory damages or recovery of as a result of the consumer file 903 The scope of this provision remains limited, attorney’s fees. disclosure. Instead, the Bureau’s however, by the focus on the source of the 907 Congress excluded the following three entities from the definition of credit repair organization in revision to § 1030.3(a)(4) reaches more information being the consumer’s file as defined in FCRA. A person that provides a consumer with CROA: Nonprofit organizations, creditors assisting information that also is kept in a consumer file with debts owed to them, and depository 900 The Bureau is clarifying in the final rule that would not be covered, unless the information institutions and credit unions. 15 U.S.C. the term credit scores in § 1030.3(a)(4) means credit provided actually came, directly or indirectly, from 1679a(3)(B). For the purposes of CROA, see Public scores as defined in FCRA. 15 U.S.C. 1681g(f)(2)(A). the consumer’s file. Law 104–208, 2451 (1996) (adopting CROA, and 901 The proposed exception would only have 904 See 15 U.S.C. 1679a(3) (notwithstanding making findings in the statute that the statute seeks applied to certain adverse action notices provided exclusions not relevant here, defining a ‘‘credit to protect consumers from certain credit repair by a user covered by FCRA. 15 U.S.C. 1681m. The repair organization’’ as ‘‘any person who uses any business practices that have ‘‘worked a financial term ‘‘user’’ is not defined in FCRA, however, and instrumentality of interstate commerce or the mails hardship upon consumers, particularly those of the Bureau did not intend for the exemption to turn to sell, provide, or perform (or represent that such limited economic means and who are on the identity of the person directly providing the person can or will sell, provide, or perform) any inexperienced in credit matters.’’). notice to the consumer. By deleting the reference service . . . for the express or implied purpose of— 908 Some of the most recent actions are described to this term, the exception applies regardless (i) improving any consumer’s credit record, credit in the section-by-section analysis of the coverage of whether the notice is provided directly to the history, or credit rating; or (ii) providing advice or credit repair firms under § 1040.3(a)(3)(ii) above. consumer by a user covered by 15 U.S.C. 1681m or assistance to any consumer with regard to any 909 See, e.g., Press Release, Fed. Trade Comm’n, a third party contracted by such a person. The activity or service described in clause (i)’’). ‘‘At FTC’s Request, Court Shuts Down Credit Repair Bureau also is shortening the description of the 905 If they are not, then the exemption the Scam that Impersonates FTC,’’ (Mar. 27, 2015) exception. commenters have requested would be unnecessary. Continued

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Study also identified six Federal class consensus has been reached to date. In bars collecting payment until the end of action settlements based on CROA connection with these efforts, the FTC a service period, such as a monthly claims finalized between 2008 and has twice expressed concern about the subscription period, it is unclear why 2012.910 Indeed, as discussed above, the difficulty in structuring a revision to providers could not make such a price Bureau believes it is important that the CROA that would distinguish between structure work. Indeed, the Bureau final rule cover credit repair services, products that may pose significant risks notes that all three major consumer and it has added credit repair services to consumers and those that may not.912 reporting agencies already forgo some or based on coverage in the TSR to the This history suggests that the author of all revenues during an introductory coverage in § 1040.3(a)(3)(ii). CROA (Congress) and its enforcer (the period by offering credit monitoring at Moreover, the Bureau notes that FTC) are not certain CROA should be a discounted or even free price during concerns about whether and when the revised, or how. Particularly given that that time.915 The commenters also did statute applies to credit monitoring and an exception to the class rule would not demonstrate the infeasibility of (if so) whether the statute should be need to grapple with these same complying with other CROA scaled back raise difficult policy and questions about distinguishing between requirements.916 Thus, the Bureau does legal issues. Specifically, the Bureau different types of products, the Bureau not find that the record supports a notes that since 2005, there have been is hesitant to decide them ahead of these conclusion that these products or a number of efforts in Congress to primary actors. services cannot comply with CROA (if determine whether CROA could be With regard to the industry they are, in fact, subject to CROA). As improved by clarifying the CROA credit commenters’ claims that compliance to potential price increases, the Bureau monitoring coverage issue that with CROA is infeasible or would result believes that competition in this commenters raised here.911 No in substantial price increases, the product market, including from Bureau is not persuaded of these claims depository institutions, which are (announcing CROA enforcement action), available based on the record before it.913 Even if exempt from CROA under 15 U.S.C. at https://www.ftc.gov/news-events/press-releases/ CROA’s disclosure requirements apply, 1679a(3)(B)(iii), might be a limiting 2015/03/ftcs-request-court-shuts-down-credit- 917 repair-scam-impersonates-ftc; Press Release, Fed. the Bureau believes that they could be factor. Trade Comm’n, ‘‘FTC Asks Court to Shut Down bundled with a contract and/or Commenters also contended that Phony Debt Relief and Credit Repair Scheme,’’ provided electronically.914 And if CROA application of CROA to credit (Aug. 22, 2014), available at https://www.ftc.gov/ monitoring products could potentially news-events/press-releases/2014/08/ftc-asks-court- shut-down-phony-debt-relief-credit-repair-scheme; monitoring); Credit Monitoring Clarification Act, Press Release, Fed. Trade Comm’n, ‘‘FTC Charges H.R. 6129, 109th Cong. (2006) (Bill to amend CROA among the least costly types of mandated Credit Repair Operators with Misleading Credit to provide a disclosure requirement and right to disclosures. See generally Bureau of Consumer Fin. Bureaus and Charging Consumers Illegal Up-Front cancel for credit monitoring, introduced Sept. 20, Prot., ‘‘Understanding the Effects of Certain Deposit Fees,’’ (Oct. 13, 2011) (same), available at https:// 2006); Credit Monitoring Enhancement Act, S. Regulations on Financial Institutions’ Operations,’’ www.ftc.gov/news-events/press-releases/2011/10/ 3662, 109th Cong. (2006) (Bill to amend CROA to at 98 (2013), available at http:// _ _ _ ftc-charges-credit-repair-operators-misleading- provide a disclosure requirement and right to files.consumerfinance.gov/f/201311 cfpb report credit-bureaus; Press Release, Fed. Trade Comm’n, cancel for credit monitoring, introduced July 14, findings-relative-costs.pdf. ‘‘ ‘Operation Clean Sweep’: FTC and State Agencies 2006); Credit Repair Organizations Act Technical 915 See, e.g., Equifax, ‘‘Get your Equifax 3-Bureau Target 36 ‘Credit Repair’ Operations,’’ (Oct. 23, Corrections Act, H.R. 5445, 109th Cong. (2006) (Bill Credit Scores with your Free 7-day Trial,’’ http:// 2008) (announcement of Federal and State actions to amend CROA to provide a disclosure www.equifax.com/freetrial/ (last visited May 23, against 33 credit repair operations), available at requirement and right to cancel for credit 2017) (offering free 7-day trial then $19.95 per https://www.ftc.gov/news-events/press-releases/ monitoring, introduced May 22, 2006); H.R. 4127, month); Experian, ‘‘Credit Monitoring, Try Experian 2008/10/operation-clean-sweep-ftc-and-state- Financial Data Protection Act (Bill to amend CROA CreditWorks for $4.99/first month,’’ available at agencies-target-36-credit; Press Release, Fed. Trade to provide a disclosure requirement and right to http://www.experian.com/consumer-products/ Comm’n, ‘‘Project Credit Despair Snares 20 Credit cancel for credit monitoring, introduced Oct. 25, credit-monitoring.html (last visited May 23, 2017) Repair Scammers,’’ (Feb. 2, 2006) (announcement of 2005, and reported out by three House committees); (offering $4.99 price for the first month and $24.99 Federal and State actions against 20 credit repair Data Accountability and Trust Act, H.R. 3997, 109th for each month thereafter); TransUnion, ‘‘Get all 3 operations), available at https://www.ftc.gov/news- Cong. (2005) (Bill to amend CROA to provide a bureau scores for FREE, Begin monitoring your events/press-releases/2006/02/project-credit- disclosure requirement and right to cancel for credit credit reports when you start a 30 day trial for despair-snares-20-credit-repair-scammers; Press monitoring, introduced Oct. 6, 2005, reported by $4.95,’’ https://www.transunion.com/ppc-credit- Release, Fed. Trade Comm’n, ‘‘List of Law three House committees as described in H. Rept. report-495 (last visited May 23, 2017) (offering 30- Enforcement Actions: Operation New ID—Bad 109–454). day trial for $4.95). See also, e.g., Ducharme v. Idea,’’ (Feb. 2, 1999) (announcement of more than 912 See ‘‘Oversight of Telemarketing Practices and Heath, 2010 WL 5211502 at *6 (N.D. Cal.) (Slip Op. 30 actions), available at https://www.ftc.gov/news- the Credit Repair Organizations Act,’’ Hearing of Dec. 16, 2010) (holding that CROA does not events/press-releases/1999/02/list-law-enforcement- before the S. Comm. on Commerce, Sci., and prohibit billing on a monthly basis for a service actions. Transp., 110th Cong. (2007) (testimony by FTC performed during the prior month). 910 Study, supra note 3, section 8 at 13 fig. 1. Bureau of Consumer Protection Director citing prior 916 Specifically, in particular, the commenters 911 See H. Rept. 114–903 (2017) (describing proposals to amend CROA and concern that also have not demonstrated that it would be hearing held Sept. 27, 2016, as part of legislative fraudulent credit repair firms could use exemptions infeasible to provide a guarantee of performance history of including H.R. 347, Facilitating Access to to evade CROA, and urging further Congressional (based on whatever service is being offered), to Credit Act (Bill to exclude consumer reporting review); Letter from Donald S. Clark, Sec’y, Fed. provide an estimate of the period necessary for agencies from CROA and commission FTC study on Trade Comm’n, to Hon. Edward R. Royce (July 1, performing services (such as a subscription period), whether other entities should be excluded, 2005), attached to industry comment letter (same). or to obtain a signature of a consumer (which may introduced Jan. 14, 2015)); Facilitating Access to 913 With respect to the industry commenter’s be obtained electronically). Credit Act, H.R. 5446, 113th Cong. (2014) (Bill to assertion that the Stout decision shows that CROA 917 The Bureau also understands that the credit exclude consumer reporting agencies from CROA would drive credit monitoring providers out of monitoring market includes dozens of competitors and commission FTC study on whether other business, the Bureau disagrees with this claim. To and that competition may reduce the degree to entities should be excluded, introduced Sept. 10, the extent credit monitoring is subject to CROA, which CROA compliance costs would be passed 2014); ‘‘An Overview of the Credit Reporting credit monitoring firms could prevent substantial through to consumers. WalletHub, ‘‘2017’s Best System,’’ Hearing on the Fair Credit Reporting Act CROA class exposure by complying with CROA. Credit Monitoring Service,’’ https://wallethub.com/ before the Subcomm. on Fin. Insts., and Consumer The Stout decision does not reflect efforts by the best-credit-monitoring-service/ (last visited May 23, Credit, H. Comm. on Fin. Servs., 113th Cong, (2014) defendant to comply with CROA. 2017) (An industry Web site that lists nearly 30 (industry representative urging amendments to 914 See 15 U.S.C. 1679c(a) (requiring only that providers.). See also Gov’t Accountability Office, CROA concerning credit monitoring); ‘‘Examining written disclosure be provided ‘‘before’’ execution ‘‘Identity Theft Services: Services Offer Some the Need for H.R. 2885, The Credit Monitoring of the contract); Electronic Signatures in Global and Benefits but are Limited in Preventing Fraud,’’ at 5 Clarification Act,’’ Hearing on H.R. 2885 before the National Commerce (ESIGN) Act, 15 U.S.C. 7001(c) (Mar. 2017) (Report to Congressional Requesters), H. Comm. on Fin. Servs., 110th Cong. (2008) (proscribing standards permitting electronic available at http://www.gao.gov/assets/690/ (examining bill to amend CROA to provide a delivery of disclosures that are required to be 683842.pdf (finding about 50 to 60 companies disclosure requirement and right to cancel for credit provided in writing). This sort of disclosure is providing identity theft services in 2015 and 2016).

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inconvenience consumers and confuse notes, as confirmed by the industry insurance. As noted above, these them. The Bureau has not seen support commenters, that a variety of identity products and services would not be for commenters’ concern about the theft prevention and remediation covered by § 1040.3(a)(4) if they do not potential for consumer confusion, products or services may be bundled involve providing information derived which is based on disclosures referring with credit monitoring, such as identity from the consumer’s file maintained by to the credit monitoring provider and monitoring from non-FCRA sources, the consumer reporting agency, and in consumer reporting agency as separate identity restoration services, and the case of identity theft insurance may persons. These disclosures would identity theft insurance. These products be excluded pursuant to § 1040.3(b)(6) appear to remain accurate in the credit and services would not be covered by as the business of insurance. Thus the monitoring context, since the Bureau § 1040.3(a)(4) if they do not involve impact of disgorgement would not understands that credit monitoring providing information from the necessarily fall on the entire bundled providers are not the same entities as consumer’s report,922 and, in the case of suite of services, but generally only on consumer reporting agencies. In identity theft insurance, it may be the credit monitoring component of addition, to the extent CROA might alter excluded pursuant to § 1040.3(b)(6) as those services (to the extent CROA how credit monitoring is offered and the business of insurance.923 applies and a violation occurs). The that this may inconvenience consumers, Relatedly, with respect to credit commenters did not assert that the the Bureau notes that consumers have education services, the Bureau notes CROA exposure that the provider of a other options in lieu of or in addition to that the commenters’ principal concern bundled suite of services may face credit monitoring products if such seems to be that consumers may not would be based on the fees consumers inconvenience would in fact be elect to use a CROA-compliant service. paid for the bundled suite of services. significant. With respect to credit Although the commenters speculated Accordingly, the Bureau believes this monitoring itself, a brief cancellation that a brief waiting period before exposure, to the extent it exists, may be period of a few days before commencing commencement of the service was a more limited for bundled services. the product or service under CROA reason for this, the record did not Second, the Bureau further understands would not necessarily lead to many establish that. In any event, as noted that, under CROA,924 the disgorgement cancellations. The commenters did not above, to the extent consumers remedy only applies to the amount paid contend that consumers were likely to voluntarily choose not to use a product by the person against whom a violation cancel the product or service in this or service, this does not mean that the was committed. Thus, when a consumer time period, and to the extent any product or service is not accessible to receives credit monitoring for free from consumers voluntarily choose not to use them. a firm in the event of a data breach, a product or service, this does not mean Insofar as compliance is not infeasible there are no consumer payments to be that the product or service is not and cost increases are unlikely, disgorged in a CROA class action.925 accessible to them. Consumers also have commenters’ primary concern appears The Bureau notes that, increasingly, a number of potential alternatives to to be that the disgorgement remedy tens of millions of consumers receive credit monitoring. For example, available under CROA makes it free credit monitoring as the result of consumers may place a freeze on the difficult—if not impossible—for such breaches. release of information from their providers to irreversibly pass any For all of the reasons discussed above, consumer files in the first place 918 or increased costs on to consumers. This is the Bureau does not believe that it place a fraud alert on their consumer because no matter how high a provider would be appropriate, in this rule, for report in order to obtain alerts from raises its prices, it may not be able to the Bureau to substitute its judgment for potential creditors of potential new retain that increase to cover CROA that of Congress, which has so far not accounts before they are actually liability in the event that all revenue acted to restructure the scope of CROA opened,919 and they may obtain free must be returned to injured consumers. in this area. copies of their consumer report each The Bureau is not persuaded for several With regard to other concerns raised year and in a number of other reasons. First, the Bureau recognizes, as by some commenters that the scope of circumstances described in FCRA.920 In confirmed by the industry commenters, proposed § 1040.3(a)(4) was too narrow, addition, depository institutions issuing that a variety of identity theft the Bureau disagrees that the scope credit cards have become a common prevention and remediation products or should be expanded. For example, the provider of free credit scores to services may be bundled with credit Bureau is not expanding the scope of consumers.921 Additionally, the Bureau monitoring, such as identity monitoring proposed § 1040.3(a)(4) to reach forms from non-FCRA sources, identity of identity monitoring services that do 918 See Bureau of Consumer Fin. Prot., ‘‘What restoration services, and identity theft not involve providing consumers with Does it Mean to Place a Security Freeze on My consumer reports, credit scores, or Credit Report?,’’ (reporting that 47 States have laws issuers offering free credit scores), https:// information derived from consumer files governing these freezes and the major consumer www.consumerfinance.gov/about-us/blog/check- at this time. Given the limited nature of reporting agencies also provide credit freezes to our-new-list-see-if-your-credit-card-offers-you-free- consumers in the other States), https:// access-one-your-credit-scores/. the comments received, the Bureau has www.consumerfinance.gov/askcfpb/1341/what- 922 The Bureau similarly notes that credit insufficient information in this security-freeze-my-credit-report.html (Updated June education services (whether existing now or in the rulemaking to develop a legal definition 1, 2017). future) would not be covered by § 1040.3(a)(4) if of this type of product or service. At the 919 15 U.S.C. 1681c–1(a)–(b). they do not involve providing information from the 920 15 U.S.C. 612(a)–(d). consumer’s report. same time, however, the Bureau 921 15 U.S.C. 1679a(3)(B)(iii). Those depository 923 For example, identity theft insurance may be institutions issuing credit cards have become a regulated under applicable State insurance laws. 924 15 U.S.C. 1679g(a)(1). common provider of free credit scores to See, e.g., N.Y. Consol. State. § 28–1113 (authorizing 925 Cf. FTC v. Gill, 71 F.Supp.2d 1030, 1048 (C.D. consumers. See Bureau of Consumer Fin. Prot., burglary and theft insurance to include identity Cal. 1999) (observing that the plain language of the Notice of Public List of Companies Offering Existing theft insurance) & § 28–3451 (regulating identity damages provision of CROA does not allow the FTC Customers Free Access to a Credit Score, 81 FR theft group insurance policies); Ariz. Rev. Stat. to recover damages incurred by consumers). One of 69046 (Oct. 5, 2016); Maria Jaramillo, ‘‘Check Our § 20–1694 (regulating identity theft group insurance the industry commenters discussed above stated New List to See if Your Credit Card Offers Free policies); Code of Maine Rules part 02–31 Ch. 375 that over 130 million consumers received some Access to One of Your Credit Scores,’’ CFPB Blog § 3.4 (authorizing writing of group identity theft form of identity theft protection, which can include Post (Mar. 2, 2017) (providing list of credit card insurance). credit monitoring, in the previous year.

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disagrees with the industry association section-by-section analyses of those § 1040.3(a)(6) would have included in commenter that by focusing its coverage provisions, furnishing in connection the coverage for proposed part 1040 in § 1040.3(a)(4) on information derived with these products or services already both accounts and remittance transfers from CRA records, the Bureau is would be covered as part of the coverage subject to EFTA, including its creating an un-level playing field by of those products or services. For debt implementing regulation, Regulation E, generating CROA class liability collection, this would be true whether 12 CFR part 1005. EFTA, first adopted exposure for those market participants the collection is on an extension of in 1978, provides a basic framework but not identity monitoring firms that consumer credit, an automobile lease, a establishing the rights, liabilities, and rely on information from sources other check, or a deposit account. Thus, the responsibilities of participants in than FCRA-regulated consumer Bureau does not believe separately electronic fund and remittance transfer reporting agencies. This commenter covering furnishing is necessary at this systems and creates rules specific to noted, for example, that its product also time. consumer asset accounts and remittance scans the internet in addition to transfers.930 As explained in the 3(a)(5) consumer reports; providing proposal, the Bureau believed that information derived from a general As explained in the proposal, the defining this coverage by reference to search of the Internet would not be Bureau believed the proposal should accounts and remittance transfers subject to the rule, whether it is done by apply to deposit and share accounts.926 subject to EFTA as implemented by a person whose other products or Proposed § 1040.3(a)(5) would have Regulation E would facilitate services are covered, or by a person who included in the coverage of proposed compliance with proposed part 1040. is not covered by the rule at all. Where part 1040 accounts subject to the Truth The Bureau noted in the proposal that a product or service bundles together in Savings Act (TISA), 12 U.S.C. 4301 et it had separately proposed a rule to activities that are covered with activities seq., and its implementing regulations, extend the Regulation E definition of that are not, the rule (§ 1040.4(a)(1), 12 CFR part 707, which applies to credit ‘‘account’’ to include ‘‘prepaid (a)(2), and (b)) still only applies to unions, and Regulation DD, 12 CFR part accounts.’’ 931 As the Bureau further activities that are covered. Thus, 1030, which applies to depository noted, where the proposal on arbitration participants in the market are being institutions. agreements references terms from treated equally in that the rule equally TISA created uniform disclosure another statute or its implementing excludes products or services outside its requirements for deposit and share regulations, to the extent that term is scope, regardless of who provides them. accounts.927 TISA has existed since redefined or the subject of a new In any event, to the extent different 1991 and the Bureau believes that banks interpretation in the future, that new types of identity monitoring products or and credit unions are familiar with definition or interpretation would have services face different risks of being TISA’s application to accounts that they applied to the use of that term in covered by CROA, that is a function of may offer. Accordingly, as explained in proposed § 1040.3. Here, for example, the scope of CROA. the proposal, the Bureau believed that any new definition of account that The Bureau also is not expanding the defining the accounts the Bureau would include prepaid products would scope of proposed § 1040.3(a)(4) to proposes to cover by reference to terms have been incorporated into proposed include consumer reporting agency in TISA, and its implementing § 1040.3(a)(6). activities beyond those that involve regulations, Regulation DD and 12 CFR In the proposal, the Bureau noted that providing consumer reports, credit part 707 would facilitate compliance EFTA also regulates preauthorized scores, or information derived from a with proposed part 1040. electronic fund transfers (PEFTs) and consumer file under FCRA. The Bureau The Bureau did not receive comments store gifts cards and gift certificates. The is not persuaded that arbitration on proposed § 1040.3(a)(5).928 The final Bureau had not proposed to include agreements affect these activities, and rule adopts this provision as proposed. those activities as covered products or agrees with the industry association 3(a)(6) services under proposed § 1040.3(a)(6). comment that it is unclear how a The Bureau noted that certain gift cards consumer reporting agency would be As explained in the proposal, in and gift certificates redeemable only at able to enter into an arbitration addition to coverage of deposit and a single store or affiliated group of agreement with a consumer in this share accounts as defined by (or within merchants, while subject to Regulation context. The Bureau may inquire into the meaning set forth in) TISA in E,932 are payment devices that this question in its supervision and proposed § 1040.3(a)(5), the Bureau merchants use to help consumers pay monitoring of the consumer reporting believed the proposal should cover for their own goods or services, which other accounts as well as remittance market. If arbitration agreements did 929 as noted above and discussed in more appear to be limiting the ability of transfers subject to the EFTA. EFTA detail below, the Bureau was not consumers to obtain relief from a applies generally to ‘‘consumer asset accounts,’’ including those provided by consumer reporting agency in a FCRA 930 See 15 U.S.C. 1693(b); 12 CFR 1005.2(b) class action, the Bureau could address nonbank companies as well as to most (defining ‘‘account’’) and 12 CFR 1005.30(e) if not nearly all of the deposit and share (defining ‘‘remittance transfer’’). that issue at a future time. 931 With regard to the comments seeking accounts provided by depository Prepaid Accounts Under the Electronic Fund institutions. Thus, proposed Transfer Act (Regulation E) and the Truth in an expansion of scope to cover Lending Act (Regulation Z), 79 FR 77101 (Dec. 23, furnishing, independent of other 2014) (proposing to define a new term, ‘‘prepaid proposed coverage, the Bureau is not 926 81 FR 32830, 32876 (May 24, 2016). accounts,’’ to include certain categories of accounts 927 persuaded that it should do so at this 12 U.S.C. 4301(b). that were already subject to Regulation E as well as 928 Some comments from providers of products to certain categories that had historically been time. The examples these commenters and services covered by this proposed provision, treated as excluded from the regulation). In the described pertained to furnishing by such as credit union and community bank industry proposal for this rule concerning arbitration persons as part of a product or service comments, sought an exemption from the rule. agreements, the Bureau sought comment on that is already covered by the rule, such Because this request was not specific to these types whether the products that would be included in of products, those comments are discussed Regulation E by that proposed rule should be as debt collection (§ 1040.3(a)(10)) and separately, in the section-by-section analysis of included in proposed § 1040.3(a)(6). 81 FR 32830, servicing consumer credit § 1040.4(b) below. 32876 n.470 (May 24, 2016). (§ 1040.3(a)(1)(v)). As stated in the 929 81 FR 32830, 32876 (May 24, 2016). 932 See 12 CFR 1005.20(a).

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proposing to cover except in limited therefore be included within the scope trust account that are an integral part of circumstances. In addition, PEFTs, of coverage of accounts under real estate settlement services or legal while not described as a separate Regulation E, upon the latter of the services. By contrast, a merchant who category of coverage, generally would compliance date of this rule or the offers a domestic money transfer service have been covered when offered as part prepaid accounts rule. When prison as a stand-alone product to consumers of a covered product or service. For release cards and general-use gift cards would have been covered by proposed example, the Bureau understands that meet the definition of prepaid account § 1040.3(a)(7). In addition, the Bureau PEFTs are often offered by creditors and in that rule,934 they would be covered believed that mobile wireless third- servicers of consumer credit under by this rule. With respect to rewards party billing services that engage in proposed § 1040.3(a)(1), providers of programs, food stamp programs, and transmitting funds would have been TISA or EFTA accounts or remittance health savings accounts, these are covered by proposed § 1040.3(a)(7), as transfers under proposed § 1040.3(a)(5) generally not covered as accounts under the Bureau understood that such or (6), funds transmitting services under Regulation E as revised by the prepaid services would not typically be integral proposed § 1040.3(a)(7), payment accounts rule. The Bureau does not to the provision of wireless processing under proposed believe it would be necessary or telecommunications services. § 1040.3(a)(8), or debt collection under appropriate to use this final rule as a Comments Received proposed § 1040.3(a)(10). vehicle for defining coverage of these The Bureau received several types of products or services under the A consumer advocate commenter comments related to proposed Dodd-Frank Act. The Bureau will generally expressed support for the § 1040.3(a)(6). Some consumer continue to monitor the markets for coverage in proposed § 1040.3(a)(7). advocates and nonprofits urged the stored value products and services not This commenter stated support for the Bureau to apply the rule to stored value covered by this rule and may, at a future view that this provision may apply to products, regardless of whether they are time, determine to adjust the scope of mobile wireless third-party billing, accounts under Regulation E. One coverage of these markets in this rule. asserting that cramming is a serious commenter noted that the enumerated consumer protection problem and that laws do not evolve as quickly as the 3(a)(7) arbitration agreements impede relief. markets, leaving gaps in coverage. Two The Bureau’s Proposal This commenter urged the Bureau to commenters raised specific concerns narrow the proposed exclusion for As explained in the proposal, the with prison release cards. One transfers that are integral to a product or Bureau believed that the proposal commenter stated that, regardless of service not covered by the rule, to should apply to transmitting or whether they are covered as accounts prevent evasion. The commenter stated exchanging funds.935 Proposed under Regulation E, the rule should that only transfers that are necessary § 1040.3(a)(7) would have included in cover general use gift cards, non- and essential for a non-covered service the coverage of proposed part 1040 merchant rewards cards, Supplemental should be excluded. transmitting or exchanging funds, Nutrition Assistance Program (SNAP) An industry trade association except when integral to another product cards, and cards linked to health savings commented, however, that, in their or service that is not covered by accounts, noting that some of these are view, mobile wireless third-party billing proposed § 1040.3. Dodd-Frank section network branded just like other types of is not a consumer financial product or 1002(29) defines transmitting or cards that are covered under Regulation service and therefore should not be exchanging funds to mean: E. cited as an example that would be An industry trade association receiving currency, monetary value, or covered by the rule.936 The commenter commenter in the consumer payments payment instruments from a consumer for stated that any transmission of funds by sector also stated that clarifications in the purpose of exchanging or transmitting the a wireless telecommunications service the final rule should address the same by any means, including transmission provider is done for the third-party by wire, facsimile, electronic transfer, recipient of the funds and not for coverage of prepaid and stored value courier, the Internet, or through bill payment cards. The commenter did not say, consumer, household, or family services or through other businesses that purposes within the meaning of the however, whether the rule should facilitate third-party transfers within the include or exclude these products. United States or to or from the United States. Dodd-Frank Act. The commenter also The Bureau adopts § 1040.3(a)(6) as stated that the rule should exclude proposed. Since the close of the For example, a business that provides mobile wireless third-party billing on comment period, the Bureau has consumers with domestic money policy grounds, in addition to legal adopted changes to the definition of transfers generally would have been authority concerns. Otherwise, the ‘‘account’’ in Regulation E in its final covered by proposed § 1040.3(a)(7). As commenter asserted, providers would be prepaid accounts rule that it issued in noted above, however, proposed required to engage in a nuanced and October 2016. That rule, the relevant § 1040.3(a)(7) would not have applied to ongoing evaluation of each of their provisions of which are scheduled to transmitting or exchanging funds where third-party relationships to determine take effect on April 1, 2018, expands the that activity is integral to a non-covered whether those relationships give rise to definition of account under Regulation product or service. Thus, proposed coverage under the rule. In the E to include certain types of prepaid § 1040.3(a)(7) generally would not have commenter’s view, because third-party applied, for example, to a real estate products not previously covered.933 billing services provide a relatively settlement agent, an attorney, or a trust Those types of prepaid accounts would small revenue stream for mobile company or other custodian wireless companies and are merely 933 See 81 FR 83934 (Nov. 22, 2016); 82 FR 18975 transmitting funds from an escrow or incidental to its members’ core wireless (Apr. 25, 2017) (setting effective date of April 1, business, providers may choose to 2018). See also Prepaid Accounts Under the 934 Id. at 83968 (discussing coverage of prison discontinue offering third-party billing Electronic Fund Transfer Act (Regulation E) and the release cards as prepaid accounts) and 83977 Truth in Lending Act (Regulation Z), 82 FR 29630 (discussing coverage of gift cards as prepaid services, which, in the commenter’s (June 29, 2017) (proposal seeking comment on accounts depending on several factors, including whether the effective date should be further the nature of their marketing and labelling). 936 See also discussion of § 1040.3(a)(1) above and delayed). 935 81 FR 32830, 32876–77 (May 24, 2016). § 1040.3(a)(8) below.

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view, are desirable to consumers. The With regard to the industry trade to an incidental product or service commenter explained that the covered association comment that stated that would not create coverage for the product or service may be abandoned mobile wireless third-party billing is not provider’s core product. If the provider because, in its view, it would be a service undertaken for consumer, included an arbitration agreement for infeasible for its member companies to household, or family purposes within the products and services that are not create a compliance system and endure the meaning of the Dodd-Frank Act, the covered by the rule, the rule would not class action exposure just for this Bureau notes that the where the prohibit the provider from relying on activity given that is so incidental and provider is acting as a bill payment that arbitration agreement for those minor to the overall suite of products service provider like other financial products and services in a class action. and services the companies provide to services providers,939 the Bureau Relatedly, as noted below, the provider their customers. In addition, the believes this typically would be a would have the option, under the final commenter stated that if mobile wireless service provided for consumer rule, of including contract language that third-party billing were not excluded purposes. On the other hand, where the clarifies that some products or services from the rule, then the Bureau should provider is simply acting as a merchant provided are not covered by the rule, articulate the particular features of collecting funds for its own which would limit the impact of the third-party billing that make it a product nonfinancial goods or services, that § 1040.4(a)(2) of the rule. Thus, the or service a covered by the rule. conduct generally would not be covered impact of the rule on the provider by § 1040.3(a)(7). Thus, the coverage of would presumably be in proportion to The Final Rule § 1040.3(a)(7) will depend on the nature the importance that the covered product The Bureau is finalizing § 1040.3(a)(7) of a person’s funds transmitting and or service has to the provider. as proposed, but changing the exclusion exchange activities. in two ways to prevent evasion and The Bureau recognizes that, to comply 3(a)(8) uncertainty. First, the Bureau sought with the final rule, mobile wireless The Bureau’s Proposal comment on whether the Bureau should providers engaged in providing third- As explained in the proposal, the define the limitation on coverage in a party billing services would need to Bureau believed that the proposal different way, including whether the analyze the extent to which their should cover certain types of payment Bureau should adopt ‘‘necessary or products or services include and financial data processing.941 essential to a non-covered product or transmitting or exchanging funds for Proposed § 1040.3(a)(8) therefore would service’’ as the limitation. Consistent consumer purposes. The Bureau further have included in the coverage of with the consumer advocate’s comment recognizes that the scope of transmitting proposed part 1040 any product or described above, as revised in the final and exchanging funds under the Dodd- service in which the provider or the rule, the limitation would apply only for Frank Act has not been interpreted by provider’s product or service accepts transmitting or exchanging funds when regulation. Nonetheless, the Bureau is financial or banking data directly from necessary to a product or service that is not persuaded by the suggestion in the a consumer for the purpose of initiating not covered by the rule (which could comment that for providers to determine a payment by a consumer via a payment include, for example, another consumer whether they are covered would be instrument as defined by 15 U.S.C. financial product or service that is not particularly burdensome. As noted in 5481(18) 942 or initiating a credit card or listed in § 1040.3(a) or a nonfinancial the proposal, the phrase transmitting charge card transaction for a consumer, good or service). The Bureau also is and exchanging funds is defined in the except when the person accepting the replacing the term ‘‘integral,’’ with the Dodd-Frank Act.940 The elements of this data or providing the product or service term ‘‘necessary,’’ which the Bureau financial product or service are 937 accepting the data is selling or believes is a narrower term. Second, therefore laid out there, including the marketing the nonfinancial good or the Bureau is clarifying that this reference to bill payment services, service for which the payment, credit limitation only applies when the non- which the Bureau believes provides card, or charge card transaction is being covered products and services and the useful guidance. made. Proposed comment 3(a)(8)–1 transmitting or exchanging funds are In addition, to the extent the would have clarified that the definitions done by the same person. The Bureau is application of the rule creates an of the terms credit card and charge card making this clarification to prevent incentive for the provider to develop a in Regulation Z, 12 CFR 1026.2(a)(15), confusion over whether arranging compliance system and creates class apply to the use of these terms in payments for goods or services sold by action exposure for providers who fail proposed § 1040.3(a)(8). a third party is ‘‘necessary’’ to that sale. to meet their legal obligations in The coverage of proposed As clarified, § 1040.3(a)(7) will cover delivering consumer financial services, § 1040.3(a)(8) would not have included transmitting or exchanging funds by one these are the chief goals of this all types of payment and financial data person to pay for a non-covered product rulemaking. The findings in Part VI and processing, but rather only those types or service provided by a third party, the Bureau’s Section 1022(b)(2) Analysis that involve accepting financial or without regard to whether the funds account for the fact that, on the margins, banking data directly from the consumer transmitting or exchanging activity is providers may forgo offering a product for initiating a payment, credit card, or ‘‘necessary’’ to the non-covered product because they do not want to invest in charge card transaction. An entity 938 or service. compliance and make private aggregate would have been covered, for example, relief available to consumers for that by providing the consumer with a 937 See ‘‘Merriam-Webster Online Dictionary’’ product. In addition, applying the rule mobile phone application (or app, for (‘‘necessary’’ generally defined as ‘‘absolutely needed,’’ while ‘‘integral’’ may describe one thing short) that accepts this data from the that is ‘‘formed as a unit with another part’’), § 1040.3(a)(7) therefore is consistent with the available at https://www.merriam-webster.com/ approach to the limitations in this rule on the 941 81 FR 32830, 32877 (May 24, 2016). dictionary (last visited May 30, 2017). coverage of payment processing in proposed 942 As noted in the proposal, Dodd-Frank section 938 For example, proposed § 1040.3(a)(8) included § 1040.3(a)(8). 1002(18) defines a ‘‘payment instrument’’ as ‘‘a a limitation for processing payments for a product 939 See 12 U.S.C. 5481(29) (defining ‘‘transmitting check, draft, warrant, money order, traveler’s check, or service that the provider itself sold or marketed. or exchanging funds’’ to include such activities electronic instrument, or other instrument, payment This clarification to limitations in this rule on the carried out ‘‘through bill payment services’’). of funds, or monetary value (other than currency).’’ coverage of transmitting and exchanging funds in 940 Id. Id. at n.472.

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consumer and transmits it to a Comments Received The Final Rule merchant, a creditor, or others. An A public-interest consumer lawyer For the reasons described in the entity also would have been covered by commenter stated that the exclusion in proposal, and explained below, the final itself accepting the data from the proposed § 1040.3(a)(8) should not rule adopts § 1040.3(a)(8) and comment consumer at a storefront or kiosk, by exclude sellers of automobiles, in 3(a)(8)–1 as proposed with minor edits electronic means on the internet or by particular when the payment being for clarity. The proposal described the email, or by telephone. For example, a processed is for a loan to finance the payment processing activity excluded wireless, wireline, or cable provider that purchase of the dealer’s automobiles. from § 1040.3(a)(8) based on whether it allows consumers to initiate payments A consumer advocate commenter was to process a payment or card to third parties through its billing recommended that the Bureau expand transaction for a nonfinancial good or platform would have been covered by the scope of payment and financial data service sold or marketed by the proposed § 1040.3(a)(8). processing coverage in three ways. First, processor. Rather than using the term The Bureau notes that the breadth of this commenter stated that the rule nonfinancial good or service, which is proposed § 1040.3(a)(8) would have should explicitly cover electronic funds not defined, the Bureau believes it been limited in several ways. First, the transfers (EFTs) and preauthorized would be clearer to refer to goods and coverage of proposed § 1040.3(a)(8) electronic funds transfers (PEFTs) as services that are not covered by would not have included merchants, those terms are defined in Regulation E. § 1040.3(a).944 retailers, or sellers of nonfinancial goods Second, this commenter stated that With regard to the public-interest or services when they are providing transfers of funds between accounts at consumer lawyer comment that stated payment processing services directly the same financial institution, which are that automobile dealers should not be and exclusively for the purpose of not EFTs under Regulation E, should be excluded when processing payments on initiating payment instructions by the covered. Third, this commenter stated their loans, the Bureau does not believe consumer to pay such persons for the that the Bureau should remove the word an adjustment to § 1040.3(a)(8) is purchase of, or to complete a ‘‘directly’’ from proposed § 1040.3(a)(8), necessary. As discussed in the proposal commercial transaction for, such so that the rule would reach persons and further below with regard to nonfinancial goods or services. Those who work behind the scenes to arrange § 1040.3(b)(6), the Bureau’s jurisdiction types of payment processing services are debiting funds from consumer accounts over certain automobile dealers and excluded from the type of financial other merchants is constrained by the as part of work-at-home schemes, fake 945 product or service identified in Dodd- dating apps, or other schemes Dodd-Frank Act. The Bureau has Frank section 1002(15)(A)(vii)(I). As a perpetrated by third parties who are not conformed the scope of the rule to these result, they would not be a consumer offering consumer financial products or limitations. Except when persons are financial product or service pursuant to services. excluded under § 1040.3(b), however, the final rule treats providers that 12 U.S.C. 5481(5), which is a statutory This consumer advocate commenter process payments on their own limitation on the coverage of proposed also expressed support for coverage that extension of consumer credit with a § 1040.3(a). For the sake of clarity, would regulate mobile wireless third- finance charge as engaged in proposed § 1040.3(a)(8) would have party billing, asserting that cramming is stated that it would not apply to servicing,946 debt collection, or both. a serious consumer protection problem The Bureau disagrees with the accepting instructions directly from a and that arbitration agreements impede consumer to pay for a nonfinancial good consumer advocate commenter that any relief to consumers harmed by of the changes it seeks are necessary. or service sold by the person who is cramming practices. As noted above, an accepting the instructions. In addition, The Bureau notes that EFTs and PEFTs industry trade association, however, will typically be covered pursuant to proposed § 1040.3(a)(8) would not have disagreed with the Bureau’s observation applied to accepting instructions § 1040.3(a)(5) or (a)(6) because they are that proposed § 1040.3(a)(8) could apply made to or from an account as defined directly from a consumer to pay for a to mobile wireless third-party billing.943 nonfinancial good or service marketed under EFTA or TISA and/or pursuant to This commenter stated that, in its view, § 1040.3(a)(8) because they also are by the person who is accepting the mobile wireless third-party billing instructions. As a result of this proposed processed by persons who accept data would not be covered by proposed directly from the consumer to initiate exception, proposed § 1040.3(a)(8) § 1040.3(a)(8) because the nonfinancial would not have reached, for example, a payments for services these persons goods or services of the third party are neither sold nor marketed. Similarly, a sales agent, such as a travel agent, who virtually always marketed by the mobile accepts an instruction from a consumer transfer of funds between accounts need wireless provider whether because of not be defined as covered payment to pay for a nonfinancial good or service the scope of the provider’s activities, or that is marketed by the agent on behalf processing, since the underlying simply due to the nature of payment accounts are already themselves of a third party that provides the processing itself. For example, mobile nonfinancial good or service. covered, for example, by § 1040.3(a)(5) wireless providers engage in and (a)(6). The Bureau further notes that certain promotional activities or distribute the With regard to the commenter’s forms of payment processing also would nonfinancial good or service for which suggestion to remove ‘‘directly’’ from have been covered by other provisions payment is made. The commenter also proposed § 1040.3(a)(8), the Bureau of proposed § 1040.3(a). This may asserted that simply by making their believes that limiting the scope of include, for example, proposed payment channel available to pay for a § 1040.3(a)(1)(v) (servicing of consumer given nonfinancial good or service, 944 This revision is consistent with the wording credit), § 1040.3(a)(3) (debt relief mobile wireless providers are marketing of other limitations in § 1040.3(a), including its services), § 1040.3(a)(5) (deposit and the nonfinancial goods or service paragraphs (1)(iii), (4), and (7). share accounts), § 1040.3(a)(6) because doing so promotes that good or 945 See Dodd-Frank sections 1027 and 1029. (consumer asset accounts and 946 See, e.g., Complaint at ¶ 97, Consumer Fin. service. Prot. Bureau v. Navient Corp., No. 17–00101 (M.D. remittance transfers), § 1040.3(a)(7) Pa. Jan. 18, 2017) (alleging student loan servicer (transmitting or exchanging funds), or 943 See also section-by-section analysis of engaged in payment processing as part of its § 1040.3(a)(10) (debt collection). § 1040.3(a)(1) and (a)(7) above. servicing activity).

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§ 1040.3(a)(8) to situations involving the to cashing checks for consumers as well collection is an activity in which it is acceptance ‘‘directly’’ from the as to associated consumer check especially important to allow for private consumer is important because it helps collection and consumer check guaranty enforcement, including class actions, to to distinguish consumer-focused services. Proposed § 1040.3(a)(9) would guarantee the consumer protections products and services from third-party, have included in the coverage of afforded by the FDCPA, among other back-office operations.947 This term proposed part 1040 check cashing, applicable laws. The proposal added therefore increases clarity of coverage check collection, or check guaranty that, particularly in light of the fact that under this provision, facilitating services, which are types of consumer collectors often bring suit against implementation of the rule. financial products or services identified consumers and the history discussed in The Bureau agrees with the industry in Dodd-Frank section 1002(15)(A)(vi). Part II of the proposal concerning trade association comment that, when a The Bureau did not receive comments serious fairness concerns raised in mobile wireless provider markets its on its proposal to cover cashing checks connection with the filing of numerous own nonfinancial goods or services, for consumers and associated check debt collection claims with a particular then any payment processing the mobile collection and check guaranty services. arbitration administrator, the Bureau wireless provider provides to the The final rule adopts proposed believed that application of the proposal consumer in the course of purchasing § 1040.3(a)(9) as proposed. The Bureau to collection activities may be one of the the nonfinancial good or service it has also notes that, as discussed below in most important components of the rule. marketed to the consumer would not be the section-by-section analysis of Specifically, proposed § 1040.3(a)(10) covered by § 1040.3(a)(8) because this § 1040.3(a)(10), furnishing in connection would have applied the requirements of provision specifically excludes such with debt collection would be covered proposed part 1040 to collecting debt situations. However, the Bureau as a collection activity. This also would that arises from any of the consumer disagrees with the commenter’s view be true for furnishing in connection financial products or services covered that merely providing payment with covered check collection or check by any of paragraphs (1) through (9) of processing services constitutes guaranty activity. proposed § 1040.3(a). For clarity, marketing of the goods or services for proposed § 1040.3(a)(10) would have 3(a)(10) which the payments are being processed identified the specific types of entities so as to warrant categorically excluding The Bureau’s Proposal that the Bureau understands typically third-party billing from the scope of the As explained in the proposal, the are engaged in collecting these debts: (i) rule. In the Bureau’s experience, this Bureau believed that the proposal A person offering or providing the view is overbroad and could render the should apply to debt collection product or service giving rise to the debt coverage in § 1040.3(a)(8) meaningless activities arising from consumer being collected, an affiliate of such because an exception for simply financial products and services covered person, or a person acting on behalf of facilitating payment of goods or services by paragraphs (1) through (9) of such person or affiliate; (ii) a purchaser would swallow the rule. While it is true proposed § 1040.3(a).949 Dodd-Frank or acquirer of an extension of consumer that making a payment method available section 1002(15)(A)(x) identifies debt credit covered by proposed can facilitate sales of a product, the collection as a type of consumer § 1040.3(a)(1)(i), an affiliate of such Bureau does not believe that act by itself financial product or service that is person, or a person acting on behalf of would constitute marketing as the separate from, but related to, other types such person or affiliate; and (iii) a debt Bureau interprets that term in the of consumer financial products or collector as defined by the FDCPA, 15 context of this regulation. To be eligible services. In the proposal, the Bureau U.S.C. 1692a(6). The proposed coverage for the marketing exclusion, a payment was similarly proposing to include a of each of these types of entities engaged processor would need to be engaged in separate provision specifying the in debt collection is described marketing activity for the nonfinancial coverage of activities relating to debt separately below. good or service independent of the collection in proposed § 1040.3(a)(10). Proposed § 1040.3(a)(10)(i) would payment processing activity itself.948 In addition to collections on consumer have applied to collection by a person offering or providing the covered 3(a)(9) credit as defined under ECOA, other products and services that would have product or service giving rise to the debt As stated in the proposal, the Bureau been covered by proposed § 1040.3(a) being collected, an affiliate of such believed that the proposal should apply may lead to collections; the Bureau was person,951 or a person acting on behalf concerned that if any of these collection of such person or affiliate. This coverage 947 The Bureau acknowledges section would have included, for example, 1002(15)(A)(vii) does not include that term in activities were not separately covered, defining data processing services that can be a type collectors in these cases could seek to collection by a creditor extending of consumer financial product or service, and that invoke arbitration agreements. consumer credit. The Bureau noted in the Bureau’s authority under the statute reaches As the proposal explained, the Bureau the proposal, however, that as with more broadly than does § 1040.3(a)(8). However, in proposed § 1040.3(a)(1) discussed this rule, the Bureau does not believe it is necessary believed that collections coverage was to incorporate the entire scope of Dodd-Frank particularly important because the above, proposed § 1040.3(a)(10)(i) section 1002(15)(A)(vii). To the extent a back-office Study showed that class actions alleging would not have extended coverage to processor is an affiliated service provider to a violations of the FDCPA were the most collection directly by a merchant of debt provider of a product or service covered by arising from credit it extends for the § 1040.3(a), that back-office processor may still be common type of class actions filed covered by the rule as a provider pursuant to across the six significant markets that purchase of its nonfinancial goods or § 1040.2(d)(2). the Bureau studied. Debt collection services in circumstances where the 948 More broadly, for the reasons already class settlements were also by far the merchant is exempt under proposed discussed in the response to this comment in the § 1040.3(b). Similarly, collection section-by-section analysis of § 1040.3(a)(7) above, most common type of class action the Bureau does not agree that a blanket exemption settlement in all of consumer finance,950 directly by governments or government for mobile wireless third-party billing is warranted. which in turn suggested that debt For the reasons the industry trade association 951 As proposed comment 3(a)(10)–2 would have commenter noted, to the extent mobile wireless clarified, Dodd-Frank section 1002(1) defines the third-party billing providers are processing 949 81 FR 32830, 32878–79 (May 24, 2016). term affiliate as ‘‘any person that controls, is payments for nonfinancial goods or services they 950 See Study, supra note 3, section 6 at 19 and controlled by, or is under common control with market, § 1040.3(a)(8) would not apply to them. section 8 at 12. another person.’’

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affiliates on credit they extend would The proposal explained that the FDCPA by debt collectors also were have been exempt in the circumstances Bureau believed that many activities among the most common type of described in proposed § 1040.3(b). involved in the collection of debts consumer claim identified in the Study, In addition, proposed arising from extensions of consumer whether in class actions, individual § 1040.3(a)(10)(ii) would have covered credit would also constitute servicing arbitration, or individual litigation. collection activities by an acquirer or under proposed § 1040.3(a)(1)(v). Proposed § 1040.3(a)(10)(iii) therefore purchaser of an extension of consumer However, the Bureau was proposing the would have included in the coverage of credit covered by proposed coverage of collection activities by any proposed part 1040 collecting debt by a § 1040.3(a)(1), an affiliate of such other person acting on behalf of the debt collector as defined by the FDCPA, person, or a person acting on behalf of provider or affiliate in proposed 15 U.S.C. 1692a(6),956 when the debt such person or affiliate. This coverage § 1040.3(a)(10)(i) and (ii) to confirm that arises from any consumer financial would have reached such persons even collection activity by such other persons products and services described in when proposed § 1040.3(b) would have would have been covered even when proposed § 1040.3(a)(1) through (9). excluded the original creditor from such other persons do not meet the As discussed in the proposal as coverage. For example, such collection definition of a debt collector under the described above, the Bureau believed it activities by acquirers or purchasers FDCPA (see proposed § 1040.3(a)(10)(iii) is important to cover collection on all of would have been covered even when described below) because they are not the consumer financial products and the original creditor, such as a collecting on an account obtained in services covered by the rule, since all of government or merchant, would have default.954 By proposing coverage of these products can generate fees that, if been excluded from coverage in debt collection by such other persons, not paid, lead to collection activities by circumstances described in proposed the Bureau also sought to confirm that debt collectors as defined in the FDCPA. § 1040.3(b). As a result, collection by an collection activity would be covered Of course, one of the most common acquirer or purchaser of an extension of even in contexts in which industry may types of debt collected by FDCPA debt merchant consumer credit covered by sometimes differentiate between the collectors arises from consumer credit Regulation B, such as medical credit, terms servicing and debt collection. For transactions. Accordingly, proposed would have been covered by proposed example, the proposal explained that in § 1040.3(a)(10)(iii) would have extended § 1040.3(a)(10)(ii), even in some contexts ‘‘servicing’’ may be used coverage, for example, to collection by circumstances where proposed in the industry to refer to activities a third-party FDCPA debt collector § 1040.3(b)(5) would have excluded the involving seeking and processing acting on behalf of the persons medical creditor from coverage.952 In payments on a debt from a consumer extending credit who are ECOA other words, although hospitals, who is not in default, while creditors and thus subject to proposed doctors, and other service providers ‘‘collections’’ may sometimes be used by § 1040.3(a)(1)(i) or their successors and extending incidental ECOA consumer industry to refer to post-default assigns who are subject to proposed credit would not have been subject to activities.955 Both types of collection § 1040.3(a)(1)(iv). The Bureau believed the requirements of § 1040.4 to the activity would have been covered under that proposed § 1040.3(a)(10)’s extent proposed § 1040.3(b)(5) would the proposal. references to these existing regulatory have excluded them from coverage As discussed in the proposal as regimes would facilitate compliance, because the Bureau lacks rulemaking described above, some debt collection since the Bureau expected that industry authority over them under Dodd-Frank activities are carried out by persons has substantial experience with existing section 1027 or they would have been hired by the owner of a debt to collect contours of coverage under the FDCPA excluded under another provision of the debt. The FDCPA generally and ECOA. As discussed above, proposed § 1040.3(b), an acquirer or considers such persons to be debt proposed § 1040.3(a)(10)(ii) would have purchaser of such consumer credit collectors and subjects them to its applied proposed part 1040 to generally would have been subject to various statutory requirements and purchasers of consumer credit extended proposed § 1040.4.953 prohibitions against abusive collection by persons over whom the Bureau lacks practices. Allegations of violation of the rulemaking authority under Dodd-Frank 952 As noted in the proposal, ECOA credit section 1027 or 1029 or who are includes incidental credit pursuant to Regulation B care providers who regularly allow patients to set otherwise exempt under proposed and the commentary specifically notes that up payment plans after services have been rendered § 1040.3(b). Similarly, proposed hospitals and doctors can provide such incidental are creditors . . . .’’ See Steven Toporoff, ‘‘The credit. See 12 CFR 1002.3(c), comment 1 (‘‘If a ‘‘Red Flags’’ Rule: What healthcare providers need § 1040.3(a)(10)(iii) would have applied service provider (such as a hospital, doctor, lawyer, to know,’’ Modern Medicine Network (Jan. 11, to FDCPA debt collectors when or merchant) allows the client or customer to defer 2010), available at http:// collecting on this type of credit as well the payment of a bill, this deferral of debt is credit www.modernmedicine.com/modern-medicine/ as other debts arising from products or for purposes of the regulation, even though there is news/modernmedicine/modern-medicine-feature- no finance charge and no agreement for payment in articles/red-flags-rule-what-healthcare-. The Bureau services covered by proposed installments.’’). 81 FR 32830, 32878 n.475 (May 24, stated in the proposal that it was not interpreting § 1040.3(a)(1) through (9) provided by 2016). ECOA or Regulation B. 81 FR 32830, 32878 n.476 persons over whom the Bureau lacks 953 As the proposal further noted, the Bureau also (May 24, 2016). rulemaking authority under Dodd-Frank explained in its Debt Collection Larger Participant 954 See 15 U.S.C. 1692a(6)(F)(iii) (defining a debt Rulemaking, in analyzing what type of transactions collector to exclude a person collecting on an section 1027 or 1029 or who otherwise are ‘‘credit’’ under the Dodd-Frank Act, that ‘‘[i]n account ‘‘not in default at the time it was would have been exempt under some situations, a medical provider may grant the obtained’’). proposed § 1040.3(b). right to defer payment after the medical service is 955 See Fed. Trade Comm’n, ‘‘The Structure and The Bureau recognized that FDCPA rendered. In those circumstances, the transaction Practices of the Debt Buying Industry,’’ at 13 n.57 might involve an extension of credit.’’ Defining (Jan. 2013), available at https://www.ftc.gov/sites/ debt collectors do not typically become Larger Participants of the Consumer Debt Collection default/files/documents/reports/structure-and- Market, 77 FR 65775, 65779 (Oct. 31, 2012). In this practices-debt-buying-industry/ 956 As the proposal explained, to the extent a connection, the proposal also noted, that other debtbuyingreport.pdf (‘‘Creditors consider future Bureau regulation were to implement the regulatory guidance in the past has indicated that consumers who are late in paying as being definition of debt collector under 15 U.S.C. a ‘‘health care provider’’ is a creditor under ECOA ‘delinquent’ on their debts. Creditors may continue 1692a(6), the definition in the implementing if it ‘‘regularly bill[s] patients after the completion to collect on delinquent debts, but after a period of regulation would be used, in conjunction with the of services, including for the remainder of medical time creditors consider consumers to be in ‘default’ statute, to define this component of coverage of this fees not reimbursed by insurance. Similarly, health on their debts.’’). proposal. 81 FR 32830, 32879 n.479 (May 24, 2016).

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party to agreements with consumers for particular, can use creditors’ arbitration exempt creditor or its affiliate when the provision of debt collection services; agreements to avoid the burdens of collecting on a debt arising from a they instead collect on debt incurred challenging flawed class litigation. covered consumer financial product or pursuant to contracts between Three public-interest consumer service. As an example, this commenter consumers and creditors or other lawyer commenters and a consumer referred to a third-party collector of a providers. As the proposal explained, advocate commenter supported the medical credit account. however, there are a number of ways in proposed coverage of debt collection, The Final Rule which the proposal would have which in their view was one of the most regulated or otherwise affected the important components of the proposed The Bureau adopts § 1040.3(a)(10) and conduct of debt collectors. First, under coverage. One of the public-interest its commentary in comments 3(a)(10)–1 proposed § 1040.4(a)(1), described consumer lawyers stated that a and 3(a)(10)–2 as proposed. below, the debt collector would have significant portion of the complaints The industry trade association been prohibited from invoking a pre- these commenters have seen pertain to commenter’s criticisms of the class rule dispute arbitration agreement in a class unfair debt collection practices. The were principally directed at the findings action dispute concerning such consumer advocate commenter also in support of rule as a whole, and are collection activities. Second, if a pre- noted the prevalence of class actions therefore addressed in Part VI above dispute arbitration agreement is the addressing debt collection problems as and, to the extent they relate to small basis for an individual arbitration filed providing support for coverage of debt entities, in the discussion of the by or against the debt collector related collection in the proposal. A public- potential alternative of a small entity to its collection activities that would interest consumer lawyer commenter exemption in Part IX below. With regard have been covered by the proposal, then also expressed support in particular for to the commenter’s assertion that the debt collector may be required to the coverage in proposed individual arbitration is superior to submit to the Bureau the records § 1040.3(a)(10)(i) and (ii), noting its class litigation of debt collection specified in proposed § 1040.4(b). understanding that these provisions disputes, the Bureau emphasizes that, as Finally, to the extent that a collector would apply even when the covered discussed in Part VI, creditors may becomes party to a contract with person is not a debt collector as defined continue to make individual arbitration individual consumers in the course of in the FDCPA, and also when the debt available, which may also make it settling debts, such as a payment plan being collected arises from other available for disputes with debt agreement, and that contract includes a covered activities beyond extending collectors. In addition, with regard to its pre-dispute arbitration agreement, then consumer credit. Another public- claim that arbitration better protects proposed § 1040.4(a)(2) would have interest consumer lawyer commenter consumer confidentiality, the Bureau required the collector to include the asserted that recourse to class actions notes that arbitration also depends on prescribed language in that pre-dispute for violation of debt collection laws is courts for enforcing awards, which may arbitration agreement.957 critically important for the protection of expose consumers to the same Proposed comment 3(a)(10)–1 would consumers. This commenter also stated confidentiality concerns as individual have further clarified that collecting that coverage of collection by third litigation (indeed, the Bureau debt by persons listed in § 1040.3(a)(1) parties on consumer credit extended by understands that many of the debt would have been covered with respect exempt persons, such as medical collection arbitrations in NAF discussed to the consumer financial products or providers, was particularly important. It in Part II led to court actions to enforce services identified in those provisions, stated that it has seen a number of arbitral awards in debt collection) and but not for other types of credit or debt instances of improper medical billing or further that, according to the Study, the they may collect, such as business majority of arbitration agreements did collection practices, indicating that 959 credit. coverage in this rule is important. not have confidentiality provisions. In any event, 87 percent of the Comments Received The consumer advocate commenter also urged the Bureau to clarify that, individual lawsuits in Federal court A debt collection industry trade with regard to proposed analyzed in the Study asserted FDCPA 960 association challenged the Bureau’s § 1040.3(a)(10)(iii), the FDCPA applies claims, indicating that individual findings generally, mostly echoing other to debt buyers. For example, collectors litigation is most often used in industry comments criticizing the may collect on debts they have consumer finance markets for debt proposal and the class rule in particular, purchased arising from deposit collection claims. This data suggests as discussed above in Part VI. In accounts, automobile leases, or check that for those consumers intent on addition, this commenter asserted that collection activities.958 In addition, this bringing suit, litigation is a viable individual arbitration was superior to commenter urged the Bureau to confirm alternative. class litigation in consumer disputes. that furnishing is among the debt The Bureau agrees with the consumer Some of the reasons it offered in support collection activities included within the advocate comment that, as proposed, of this claim were specific to debt scope of proposed § 1040.3(a)(10). This § 1040.3(a)(10) would apply to a third collection. For example, the commenter commenter similarly urged that the rule party collecting on consumer credit stated that in debt collection disputes, explicitly cover consumer financial originated by an exempt person, such as consumers place a particularly high products that are ancillary to a covered a medical provider exempt in value on confidentiality, which it product, such as payment processing circumstances described in proposed believed arbitration better preserves. It 961 that is ancillary to debt collection. § 1040.3(b)(6). The rule confirms this also stated that debt collection claims Finally, the consumer advocate in comment 2(c)–1.i, discussed above. are simpler to adjudicate, and thus commenter urged the Bureau to clarify 959 suited to a simpler dispute process, that proposed § 1040.3(a)(10)(i) covers Study, supra note 3, section 2 at 52 tbl. 10. 960 Id. section 2 at 27 fig. 6. which it believed arbitration offers. The third parties acting on behalf of an commenter also noted that debt 961 See, e.g., Syndicated Office Systems, LLC, 2015–CFPB–0012, Consent Order (June 18, 2015), collectors, and small entities in 958 One public-interest consumer lawyer available at http://files.consumerfinance.gov/f/ commenter also stated that the rule should apply 201506_cfpb_order-syndicated.pdf (Bureau finding 957 See proposed comment 4–1. to this type of collection activity. that affiliate of hospital chain engaged in collection

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With regard to the consumer advocate covered by § 1040.3(a)(10) regardless of would not have applied to that second commenter’s request that this rule whether it is also covered by any other product or service. clarify the coverage of debt buyers provision in § 1040.3(a). The Bureau For illustrative purposes, the Bureau under the FDCPA, the Bureau is not, in interprets the term debt collection to noted in the proposal that persons this rulemaking, interpreting the scope include processing payments made by offering or providing consumer financial of the FDCPA. The scope of that statute consumers as part of debt collection products or services covered by as it stands now therefore determines activity (i.e., processing payments proposed § 1040.3(a) described above the scope of § 1040.3(a)(10)(iii). The consumers make to satisfy a debt). would have included, without Bureau also notes, however, that the However, the only commenter to limitation, banks, credit unions, credit Supreme Court recently issued a address this question was this consumer card issuers, certain automobile lenders, decision holding that a debt buyer advocate; the Bureau did not receive automobile title lenders, small-dollar or collecting on its own behalf debts that any other comments indicating payday lenders, private student lenders, it purchased was not collecting or uncertainty over the coverage of payment advance companies, other attempting to collect, directly or payment processing that may be installment and open-end lenders, loan indirectly, debts owed or due or ancillary to debt collection activities. originators and other entities that asserted to be owed or due to another The Bureau does not believe this arrange for consumer loans, providers of within the meaning of the FDCPA.962 In example supports the commenter’s certain automobile leases, loan any event, any future interpretation of broader claim that the rule should cover servicers, debt settlement firms, the FDCPA will be automatically any consumer financial product or foreclosure rescue firms, certain credit incorporated by reference into the scope service that is ancillary to another service/repair organizations, providers of this rule, as described above. covered product. The Bureau is of consumer credit reports and credit Moreover, a debt buyer engaged in concerned that that type of coverage scores, credit monitoring service collection on a consumer credit account definition could lead to uncertainty and providers, debt collectors, debt buyers, they purchase generally would be would not facilitate compliance and check cashing providers, remittance covered by § 1040.3(a)(10)(ii), which administration of the rule. transfer providers, domestic money transfer or currency exchange service covers collecting debt by a purchaser of 3(b) Exclusions From Coverage consumer credit, even when the providers, and certain payment 965 purchaser is not a debt collector under Proposed § 1040.3(b) would have processors. the FDCPA.963 Therefore, the Bureau identified the set of conditions under Some commenters sought exclusions declines to address, at this time, the which certain persons would have been for certain persons, rather than certain commenter’s request concerning the excluded from the coverage of proposed products or services. Comments FDCPA’s coverage of debt buyers. part 1040 when providing a certain concerning a possible small entity With regard to the consumer advocate products or services that were otherwise exemption are discussed in Part IX commenter’s request to confirm that covered by proposed § 1040.3(a).964 As below. In addition, a number of credit furnishing is a debt collection activity, discussed above, if an exclusion in union and community bank industry when a person is collecting debt within proposed § 1040.3(b) did not apply to a commenters sought an exemption from the meaning of § 1040.3(a)(10), the person that offers or provides a product the rule, for a variety of reasons. For Bureau agrees that if that person or service described in proposed example, credit union commenters cited § 1040.3(a), that person would have met their member-owned, not-for-profit furnishes information on that debt in 966 the course of that debt collection, then the definition of a provider in proposed cooperative structure as providing adequate accountability incentives to furnishing falls within the scope of the § 1040.2(c) and would have been subject comply with the law, such that class rule. The relevant factor is therefore to the proposal. The exclusion was actions are not necessary. A community whether the furnishing is done in the structured to be specific to the provision bank commenter similarly stated that course of the debt collection, and not of particular products and services community banks are relationship- whether the debt collector is required to listed in 1040.3(a). In other words, even oriented, and the need to develop engage in the furnishing. However, the if an exclusion in proposed § 1040.3(b) customer relationships and retain only commenter to address this question would have applied to a person offering customers provided an adequate was this consumer advocate; the Bureau or providing one particular product or incentive to comply with the law. Credit did not receive any other comments service, that person still would have union commenters also generally indicating uncertainty over the coverage been covered by part 1040 when of furnishing by debt collectors as a debt providing a different product or service described in proposed § 1040.3(a) if an 965 81 FR 32830, 32880 (May 24, 2016). The collection activity. Therefore, the Bureau discussed the examples as well as other Bureau believes this clarification is exemption in proposed § 1040.3(b) types of entities that would have been covered in sufficient. certain circumstances in the section-by-section With regard to the consumer advocate 964 As the proposal noted, certain additional analysis to proposed § 1040.3 described above. In limitations would have been inherent in proposed addition, the Bureau noted in the proposal that, as comment concerning coverage of § 1040.3(a). 81 FR 32830, 32879–80 (May 24, 2016). part of its broader administration of the enumerated payment processing that may be These limitations arise not only from the terms consumer financial protection statutes and title X ancillary to debt collection activities, chosen for proposed § 1040.3(a) in general, but also of the Dodd-Frank Act, the Bureau continues to the Bureau agrees that this would be from the fact that in a number of places proposed analyze the nature of products or services tied to § 1040.3(a) referenced terms from other enumerated virtual currencies. Id. at n.482. consumer financial protection statutes and their 966 See generally Nat’l Credit Union Admin. ‘‘Is on debts originated by the hospital and other non- implementing regulations. For example, a a Credit Union Right For Me,’’ https:// affiliated medical providers was a ‘‘covered person’’ transaction is ‘‘credit’’ as defined by Regulation B www.mycreditunion.gov/about-credit-unions/ subject to the Bureau’s enforcement jurisdiction). implementing ECOA only if there is a ‘‘right’’ to Pages/Is-a-Credit-Union-Right-for-Me.aspx (last 962 Henson, et al. v. Santander Consumer USA, defer payment. See Regulation B comment 2(j)–1 visited June 22, 2017) (‘‘Credit unions are Inc., No. 16–349 (Slip Op. June 12, 2017). (‘‘Under Regulation B, a transaction is credit if there democratically run financial institutions providing 963 As discussed in the proposal, servicing and is a right to defer payment of a debt . . . .’’). These each credit union member one vote. Members vote collection activity may overlap. As a result, the debt limitations would have been incorporated into the on those from the membership who are running for buyer also may be covered under § 1040.3(a)(1)(iv)– coverage of proposed part 1040, regardless of the credit union’s board of directors, as well as any (v) which generally cover purchasing and servicing whether they were explicitly mentioned in the text other credit union official positions open for consumer credit accounts. of the regulation or the commentary of the proposal. election at the annual membership meeting.’’).

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asserted that their customers are more Bureau similarly believes that the extent they were providing products likely to experience higher costs from shareholder ownership, while providing and services described in proposed the proposal because their customers are a form of democratic shareholder § 1040.3(a) because they are already owners who would experience reduced accountability over the credit union, is covered by existing regulations that dividends as a result of increased costs not a sufficient compliance incentive to limit the application of pre-dispute from the rule.967 replace a right to enforce the laws on a arbitration agreements to class litigation Other comments on the proposed class basis. The Bureau further believes and provide for making arbitral awards exemptions and the Bureau’s analysis of that the presence of a financial public. those comments are discussed in the institution in a community, such as a As discussed above and in the section-by-section analysis of each credit union or community bank, with proposal,972 since 1992, FINRA, a self- proposed exclusion below.968 the interest of developing and retaining regulatory organization overseen by the The Bureau is adopting the text in the customers in that community, also is SEC, has required pre-dispute introductory paragraphs of § 1040.3(b) not a sufficient compliance incentive to arbitration agreements adopted by as proposed, with a minor clarification replace a right to enforce those laws on broker-dealers to include language to account for the fact that some a class basis.970 With regard to the disclaiming the application of the exclusions apply more broadly to potential for pass through of costs of the arbitration agreements to class actions particular parties, rather than simply rule to consumers who also have filed in court.973 The SEC, which must with regard to specific consumer ownership interests in credit unions, as authorize FINRA rules, authorized the financial products or services.969 discussed in the Bureau’s Section original version of this rule in 1992.974 With regard to the exemptions 1022(b)(2) Analysis below, the member- The Bureau also noted that claims in requested by credit union and ownership structure for credit unions FINRA arbitration between customers community bank commenters, the may make it slightly more likely that and broker-dealers are filed with Bureau is not adopting such exemptions consumers would face reduced earnings FINRA,975 which is overseen by the in the rule as discussed further in Part as owners, if costs are not passed SEC, and all awards between customers VI above and the Section 1022(b)(2) through to them as customers. and broker-dealers under FINRA rules Analysis below. As discussed in the Nonetheless, the Bureau has already must be made public.976 Proposed section-by-section analysis of considered the potential for pass comment 3(b)(1)–1 would have clarified § 1040.3(b)(2) below, the Bureau has through of costs of the rule to customers that § 1040.3(b)(1)’s reference to rules determined in the final rule that in its Section 1022(b)(2) analysis. The authorized by the SEC would include democratic accountability structures are fact that credit unions may pass through those promulgated by FINRA and an insufficient basis for excluding costs to consumers as owners, even approved by the SEC, as described governments from the rule. With regard when costs are not passed through by above, in order that products and to an exemption for credit unions, the way of product pricing, does not change services covered by those FINRA rules the nature of its findings in Part VI would have been excluded from the 967 Two credit union industry trade associations above. coverage of proposed part 1040. also noted that there may be impacts on credit The proposal also identified a CFTC unions engaged in the indirect automobile lending 3(b)(1) market where automobile dealers originating the regulation requiring that pre-dispute loans use arbitration agreements. Those comments The Bureau’s Proposal arbitration agreements in customer are discussed in the Bureau’s Section 1022(b)(2) agreements for certain products and Proposed § 1040.3(b)(1) would have Analysis. In addition, another credit union industry services regulated by the CFTC be commenter stated that credit unions not currently excluded from the coverage of proposed voluntary, such that the customer using arbitration agreements still needed an option part 1040 broker-dealers to the extent receives a specified disclosure before of using arbitration agreements in the future to they are providing any products or block TCPA class actions in light of concerns over being asked to sign the pre-dispute services covered by proposed uncertainties or ambiguities in the TCPA. As arbitration agreement, is not required to explained in Part VI, the Bureau finds that the class § 1040.3(a) that are also subject to sign the pre-dispute arbitration rule is in the public interest and for the protection specified rules promulgated or agreement as a condition of receiving of consumers notwithstanding that there may be authorized by the SEC prohibiting the questions regarding legal interpretations of laws the product or service, and is only use of pre-dispute arbitration that can be enforced through class actions. subject to the pre-dispute arbitration 968 As discussed further below, the Bureau also agreements in class litigation and received some comments that requested exemptions providing for making arbitral awards 972 81 FR 32830, 32880–81 (May 24, 2016). from the rule on bases other than the identity of the public. The term ‘‘broker-dealers’’ provider. The Bureau does not consider these 973 FINRA, ‘‘Requirements When Using requests to be requests for exemptions from the generally refers to persons engaged in Predispute Arbitration Agreements for Customer scope of coverage per se, but instead as requests for the business of effecting securities Accounts,’’ at Rule 2268(f). FINRA, formerly the the Bureau to consider certain alternatives to or transactions for the account of others or National Association of Securities Dealers, also limitations on the substantive regulation itself. For serves as an arbitral administrator for disputes buying and selling securities for their concerning broker-dealers and its rules further example, a request to exclude certain causes of 971 action providing for statutory damages or recovery own account. Broker-dealers may prohibit broker-dealers from enforcing an of attorney’s fees from the class proposal is provide products that were described in arbitration agreement against a member of a discussed in Part VIII. In addition, the Bureau’s proposed § 1040(a). For example, certified or putative class case. FINRA, ‘‘Class consideration of other potential alternatives raised broker-dealers may extend credit to Action Claims,’’ at Rule 12204(d). by commenters, such as not applying the class 974 Self-Regulatory Organizations; National proposal to matters that providers self-report to allow customers to purchase securities. Association of Securities Dealers, Inc.; Order regulators, is discussed in the analysis of impacts Securities credit is subject to ECOA as Approving Proposed Rule Change Relating to the of the rule in Part VIII. recognized in Regulation B, 12 CFR Exclusion of Class Actions from Arbitration 969 Rather than referring to the exclusions as for 1002.3(b). The Bureau proposed to Proceedings, Exchange Act Release No. 31371, 1992 WL 324491, (Oct. 28, 1992). persons to the extent they are providing consumer exclude such persons from coverage to financial products or services specified in 975 FINRA, ‘‘Filing an Initial Statement of Claim; § 1040.3(b), the introductory paragraph in the final Filing Claim with the Director,’’ at Rule 12302(a) rule states that the exclusions apply in the 970 The Bureau’s response to these comments is (providing that claimant must file an initial claim circumstances described in § 1040.3(b). This is further detailed in Part VI.C.1 above. with the Director of the FINRA Office of Dispute more accurate because some of the exclusions do 971 See 15 U.S.C. 78c(4)–(5) (defining the terms Resolution). not refer to particular consumer financial products broker and dealer under the Securities Exchange 976 FINRA, ‘‘Awards,’’ at Rule 12904(h) (‘‘All or services. Act). awards shall be made publicly available.’’).

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agreement if he or she separately signs opinion that the Bureau lacks any remittances in certain circumstances. In it, among other requirements.977 That authority under the Dodd-Frank Act to the view of this industry trade regulation, however, does not ensure promulgate rules governing the conduct association, however, these products or consumers have access to private of SEC- or CFTC-regulated persons services were related to securities remedies in class actions and does not when acting in a regulated capacity. The within the meaning of Dodd-Frank provide for transparency of arbitral commenters referenced provisions in section 1002(15)(A)(vii), and, as a result awards. The Bureau therefore stated in Dodd-Frank section 1027 and in the of this relationship, excluded from the the proposal its belief that the proposal Act’s legislative history that, in their rulemaking authority of the Bureau. The could have provided important view, support that position. commenter asserted that this would be consumer protections for providers that With respect to broker-dealers and the case regardless of whether the might also be subject to the CFTC’s investment advisers, the broker-dealer services relating to securities were regulation. The Bureau also believed and investment adviser trade financial advisory in nature, but further that complying with both rules would association commenters also stated that asserted that the products or services do not be unduly burdensome for any their position was further supported by relate to financial advisory services that affected providers, given the limited language in Dodd-Frank section broker-dealers provide. The industry nature of the CFTC rule. The Bureau 1002(15)(A)(vii), which excludes trade association asked the Bureau to therefore did not propose an exemption ‘‘services related to securities’’ from the identify what covered products and for those persons, and instead sought general definition of financial advisory services that, in the Bureau’s view, further comment on the approach to products or services that are subject to broker-dealers provide. This commenter CFTC-regulated persons. the Bureau’s Dodd-Frank Act also stated that neither it nor its Thus, under the proposal, any jurisdiction.980 With respect to futures members were aware of any covered product or service that would be subject commission merchants, the CFTC and products or services that investment to both the Bureau’s proposal and the futures industry trade association stated advisers provide, and asked the Bureau CFTC rule 978 therefore would have that the CEA confers exclusive to specifically identify any such covered needed to meet the requirements of both jurisdiction on the CFTC over CFTC- products or services of which it was rules. For example, any pre-dispute regulated products or services.981 As a aware. arbitration agreement subject to both result, these commenters asserted that A trade association of consumer rules would have needed to satisfy the the final rule need not exempt these lawyers stated in its comment letter that CFTC requirements to ensure the persons because the Bureau cannot the Bureau should not exempt any contract is voluntary and contain the regulate them in this rulemaking. products or services covered by the provision mandated by proposed Instead, commenters requested that the proposal that are subject to the CFTC’s § 1040.4(a)(2).979 Bureau, in the final rule, state that it has jurisdiction because CFTC arbitration rules are limited and ineffective, do not Comments Received no regulatory authority over these persons under Dodd-Frank section 1028 guarantee the option for participation in The Bureau consulted with the SEC and title X of the statute more class actions, and do not provide for the and CFTC prior to issuing the proposal broadly.982 transparency of arbitral awards. This and after the close of the comment The industry trade associations also commenter did not identify, however, period and received a formal comment observed that the Bureau’s Study did any consumer financial products or letter from the staff of the CFTC. In not analyze the use of arbitration services provided by CFTC-regulated addition, the Bureau received comments agreements by their members. The entities. from an industry trade association commenters also did not identify any An association of lawyers who whose members include both broker- consumer financial products or services represent investors also urged the dealers and investment advisers provided by their investment adviser or Bureau to not exempt investment regulated by the SEC, an investment futures commission merchant members advisers providing a covered product or adviser industry trade association, and that could be subject to this rule. With service because there is currently no an industry trade association respect to broker-dealers, a securities regulation of the use of arbitration representing futures commission industry trade association, whose agreements related to these products or merchants regulated by the CFTC. These members include broker-dealers who services by investment advisers, and the comments generally expressed an are also registered investment advisers, SEC, in its view, has no current plan to stated that broker-dealers provide exercise its authority to regulate 977 17 CFR 166.5. margin loans to purchase securities, and investment adviser arbitration 978 The Bureau noted in the proposal its may also provide payment processing or agreements under Dodd-Frank section understanding that foreign currency spot 921. This commenter did not identify, transactions are not covered by the CFTC rule. 81 FR 32830, 32881 n.492 (May 24, 2016). See 17 CFR 980 Section 1002(15)(A)(vii) covers ‘‘providing however, any consumer financial 166.5(a)(ii) (applying CFTC rule to ‘‘retail fore[ign financial advisory services’’ as defined in that products or services provided by ]ex[change]’’); but see 7 U.S.C. 2(c)(2)(B)(i)(I) provision, which specifically excludes ‘‘services investment advisers. (Commodity Exchange Act covering retail foreign related to securities provided by a person regulated exchange contracts that provide for ‘‘future by the [Securities and Exchange] Commission or a The Final Rule delivery’’) and CFTC and SEC, Further Definition of person regulated by a State securities Commission, ‘‘Swap,’’ ‘‘Security-Based Swap,’’ and ‘‘Security- but only to the extent that such person acts in a The Bureau adopts § 1040.3(b)(1)(i), Based Swap Agreement’’; Mixed Swaps; Security- regulated capacity) . . .’’ an exemption for persons regulated by Based Swap Agreement Recordkeeping; Final Rule, 981 7 U.S.C. 1 et seq. the SEC as defined in Dodd-Frank 77 FR 48208, 48256 (Aug. 13, 2012) (‘‘The CEA 982 One of these trade associations also stated section 1002(21), which includes generally does not confer regulatory jurisdiction on that, if the Bureau pursued the contrary view and the CFTC with respect to spot transactions.’’). sought to cover any of these persons, there also may broker-dealers and investment advisers, 979 If a provider offers products or services that be confusion over which types of claims relate to as well as their employees, agents, and would have been covered by the proposal, such as the covered products or services, and which ones contractors, to the extent regulated by consumer credit, and others that would not have relate to other products or services they provide. To the SEC. This exemption also applies to been covered, the provider would have been address this, they requested that the final rule permitted to use contract language that is tailored clarify when a claim is ‘‘related’’ to a covered persons acting in other SEC-regulated to such a circumstance. See proposed product or service. That comment is discussed in capacities as defined in Dodd-Frank § 1040.4(a)(2)(ii). the section-by-section analysis of § 1040.4(a) below. section 1002(21), such as stock

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exchanges, self-regulatory organizations, respect to excluded and exempted understands such activities generally and others. Under Dodd-Frank section securities may not be required to would be carried out by persons 1002(21), persons regulated by the SEC register with the SEC but may be registered or required to register with can only meet this definition ‘‘to the regulated by a State securities the CFTC, who therefore already would extent’’ that they are acting in an SEC- commission. The Bureau has decided meet the definition of a person regulated regulated capacity.983 Thus, it is not not to apply the rule only to smaller by the CFTC in 12 U.S.C. 5481(20). placing a condition on the exemption, investment advisers or broker-dealers Nonetheless, for the sake of clarity, the such as the condition it had in the not registered with the SEC, as it sees no Bureau is separately referring to those proposal for the broker-dealer reason to target only this one segment of activities as being excluded. Finally, exemption. The Bureau finalizes the the market for coverage in this rule and both the definition of a person regulated exemption as described given that the doing so may create confusion in the by the CFTC in the Dodd-Frank Act and SEC has authorities to regulate the use marketplace. The exclusion in the additional reference to the exclusion of arbitration agreements by SEC- § 1040.3(b)(1)(ii) does not reach more CFTC-regulated accounts, contracts, regulated persons, including Dodd- broadly than broker-dealers and agreements, and transactions only apply Frank Act section 921 in which investment advisers, however. The to the extent an activity is regulated by Congress delegated authority to the SEC Bureau does not confer a blanket the CFTC under the CEA.987 to engage in its own rulemaking exemption on persons regulated by State 3(b)(2) concerning the use of arbitration securities commissions because unlike agreements by broker-dealers and the term person-regulated by the SEC, The Bureau’s Proposal investment advisers.984 In light of the there is no definition of this term in the Proposed § 1040.3(b)(2) would have fact that the Bureau has not received Dodd-Frank Act. In some States, an excluded from the coverage of proposed comments indicating that any other agency that is a State securities part 1040 governments and their SEC-regulated persons provide commission regulates securities firms as affiliates, as defined by 12 U.S.C. consumer financial products or services well as banks and other providers that 5481(1), to the extent such entities that would otherwise be covered by regularly provide consumer financial provide products and services directly proposed § 1040.3(a), the Bureau has products or services.985 A blanket to consumers within their jurisdiction concluded, based on further exclusion could therefore inadvertently as specified in proposed § 1040.3(b)(2)(i) consideration, that incidental provision exclude State-regulated banks. or (ii). This proposed exclusion would of a consumer financial product or Thus, as revised, this exclusion not have applied to an entity that is service performed by a person when applies to a broker-dealer or investment neither a government nor an affiliate of acting in an SEC-regulated capacity adviser who falls into either or both of a government but provides services to a should not be covered, just as the the following categories: (1) Is a person government or an affiliate of a Bureau does not seek generally to regulated by the SEC as defined in government.988 regulate merchants or employers in this Dodd-Frank section 1002(21); or (2) to As stated in the proposal, the Bureau rule, as discussed in the section-by- the extent the person is regulated by a believed that private enforcement of section analysis for § 1040.3(a)(1)(iii) State securities commission as consumer protection laws, when above and § 1040.3(b)(5) below, described in Dodd-Frank section provided for by statute, is an important respectively. Moreover, an exclusion for 1027(h). It also applies to any other companion to regulation, supervision of, SEC-regulated persons is consistent person regulated by the SEC as defined and enforcement against private with the rule’s exclusion of CFTC- in Dodd-Frank section 1002(21). providers by governments at the local, regulated persons, as described below. With respect to persons regulated by State, and Federal levels. The Bureau For clarity, in light of the above factors, the CFTC, the Bureau is similarly believed, however, that financial the Bureau believes that when a person adding an exemption in the final rule to products and services provided by is acting in an SEC-regulated capacity as exclude persons regulated by the CFTC governments and their affiliates directly described in Dodd-Frank section as defined in 12 U.S.C. 5481(20) or a to consumers who reside within 1002(21), the final rule does not need to person with respect to any account, territorial jurisdiction of the apply to them. contract, agreement, or transaction to governments should generally not be In addition, the exemption in the extent subject to the jurisdiction of covered by proposed part 1040 given the § 1040.3(b)(1)(ii) applies to any person the Commodity Futures Trading unique position that governments are in to the extent regulated by a State Commission under the CEA, 7 U.S.C. 1 with respect to products and services securities commission as a broker-dealer et seq. The Bureau recognizes that the that they and their affiliates provide or investment adviser. For example, CFTC has authority to issue arbitration directly to their own constituents. some smaller investment advisers have rules for persons regulated by the CFTC, Specifically, proposed assets under management that fall below as demonstrated by the CFTC arbitration § 1040.3(b)(2)(i) would have excluded registration thresholds for SEC oversight rules discussed above, which have been from coverage any products and services but that are required to register in the in place for over four decades.986 In covered by proposed § 1040.3(a) when States in which they operate. Similarly, addition to excluding a person regulated provided directly by the Federal some broker-dealers operating by the CFTC as that term is defined in government and its affiliates. In exclusively within a State or only with Dodd-Frank section 1002(20), the circumstances where proposed exemption separately applies to 983 12 U.S.C. 5481(21) (clarifying that definition accounts, contracts, agreements, and 987 See 15 U.S.C. 5481(20) (defining the term applies ‘‘only to the extent that any person transactions subject to CFTC ‘‘person regulated by the [CFTC]’’ as referring to a described in any of subparagraphs (A) through (K), person registered or required to register with the or the employee, agent, or contractor of such jurisdiction under the CEA. The Bureau CFTC ‘‘but only to the extent that the activities of person, acts in a regulated capacity.’’). such person are subject to the jurisdiction of the 984 For example, the Bureau recognizes that the 985 For example, in the District of Columbia, one [CFTC] under the [CEA].’’). FINRA rules described above already apply to agency—the Department of Insurance, Securities 988 Dodd-Frank section 1002(1) defines the term broker-dealers and that the SEC could issue further and Banking—regulates both banks and securities. affiliate as ‘‘any person that controls, is controlled regulations on this subject under the Dodd-Frank 986 17 CFR 166.5, originally adopted by 41 FR by, or is under common control with another Act. 42942 (Sept. 29, 1976). person.’’ 12 U.S.C. 5481(1).

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§ 1040.3(b)(2)(i) would have applied, the and affiliates provide directly to those The Bureau further noted that the Bureau posited that the Federal consumers. For these reasons, the proposal would not have covered any government and its affiliates may be Bureau proposed to exempt from government utility, or other affiliates of uniquely accountable through the coverage of part 1040 products and governments such as schools, when democratic process to consumers to services provided directly by eligible for other exemptions in whom the Federal government and its governments and their affiliates to proposed § 1040.3(b). For example, a affiliates directly provide products and consumers who reside within the government would have been exempt services. The Bureau additionally territorial jurisdiction of these when providing consumer credit for its posited that the democratic process may governments. own services if the government does compel the Federal government and its As with the proposed exclusion for this below the frequency specified in affiliates to treat consumers fairly with the Federal government and its proposed § 1040.3(b)(3), or if the credit respect to dispute resolution over the affiliates, proposed § 1040.3(b)(2)(ii) does not include a finance charge, in products and services they provide would not have excluded from the which case the exemption in proposed directly to consumers. For these coverage of part 1040 nongovernmental § 1040.3(b)(5) generally would have reasons, the Bureau proposed to exempt entities that provide covered products applied. from coverage of part 1040 products and or services on behalf of State, local, or Comments Received services provided directly by the Tribal governments or their affiliates, Federal government and its affiliates to such as a bank that issues a payroll card A consumer advocate and two public- consumers. By limiting this exemption account for State, local, or Tribal interest consumer lawyer commenters to products and services provided government employees or a private debt urged the Bureau not to adopt the directly by the Federal government and collector that collects on consumer proposed exclusions, asserting that its affiliates, proposed § 1040.3(b)(2)(i) credit extended by a State, local, or democratic processes are insufficient to would not have exempted Tribal government. This proposed protect consumers. In particular, they nongovernmental entities that provide exemption also would not have noted that consumers are not covered products or services on behalf extended to State, local, or Tribal necessarily aware of legal harms (as the of the Federal government or its governments or their affiliates providing Bureau had itself noted in the proposal), affiliates, such as student loan servicers. products or services to consumers who and thus may be unable to use the Proposed comment 3(b)(2)–1 would reside outside the territorial jurisdiction democratic process to hold government have reiterated this point with respect to of the particular government. The providers to account. Moreover, even the exclusions in proposed Bureau believed that the democratic when consumers are aware, the § 1040.3(b)(2), and also would have process and its accountability commenters asserted that very few are noted that the definition of affiliate in mechanisms are not generally as strong likely to exercise their vote on this basis Dodd-Frank section 1002(1) would have in protecting consumers who do not alone, particularly over small-dollar applied to the use of the term in reside in the territory of the government harms. The commenters also cited proposed § 1040.3(b)(2). that is itself, or via a government examples of the use of class actions to protect the rights of minorities, who, in Proposed § 1040.3(b)(2)(ii) would affiliate, providing products or services their view, have historically faced have excluded from coverage any State, directly to them. For example, because particular difficulties holding local, or Tribal government, and any such consumers do not reside in the governments accountable.989 affiliate of a State, local, or Tribal government’s territorial jurisdiction, These commenters separately urged government, to the extent it is providing they are not likely to be eligible to vote the Bureau not to use the term consumer financial products and in elections to select representatives in ‘‘affiliate’’ as defined in Dodd-Frank Act services covered by § 1040.3(a) directly that government or on ballot initiatives section 1002(1) because that definition to consumers who reside in the or other matters that would bind that was developed for the private government’s territorial jurisdiction. government or its affiliates. marketplace and would be ambiguous in The Bureau believed that such Proposed comment 1040.3(b)(2)–2 this context. One of these commenters governments and their affiliates are would have provided examples of also stated that affiliates of governments persons pursuant to Dodd-Frank section consumer financial products and often have weaker accountability than 1002(19) and that a number of such services that are offered or provided by governments themselves. Instead, the governments and their affiliates may State, local, or Tribal governments or commenters advocated using a more provide financial products and services their affiliates directly to consumers developed test applied by the Internal that could otherwise be covered by who reside in the government’s Revenue Service to determine when proposed § 1040.3(a). In circumstances territorial jurisdiction, as well as entities are governmental in nature such where proposed § 1040.3(b)(2)(ii) would products and services that would have fallen outside the scope of the proposed have applied, the Bureau posited that 989 These commenters also referred to particular governments and their affiliates may be exclusion. The use of the term products or services that may be provided by uniquely accountable through the ‘‘affiliated’’ in these examples also governments. One commenter identified an democratic process to consumers for would have indicated that this arbitration agreement in a particular home- exemption would not have applied to improvement financing contract used in a PACE products and services the governments (Property Assessed Clean Energy) home and their affiliates provide directly to services provided by persons who are improvement financing program, as part of a consumers who reside within their not affiliates of governments. For program that, in the view of the commenter, has led territorial jurisdiction. The Bureau example, so-called ‘‘public utilities’’ to problems for many consumers. (The Bureau would not have been exempt unless understands that PACE financing is typically additionally posited that the democratic supported by local governments and structured to process may compel governments and they control, are controlled by, or are be paid off through the local government tax their affiliates to treat consumers who under common control with a assessment process.) In addition, another public- reside within the government’s government or its affiliates. The Bureau interest consumer lawyer commenter expressed requested comment on these proposed concern over the government exemption to the territorial jurisdictions fairly with extent it would exclude debt collection by State respect to dispute resolution over the examples, and on whether other schools, which, in its view, might add arbitration products and services the governments examples should be included. agreements in the future.

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that they are not required to file a regulators (including the Bureau), were Finally, two Tribal commenters urged Federal tax return.990 The consumer a much stronger guarantor of the Bureau to expand its proposed advocate commenter also stated that the accountability for consumer protection exemption to include a service provider Bureau should not use the term ‘‘arm of matters, whereas, in their view, the that acts on behalf of a government, the State’’ to define which entities are Bureau has not established that asserting that these service providers exempt because the application of that democratic accountability is an enjoy the same legal status as the term from constitutional immunity law adequate form of accountability for government itself. In support of their is uncertain, and could lead to the consumer protection purposes. A Tribal position, these commenters asserted that exemption of entities who have only a industry trade association stated that the contractors may manage Tribal casinos small amount of capital contribution exclusion should be broadened to apply without violating Federal gambling law, from governments. Similarly, a public- to all Tribal governments, including and contractors that run lotteries on interest consumer lawyer commenter arms of Tribal governments, that are behalf of State governments enjoy the also stated that the term affiliate in the subject to Tribal regulatory oversight same immunities that are conferred on Dodd-Frank Act should not be used and dispute resolution mechanisms the State government itself.995 because it was ambiguous, and could codified in Tribal law. In the view of The Final Rule reach providers acting as a special this commenter, the Bureau did not find counsel to prosecutors in connection that class actions were in the public After consideration of the comments with check collection. interest and for the protection of and the Bureau’s further analyses, the As is discussed above in Part IV, the consumers in these contexts. In Bureau has decided to shift away from Bureau held a consultation with addition, several Tribal commenters an exemption for governments based on representatives of Tribal governments in noted that the proposal’s concept of where their consumers reside, as the Phoenix, Arizona, on August 22, 2016. residency could be difficult to apply to Bureau had proposed. The Bureau also Many Tribal government representatives all Tribes. Commenters explained that understands the concerns raised by attending the consultation and other many Tribes may have members that do commenters about democratic Tribal commenters (for convenience, not reside on Tribal lands, whether accountability being potentially both are referred to here as Tribal because the Tribe has little or no land insufficient to protect consumers in commenters, as many of those providing or because the Tribal members reside some situations. At the same time, the oral input at the consultation also elsewhere (and thus these Tribes would Bureau also does not see a need, in provided written comments) not be able to qualify for the exception general, for the rule to apply to persons emphasized that, in their view, the even when dealing with their own who cannot be sued in class actions in proposal would interfere with the members), while others may have any event because they are immune sovereign immunity of Tribal complicated interpretations of what from suit. The Bureau is therefore 991 governments. Many Tribal land is considered their territory (and adopting a status-based exemption in commenters also expressed their thus who are their residents). § 1040.3(b)(2) for (i) Federal government opinion that the Bureau had no legal Several Tribal commenters also stated agencies as defined in the Federal Tort authority to regulate Tribal governments that the proposal would interfere with Claims Act, 28 U.S.C. 2671, and (ii) any for several reasons, including that the Supreme Court and other appellate State, Tribe, or other person to the reference to regulation of ‘‘persons’’ in precedent recognizing that consumers extent the person qualifies as an arm of the statute, 12 U.S.C. 1002(19), did not who are not members of a Tribe and not the State or Tribe within the meaning of specifically list Tribal governments. In resident in Tribal territory nonetheless Federal law concerning sovereign addition, many of these commenters can consent to Tribal jurisdiction.993 immunity and the person’s immunities criticized the Bureau because it did not Several Tribal commenters further have not been abrogated by the U.S. propose to exempt Tribal governments asserted that there was no basis for Congress. The Bureau is adding entirely or otherwise state that the applying the proposal to Tribal comment 3(b)(2)(ii)–1 to clarify that, proposal would not apply to them. In particular, Tribal commenters governments, since they have sovereign when the rule uses the term State, this immunity from private lawsuits includes any State, territory, or criticized proposed § 1040.3(b)(2). With 994 regard to the Bureau’s focus on including class actions. One Tribal possession of the United States, the democratic accountability, a number of commenter also stated that Tribal District of Columbia, the Tribal commenters stated that their governments may need to spend Commonwealth of Puerto Rico, the governments are sufficiently significant funds, and that based on its Commonwealth of the Northern Mariana accountable, whether to residents or experience litigating immunity issues in Islands, Guam, American Samoa, and 996 non-residents, and that they should be a recent class action, those could be in the United States Virgin Islands. The completely exempted from the rule. One excess of $100,000 per case. This Bureau also is adding comment Tribal commenter stated that the lack of commenter suggested that arbitration 1040.3(b)(2)(ii)–2 to clarify that the term a similar exemption in the Bureau’s agreements may reduce this cost, though ‘‘Tribe’’ in this exemption is a reference proposed rulemaking for small-dollar this commenter also stated that its to any federally recognized Indian loans raised questions about the Tribal lending operation did not use Tribe, as defined by the Secretary of the Bureau’s rationale for proposing one arbitration agreements. Interior under section 104(a) of the here.992 Several Tribal commenters also suggested in their comments that other 993 See, e.g., Montana v. United States, 450 U.S. 995 Many Tribal commenters also objected to the mechanisms, such as intergovernmental 544, 565 (1981) (holding that a Tribe may regulate language in Bureau’s proposed mandatory provision dealings with nonmembers based on consent); for arbitration agreements. Those comments are relations with consumer protection Dollar Gen. Corp. v. Mississippi Band of Choctaw discussed in the section-by-section analysis of Indians, 746 F.3d 167, 177 (5th Cir. 2014) (applying § 1040.4(a)(2) below. 990 See I.R.S. Rev. Proc. 1995–48. Montana consent-based test), aff’d per curiam, 579 996 This definition mirrors the definition of State 991 These commenters’ disagreement with the U.S. ___, 136 S.Ct. 2159 (2016). in Dodd-Frank section 1002(27), except, however, class proposal are addressed in Part VI above. 994 Some of the comments cited authority, for purposes of this rule the Bureau is separately 992 See generally Payday, Vehicle Title, and including C&L Enterprises, Inc. v. Citizen using the term ‘‘Tribe’’ for clarity, given that the Certain High-Cost Installment Loans, 81 FR 47864 Bandpotawatomi Tribe of Okla., 532 U.S. 411 rule also separately refers to the arm of the State (July 22, 2016). (2001). and arm of the Tribe immunity law standards.

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Federally Recognized Indian Tribe List or Tribe (and by extension, their arms) arbitration agreements in connection Act of 1994, 25 U.S.C. 479a–1(a).997 to be, in some circumstances, abrogated with offering or providing a covered The Bureau recognizes that certain by Congress, the Bureau does not intend product or service to consumers and no government actors generally enjoy for its rule to permit arbitration other exemption applies. The blanket immunities from private suit agreements to block class actions in rulemaking record does not establish except when the immunity is lawfully these instances.1001 In those that such situations are common.1003 abrogated by an act of Congress. These circumstances, an entity that may be a Alternatively, some entities may not be actors include not only States and State, Tribe, or an arm of a State or an arm of the State and may be subject Tribes, but also entities that are Tribe, may be subject to private suit, to Federal law claims, but may be determined to be an ‘‘arm of a State,’’ including a class action. Therefore, the afforded a governmental status and and similarly, an arm of a Tribe.998 The exemption adopted in § 1040.3(b)(2) is associated immunities under State law. Federal government, including its not available to an entity to the extent While those persons would not be agencies, also generally enjoys its immunity has been abrogated by eligible for the exemption in immunity from private suit, again Congress.1002 § 1040.3(b)(2)(ii), they may still use unless waived by Congress for particular The Bureau also recognizes that the immunity preserving language Federal law claims.999 The Bureau does existence and nature of sovereign permitted by § 1040.4(a)(2)(vi). Finally, not believe it is necessary for the rule to immunity from suit is not always fully the Bureau recognizes that some entities apply to persons who cannot be sued on certain. If a question or uncertainty were may be affiliated loosely with a State or any claims in a private lawsuit because to arise, the final rule provides tailored Tribal government, but in a manner they enjoy sovereign immunity and that language for entities to include in their insufficient to create immunity from immunity has not been abrogated. The contracts to preserve any immunity private suit. The Bureau does not Bureau believes that, in part because of claims. Specifically, as discussed in the believe that an exemption for these their general immunities, such entities section-by-section analysis for entities would be warranted. The do not tend to use arbitration § 1040.4(a)(2)(vi) below, if a person has Bureau thinks the case for an exemption 1000 agreements in the first instance. a genuine belief that sovereign is weakest under the logic of either the Accordingly, the Bureau is adopting in immunity from private suit under proposal or the final rule with regard to § 1040.3(b)(2) exemptions for these applicable law may apply to a person entities with such loose governmental persons. With respect to the consumer that may seek to assert the pre-dispute relationships, and has concluded on advocate commenter that stated that an arbitration agreement, the person may balance that it would be beneficial to exemption based on an arm of a State voluntarily include a specified subject them to the final rule. or an arm of a Tribe could lead to the provision in its arbitration agreement The Bureau further notes that the exclusion of entities that have only a that is designed to preserve any claim to exemption in § 1040.3(b)(2)(ii) applies small amount of capital contribution that immunity that the person may to an entity that qualifies as an arm of from governments, the Bureau does not have. This option allows providers the State or arm of the Tribe under U.S. believe that would be a reason to subject covered by the rule to deal with any law, regardless of whether it has waived such persons to the rule when they uncertainty they may perceive its immunity. Under sovereign would be immune from private suit concerning the status of their immunity law, States, Tribes, or arms of anyway. To the extent the reduced immunities, without taking the risk that a State or Tribe may become amenable capital contribution raises a genuine a court ultimately would disagree with to private suit by voluntarily consenting belief about whether the person truly is 1004 their reliance on the exemption in to private suit. After substantial an arm of the State or an arm of a Tribe, § 1040.3(b)(2), and potentially consideration, however, the Bureau the person may insert the optional subjecting them to a risk of penalties for believes that there would be undue language in § 1040.4(a)(2)(vi). violation of this rule. complications with basing eligibility for Insofar as U.S. sovereign immunity the exemption in § 1040.3(b)(2)(ii) of law allows for the immunities of a State The Bureau also recognizes that some governmental entities may not be this rule on whether an entity has voluntarily waived its immunities. First, 997 This definition repeats the definition used in eligible for the exemption in § 1040.3(b)(2)(ii). For example, some if a State, Tribe, or other person that is Dodd-Frank section 1002(27). These are the Tribal an arm of the State or Tribe uses an entities recognized and eligible for funding and local governments may not be an arm of services from the Bureau of Indian Affairs (BIA) of the State in which they are located. arbitration agreement, this may establish the U.S. Department of Interior by virtue of their These governments would be subject to a formal dispute mechanism where one status as Indian Tribes. See, e.g., Indian Entities did not otherwise exist—unlike for Recognized and Eligible to Receive Services from the rule to the extent they use the United States Bureau of Indian Affairs, 81 FR other providers, which are generally 5019 (Jan. 29, 2016). 1001 C&L Enterprises, 532 U.S. 411, 418 (2001) amenable to a suit in court absent an 998 Alden v. Maine, 527 U.S. 706, 713 (1999) (affirming that abrogation of Tribal immunities arbitration agreement. As a result, the (State sovereign immunity); People ex. rel. Owen v. under U.S. law is a matter for Congress alone); Bureau is concerned that eliminating Miami Nation Enterprises, 2016 WL 7407327 (Cal. Florida Prepaid Postsecondary Educ. Board v. the exemption in the case of a waiver, 2016) (summarizing national jurisprudence on the College Svgs. Bank, 527 U.S. 627, 634 (1999) ‘‘arm of the Tribe’’ doctrine). (limiting, but not abandoning, abrogation powers of such as may occur by use of an 999 Glidden Co. v. Zdanok, 370 U.S. 530 (1962) Congress with respect to States). (holding that Article III courts exercise jurisdiction 1002 With regard to the Tribal industry association 1003 A consumer advocate identified an over claims against the United States under commenter’s request for an exemption for Tribal arbitration clause in one consumer agreement for a jurisdiction conferred by Congress). governments and arms of Tribal governments when home improvement program funded through tax 1000 One Tribal entity commenter stated that the subject to Tribal regulatory oversight and Tribal assessments. The commenter did not establish rule would have a number of effects on Tribal dispute resolution processes, the exemption the whether the agreement entails an extension of economic development including job growth. This Bureau is adopting in § 1040.3(b)(2) would apply to consumer credit under Regulation B, or whether the commenter clarified, however, that it does not use these persons when they are immune from private provider of the financing is an arm of the State, arbitration agreements. As a result, it was unclear suit under Federal sovereign immunity law. To the however. Whether such a program is covered will why the commenter foresaw this result. In any extent these persons’ immunity from private suit in depend on the facts and circumstances, and the event, the exemption in § 1040.3(b)(2) should non-tribal courts is abrogated by Congress, the application of these legal standards. prevent any unintended consequences from the rule Bureau believes this rule should not restrict 1004 See, e.g., College Svgs. Bank v. Florida on Tribal governmental bodies that are immune consumers’ access to non-tribal courts in disputes Prepaid Postsecondary Educ. Board, 527 U.S. 666, from private suit as arms of a Tribe. with these persons. 673 (1999) (describing voluntary waiver doctrine).

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arbitration agreement, could discourage consumers in the current calendar year statutes and regulations incorporated by all forms of dispute resolution. Second, and that it and any affiliates have not reference do not specify particular issues of waiver—including the extent provided to more than 25 consumers in numeric thresholds.1009 of any waiver—are often fact-dependent, the preceding calendar year.1006 For For purposes of the proposal, the and in some cases may only be resolved example, a person who, together with its Bureau believed that a single uniform through litigation. For example, a State affiliates, provides a covered product or numerical threshold may facilitate legislature may waive immunities of an service to 26 or more consumers in the compliance and reduce complexity, arm of the State for certain State law current calendar year or in the previous particularly given that application of the purposes, but leave unresolved whether calendar year would not have been proposal would not just affect immunity from Federal law claims has eligible for this proposed exemption and consumers’ ability to bring class claims been waived. Thus, conditioning the generally would have been required to under specific Federal consumer exemption on the absence of a voluntary comply with all applicable provisions of financial laws, but also other types of waiver may create undue uncertainty. the proposal. State and Federal law claims. The Accordingly, the Bureau is not As stated in the proposal, the Bureau proposed 25-consumer threshold also conditioning the exemption on the believed that a threshold of the type would have been generally consistent absence of a voluntary waiver. An entity described above (based upon provision with the threshold for ‘‘regularly that is an arm of the State or Tribe of a product or service to only 25 or extend[ing] consumer credit’’ under 12 whose attendant immunity from suit has fewer persons annually) may have been CFR 1026.2(a)(17)(v), which applies not been abrogated by Congress is appropriate to exclude covered products certain TILA disclosure requirements to eligible for the exemption in and services from coverage when they persons making more than 25 non- § 1040.3(b)(2)(ii), even if the entity is are not offered or provided on a regular mortgage credit transactions in a year. found to have voluntarily waived the basis for several reasons.1007 First, the The Bureau emphasized that it was immunities that flow from its status as Bureau believed that services and proposing this uniform standard in the an arm of the State or Tribe. Similarly, products provided to only 25 or fewer unique context of this proposal, and that even if Tribal law allowed certain consumers per year are unlikely to it expected to continue to interpret claims against an entity that was an arm cause harms that are eligible for redress thresholds under the enumerated of the Tribe under Federal law, if that in class actions under the ‘‘numerosity’’ consumer financial protection statutes entity’s sovereign immunity from requirement of Federal Rule 23 and their implementing regulations private suit under Federal law was not governing class actions or State according to their specific language, abrogated by Congress, then it would be analogues, as discussed above in Part II. contexts, and purposes. The Bureau eligible for the exemption as well. Second, when covered products or further noted that basing an exemption Through monitoring the provision of services are provided so infrequently, on the level of activity in the current consumer financial products or services the likelihood of an individual claim in and preceding calendar year would have provided by governments, however, the arbitration also is especially low. been consistent with the threshold Bureau could at a future point condition Therefore, the Bureau believed that under 12 CFR 1026.2(a)(17)(v). the exemption on the absence of a applying the proposal to persons who The Bureau received one comment on waiver of immunities.1005 engage in so little activity involving a this proposed exemption from a covered product or service is unlikely to consumer advocate that supported the 3(b)(3) have a significant impact on consumers. proposed exemption as appropriate. In The Bureau proposed in § 1040.3(b)(3) Third, the Bureau believed that this commenter’s opinion, the an exemption for a person in relation to excluding covered products and exemption would have minimal impact any product or service listed in a services that entities provide so on consumers in light of the numerosity paragraph under proposed § 1040.3(a) infrequently would relieve these entities requirement for class actions. The that the person and any affiliates of the burden of complying with the commenter noted that the similar collectively provide to no more than 25 proposal for those products and exemption in Regulation Z has been services. well understood and implemented. 1005 Although no commenters raised this concern, As also explained in the proposal, the The final rule adopts § 1040.3(b)(3) the Bureau also notes that it is in theory possible Bureau was aware that some of the and comment 3(b)(3)–1 as proposed, that a State law does not afford immunities to an terms in statutes or their implementing with two minor clarifications. First, entity that nonetheless has arm of the State status under Federal law and is immune from Federal law regulations referenced in proposed rather than framing the exemption as claims. This could occur, for example, because the § 1040.3(a) have their own exclusions applying ‘‘when’’ the person provides entity is not treated as part of the State government for persons who do not regularly engage products or services below the specified for purposes of the State immunity law, or the in covered activity. Except for the threshold frequency, the final rule states immunity such an entity may typically enjoy under State law has been abrogated. The Bureau believes, definition of remittance transfer in that the exemption applies ‘‘with however, that it would be rare for State law to allow Regulation E subpart B, which is respect to’’ the products or services for claims against a body so closely connected with incorporated into proposed provided below that frequency. This the State that Federal law deems it is an arm of the § 1040.3(a)(6),1008 the underlying revision seeks to emphasize more State. The Bureau also believes it would be impractical to condition the exemption on an entity having immune status under both Federal and State 1006 As proposed comment 3(b)(3)–1 would have circumstances’’). Regulation E further provides a law. This could often implicate complex questions clarified, Dodd-Frank section 1002(1) defines the safe harbor whereby persons providing 100 or fewer under laws of multiple States and Federal law term affiliate as ‘‘any person that controls, is transfers in the current and prior calendar years are merely to determine eligibility for the exemption. controlled by, or is under common control with deemed not to be remittance transfer providers. 12 Accordingly, the Bureau is adopting a simpler another person.’’ 12 U.S.C. 5481(1). CFR 1005.30(f)(2). Thus, the proposal would not approach. If such an entity were an arm of the State 1007 81 FR 32830, 32882 (May 24, 2016). apply to transfers provided by persons who are not under Federal law, then it would be eligible for the 1008 The definition of remittance transfer in remittance transfer providers, because such exemption in § 1040.3(b)(ii). The Bureau notes that Regulation E is limited to transactions conducted by transfers are not ‘‘remittance transfers’’ as defined if a similar scenario occurred in which a Tribal law a remittance transfer provider in the normal course by Regulation E. does not afford immunities to a Tribal entity that of its business. 12 CFR 1005.30(f)(1). See also 1009 For example, the definition of creditor in nonetheless qualifies as an arm of the Tribe under Regulation E comment 30(f)–2 (‘‘[w]hether a person ECOA and Regulation B and debt collector in the U.S. Federal sovereign immunity law, the entity provides remittance transfers in the normal course FDCPA refer to regular activity but do not specify would, likewise, still be eligible for the exemption. of business depends on the facts and a numeric threshold.

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clearly that, if a person provides two 3(b)(4) connection with a credit transaction products or services covered by The Bureau’s Proposal pursuant to Dodd-Frank section § 1040.3(a), one with a frequency that is 1027(a)(2)(B)(i) unless the same credit below the threshold and the other with As stated in the proposal, merchants, transactions are also credit transactions retailers, and other sellers of a frequency that exceeds the threshold, pursuant to Dodd-Frank section nonfinancial goods and services then the exemption only applies to the 1027(a)(2)(B)(ii) or (iii). Thus, a extending consumer credit are excluded first product or service and not the merchant who is a creditor under from the Bureau’s rulemaking authority Regulation B that is extending consumer second. Second, comment 3(b)(3)–1 is except in certain limited circumstances revised to clarify that although the credit as described in Dodd-Frank under Dodd-Frank section 1027(a)(2)(B). section 1027(a)(2)(A)(i) would have number of times a product is offered is Thus, while they are covered persons been eligible for this exemption with not relevant for purposes of determining under the Dodd-Frank section 1002(6), respect to such consumer credit eligibility for this exemption, the proposal would have applied to transactions when they are sold, participating in a credit decision with them generally only when they act as assigned, or otherwise conveyed to a regard to consumer credit in creditors as defined by Regulation B by third party, so long as the consumer circumstances described in extending consumer credit or credit was not extended in an amount § 1040.3(a)(ii) would count. In participating in consumer credit that significantly exceeded the value of particular, this activity constitutes decisions, or when they engage in the good or service (which creates a providing a product or service covered collection on or sale of these consumer basis for rulemaking authority under by § 1040.3(a), even if an application for credit accounts beyond the scope of the section 1027(a)(2)(B)(ii)) and did not consumer credit is denied. The exclusion in Dodd-Frank section have a finance charge (which creates a clarification in comment 3(b)(3)–1 is 1027(a)(2). In particular, because section basis for rulemaking authority under important to prevent confusion over 1027(a)(2)(A) generally excludes section 1027(a)(2)(B)(iii) except where what constitutes providing a covered activities by a merchant, retailer, or the creditor is not engaged significantly product or service in the context of other seller of nonfinancial goods or in that type of lending under section services to the extent such person consumer credit, because the number of 1027(a)(2)(C)(i)). extends credit directly to a consumer times a person and its affiliates offer a In addition, the exclusion in proposed exclusively for the purchase of a § 1040.3(b)(4)(ii) would have applied to product or service is not relevant to nonfinancial good or service directly eligibility for the exemption.1010 a merchant who purchases or acquires from that person, the Bureau proposed credit extended by another merchant in The Bureau also adopts new comment to reflect that general restriction through a sale, assignment, or other conveyance 3(b)(3)–2 to clarify the obligations of a language excluding merchants in that is subject to Dodd-Frank section person providing a covered product or § 1040.3(b)(5) as discussed further 1027(a)(2)(B)(i). As a result, the proposal service upon becoming ineligible for the below. would not have applied, for example, to exemption. The Bureau notes that the The Bureau also proposed in a merchant who, in a merger or exclusion in § 1040.3(b)(3) is based on § 1040.3(b)(4) to exclude merchants acquisition transaction, acquires the frequency with which a person and from the scope of the rule for an customer accounts of another merchant its affiliates collectively ‘‘provide’’ a additional type of activity that is who had extended credit with no product or service. That standard is in generally not excluded from Bureau finance charge and not in an amount the present tense so the exemption is jurisdiction under section 1027(a)(2). that significantly exceeded the value of Specifically, proposed § 1040.3(b)(4) available so long as the criteria in the the goods or services (i.e., credit not would have excluded merchants to the exemption are met. Accordingly, subject to Dodd-Frank section extent they are engaged in certain comment 3(b)(3)–2 clarifies that, if, 1027(a)(2)(B)(ii) or (iii)). ‘‘factoring’’ transactions and other types Further, the Bureau noted that during a calendar year, a person to that of commercial credit in which the proposed § 1040.3(b)(4) would only point excluded by § 1040.3(b)(3) for a merchant collateralizes its interest in its have exempted a merchant, retailer, or given product or service described in own consumer credit receivables on seller of the nonfinancial good or § 1040.3(a) provides that product or which no finance charge is imposed. service, but would not have affected service to a 26th consumer, then that See Dodd-Frank section 1027(a)(2)(B)(i). coverage of other persons who may person ceases to be eligible for this As explained in further detail in the conduct servicing, debt collection exclusion at that point in time with proposal, the Bureau would have activities, or provide covered products respect to that product or service. The limited the exemption in § 1040.3(b)(4) and services pursuant to proposed provider must begin complying with to circumstances where the Bureau § 1040.3(a) in connection with the same this part with respect to the covered would not have other bases for extension of consumer credit. As product or service provided to that 26th jurisdiction, such as under other parts of discussed below in the section-by- consumer. In addition, the provider will Dodd-Frank section 1027(a)(2) that section analysis to comments 4–1 and not be eligible for the exclusion in subject certain types of credit 4–2, those providers would have been § 1040.3(b)(3) whenever it offers or transactions by merchants to the subject to the proposal. rulemaking authority of the Bureau.1011 provides that product or service for the Comments Received remainder of that calendar year and the Proposed § 1040.3(b)(4)(i) thus would following calendar year. have excluded from the coverage of part A public-interest consumer lawyer 1040 merchants, retailers, or other commenter opposed the proposed 1010 For example, a person and its affiliates sellers of nonfinancial goods or services exemption in § 1040.3(b)(4) but did not collectively may offer a product or service to more to the extent providing an extension of elaborate on the basis for its opposition. than 25 consumers in a given calendar year, but consumer credit covered by proposed A consumer advocate commenter was only provide the product or service to 25 or fewer § 1040.3(a)(1)(i) and described by Dodd- not opposed to the exemption in consumers in that calendar year and 25 or fewer consumers in the prior calendar year. In that Frank section 1027(a)(2)(A)(i) in proposed § 1040.3(b)(4), stating that example, the person would still be excluded by some merchant financing arrangements § 1040.3(b)(3). 1011 81 FR 32830, 32883–84 (May 24, 2016). may expose the merchant to risks, but

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that these risks generally should not final § 1040.3(b)(5) (renumbered as parties for the statutory exclusion in filter down to consumers. This § 1040.3(b)(6)) achieve this same effect Dodd-Frank section 1027(a)(2). commenter also supported the view that because they generally exclude parties 3(b)(5) and (b)(6) the Bureau expressed in the proposal who are not subject to the Bureau’s that only the merchant itself would be rulemaking authority, the Bureau The Bureau’s Proposal eligible for the exemption, and not third believes that including this second The proposal would not have applied parties such as payment processors, element in § 1040.3(b)(4) will help to to persons to the extent they are servicers, or debt collectors. This reduce confusion about whether excluded from the rulemaking authority commenter urged the Bureau to merchants extending consumer credit of the Bureau under Dodd-Frank memorialize this point in the with no finance charge would be subject sections 1027 and 1029. For the sake of commentary to the final rule. to the rule. Given that proposed clarity, the Bureau proposed to make An industry trade association § 1040.3(b)(4) already incorporated this limitation an explicit exemption in expressed concern that the scope of the certain elements of section 1027(a)(2) of proposed § 1040.3(b)(5). Proposed exemption in proposed § 1040.3(b)(4)(i) the statute, the Bureau believes that, § 1040.3(b)(5) thus would have clarified would be confusing and difficult to based on the industry trade association that part 1040 would not have applied analyze for merchants extending comment described above, it would be to a person to the extent the Bureau consumer credit with no finance charge. clearer if this provision also refers to the lacks rulemaking authority over that This commenter stated that the Bureau circumstances where a statutory person or a product or service offered or should clarify that any merchant exclusion in section 1027(a)(2) would provided by the person under Dodd- extending consumer credit would be apply to the merchant. Frank sections 1027 and 1029 (12 U.S.C. exempt from the rule except where Therefore, in light of the addition of 5517 and 5519). extending consumer credit with a subparagraph (A) to § 1040.3(b)(4)(i) to As the Bureau noted in the proposal, finance charge or in an amount that refer to circumstances—i.e., the Bureau had intended that proposed significantly exceeded the value of the circumstances in which the Bureau does § 1040.3(b)(5) would only restrict nonfinancial good or service being not have rulemaking authority under application of proposed § 1040.4 with financed. The commenter also stated Dodd-Frank section 1027(a)(2)(B), the that the merchant should be excluded, regard to those parties for which the Bureau has moved the other references Bureau’s authority is constrained by unless the basis for covering the to provisions of section 1027(a)(2)(B) merchant was established by ‘‘clear and Dodd-Frank sections 1027 and 1029. that appeared in the proposal to a new Accordingly, while merchants and convincing evidence.’’ Finally, the subparagraph (B) of § 1040.3(b)(4)(i). As commenter stated that the exemption in automobile dealers who are not subject a result, merchants extending consumer to the Bureau’s rulemaking authority proposed § 1040.3(b)(4)(ii) should not be credit with no finance charge would limited to the act of acquiring or due to sections 1027 and 1029 would know that, even if they were not eligible purchasing the extension of consumer not have been subject to proposed for the exemption in § 1040.3(b)(4)(i) as credit, but should also include the § 1040.4, the Bureau explained that it proposed, they may still be excluded activities carried out with respect to that has Dodd-Frank section 1028 from coverage of the rule. However, the account that would have been exempt rulemaking authority over other Bureau disagrees with the commenter had they been performed by the selling providers who assume or seek to use that merchants extending consumer merchant, such as servicing. Otherwise, arbitration agreements entered into by credit with a finance charge, or in an in its view, the purchasing or acquiring such merchants or automobile dealers. amount that significantly exceeds the merchant would be more limited in Notably, entities excluded from Bureau value of the nonfinancial goods or what it could do without triggering the rulemaking authority under Dodd-Frank rule than the original merchant would services being financed, should only be sections 1027 and 1029 may still be be—without any basis for that covered if these circumstances are covered persons as defined by Dodd- differential treatment. established with ‘‘clear and convincing Frank section 1002(6). Thus, the Bureau evidence.’’ Such an approach would set stated that proposed § 1040.4 may apply The Final Rule a higher standard for applying the to a provider that assumes or seeks to The final rule adopts § 1040.3(b)(4) as Bureau’s rule than for underlying use an arbitration agreement entered proposed, with technical changes to statutes whose compliance the Bureau is into by a covered person over whom the refer to the excluded person in the seeking to ensure. For example, if a Bureau lacks rulemaking authority singular instead of plural and to refer to TILA claim were asserted against a under Dodd-Frank sections 1027 and the activity of offering as excluded,1012 merchant extending consumer credit on 1029 with respect to the activity at as well as an additional clarification. In the basis of a finance charge being issue. particular, in addition to excluding present, such a claim would not For example, proposed § 1040.4 may merchants under the circumstances necessarily be subject to a ‘‘clear and have applied to a provider that is a debt addressed in proposed § 1040.3(b)(4), convincing evidence’’ standard. Setting collector, as defined in the FDCPA, the Bureau has added a new such a standard for the scope of the rule collecting on debt arising from a subparagraph (A) to extend the would therefore reduce consumer consumer credit transaction originated exclusion also to apply to circumstances protections the rule is seeking to by a merchant, even if the merchant in which the merchant is not subject to enhance. would have been exempt under Bureau rulemaking authority under any The Bureau is also adding comment proposed § 1040.3(b)(5) because the component of Dodd-Frank section 3(b)(4)–1 to clarify that the exemption in merchant is excluded from Bureau 1027(a)(2). While both proposed and § 1040.3(b)(4)(ii) applies not only to the rulemaking authority under Dodd-Frank purchase or acquisition itself, but also to section 1027 for the particular extension 1012 The header of Dodd-Frank section 1027(a)(2) any servicing or collection by the of consumer credit at issue. As noted in indicates that statutory provision relates to merchant purchaser or acquirer. the discussion of proposed ‘‘offering or provision’’ of certain consumer § 1040.3(a)(10) described above, for financial products. For clarity, the Bureau is The Bureau also reaffirms the similarly revising the scope of the exclusion in statement that it made in the proposal example, hospitals, doctors, and other § 1040.3(b)(4). concerning the ineligibility of third service providers extending incidental

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ECOA credit would not have been arbitration agreements or amending the § 1040.3(b)(6), and would thus not be subject to the requirements of § 1040.4 agreement at the time that the indirect obligated to include in their consumer to the extent the Bureau lacks lenders acquire the loan contracts. contracts the provisions mandated in rulemaking authority over them under In addition, an industry commenter the rule. The class rule also would not Dodd-Frank section 1027. Similarly, sought an express exemption providing require indirect automobile finance proposed § 1040.4 may have applied to that the rule would not apply to companies to mandate that automobile a provider that is acquiring an employer compensation agreements that dealers with whom they work use automobile loan originated by an relate to consumer financial products contracts with consumers that include automobile dealer in circumstances and services for employees, for example, the provisions mandated in the rule. where the automobile dealer is exempt employer-provided assistance with the Rather, the indirect automobile finance by proposed § 1040.3(b)(5) because the down payment for a home. The company could amend the contract to automobile dealer is excluded from commenter asserted that Dodd-Frank include the mandated provisions or Bureau rulemaking authority under section 1027(g) excluded any employee send the consumer a notice about the Dodd-Frank section 1029. benefit or compensation plan or rule at the time the company purchases arrangement from Bureau rulemaking the credit.1015 The Bureau therefore Comments Received authority, and expressed concern that disagrees with the commenter’s A consumer advocate stated in its even if some employer-provided suggestion that the rule would conflict comments that the final rule should consumer financial products or services with Dodd-Frank section 1029. clarify that the rule applies to buy-here- were covered by the rule, the rule At the same time, the Bureau pay-here automobile lenders, which this should not reach broader employment acknowledges the possibility that, as a commenter described as dealers who agreements concerning other aspects of business decision and of their own provide their own financing to the employment relationship. The volition, indirect automobile finance consumers and require the consumers to commenter suggested that an exclusion lenders may include an arbitration return to the lot to make payments. This for employer-provided products and provision consistent with the rule in a commenter believed that this services also would be consistent with form contract they provide to the clarification would help address what, the Bureau’s decision not to propose automobile dealer to use with the in its view, was a general misimpression covering consumer reports provided by consumer. However, even if this were to held by some in the marketplace that employers under proposed occur, as discussed below in connection the Bureau did not regulate buy-here- § 1040.3(a)(4). On the other hand, a with § 1040.4(a)(2)(iii)(A), these lenders pay-here automobile lenders. consumer advocate commenter would be free to include in their An industry trade association for expressed concerns about certain contracts language to clarify that the automobile dealers stated in its practices by employers, such as rule would not apply to the dealers (to comment that, in its view, proposed compelled use of a payroll card account, the extent that the dealers are excluded § 1040.3(b)(5) would be inadequate to in violation of Regulation E.1013 from Bureau rulemaking authority by truly exempt automobile dealers from Dodd-Frank section 1029). the rulemaking and instead that the The Final Rule The Bureau does not believe it is proposal would conflict with the The Bureau has considered the necessary in this rule, in either exclusion in Dodd-Frank section 1029 comments and is adopting proposed regulation text or commentary, to for certain automobile dealers. The § 1040.3(b)(5) with minor technical provide interpretations of the scope of commenter focused specifically on the changes for clarity,1014 renumbering it provisions in Dodd-Frank sections 1027 proposed requirement in § 1040.4(a)(2) as § 1040.3(b)(6), and creating a new or 1029. With regard to buy-here-pay- that providers include in their pre- § 1040.3(b)(5) to provide an exemption here automobile lenders, the Bureau did dispute arbitration agreements for employer-provided products and receive a number of comments on behalf mandatory language explaining that the services as described further below. of automobile lenders or automobile provisions would not prohibit As the Bureau had explained in the dealers, and none suggested the type of consumers from participating in class proposal, automobile dealers extending confusion that the consumer advocate actions. Although proposed consumer credit that is assigned to commenter suggested may exist. The § 1040.3(b)(5) would have excluded unaffiliated third parties are generally Bureau does not believe it is necessary many automobile dealers from this excluded from the rulemaking authority to restate the statute in this rule.1016 requirement, the commenter argued that of the Bureau in the circumstances With regard to the industry the rule would still effectively require described in Dodd-Frank section 1029. commenter concerned with potential automobile dealers making loans that These automobile dealers are not subject coverage of employers under the rule, are assigned to unaffiliated third parties to this rule, as reaffirmed by the explicit the Bureau notes that Dodd-Frank to include the mandatory contract reference to section 1029 in section 1027(g) generally excludes provisions that the unaffiliated third Bureau rulemaking authority over parties would be required to have under 1013 See also Bureau of Consumer Fin. Prot., consumer financial products or services the rule. This commenter asserted that ‘‘Payroll Card Accounts (Regulation E),’’ CFPB that relate to a ‘‘specified plan or automobile dealers are generally Bulletin No. 2013–10 (Sept. 12, 2013), available at 1017 http://files.consumerfinance.gov/f/201309_cfpb_ arrangement.’’ Whether a consumer required to use the forms created by payroll-card-bulletin.pdf. indirect automobile finance companies. 1014 Proposed § 1040.3(b)(5) referred to an 1015 See § 1040.4(a)(2)(iii). Because indirect lenders would be exclusion for persons and their products or services 1016 See, e.g., Press Release, Bureau of Consumer required to use the Bureau’s contract to the extent ‘‘limitations’’ in Dodd-Frank sections Fin. Prot., ‘‘CFPB Takes First Action Against ‘Buy- 1027 or 1029 ‘‘apply.’’ Exclusions from the Here Pay-Here’ Auto Dealer,’’ (Nov. 19, 2014), provision, the commenter predicted that rulemaking authority of the Bureau, such as available at http://www.consumerfinance.gov/ they would require as a matter of exclusions for automobile dealers in certain about-us/newsroom/cfpb-takes-first-action-against- contract that the dealers include that circumstances, are the type of exclusions that are buy-here-pay-here-auto-dealer/. provision on their standard forms, relevant to this rulemaking. The Bureau is therefore 1017 See 12 U.S.C. 5517(g)(4) (defining the phrase clarifying that § 1040.3(b)(6) excludes persons to the ‘‘specified plan or arrangement’’ as including rather than satisfying the rule either by extent providing products or services in certain plans, accounts, or arrangements under the sending consumers notice of the circumstances that are excluded from the Internal Revenue Code of 1986, any employee restriction on use of pre-dispute rulemaking authority of the Bureau. Continued

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financial product or service covered by coverage of FLSA that are separate from products and services, the Bureau does § 1040.3(a) would be excluded pursuant the definition of employer. not believe that employees should be to section 1027(g), when provided under The exemption includes two treated differently from other consumers an employment agreement, therefore important limitations, however. First, who receive those products and services would depend on whether the product the exemption would only apply to the on the same terms and conditions. or service relates to a specified plan or employer. If, for example, an employer were to partner with a third party that Section 1040.4 Limitations on the Use arrangement as defined in the statute. of Pre-Dispute Arbitration Agreements Accordingly, section 1027(g) does not may extend consumer credit to the preclude rulemaking authority over employee, the employer may be exempt Dodd-Frank section 1028(b) employer-provided consumer financial with respect to its activity of referring authorizes the Bureau to prohibit or products or services that do not relate to its employees to the third party (which impose conditions or limitations on the a specified plan or arrangement. otherwise may be covered by use of an agreement between a covered § 1040.3(a)(1)(iii) in certain person and a consumer for a consumer Nonetheless, the Bureau recognizes circumstances). The third-party lender, financial product or service providing that employee benefits may be subject to however, generally would be covered by for arbitration of any future dispute employment arbitration agreements and § 1040.3(a)(1)(i). Similarly, if an between the parties, if the Bureau finds that employment arbitration and the employer extended credit to the that doing so is in the public interest regulation of employment arbitration employee but hired a third party to and for the protection of consumers. agreements may function differently administer the loan, that third party Section 1028(b) also requires that the from those the Bureau analyzed in the generally would still be covered by findings in any such rule be consistent Study, for example because they do not § 1040.3(a)(1)(v). Likewise, if an with the Study conducted under Dodd- necessarily follow rules designed for employer partners with an unaffiliated Frank section 1028(a). Dodd-Frank consumer arbitration. Thus, the Bureau bank to provide a network-branded section 1028(d) states that any is adopting an exemption in payroll card to its employees that is regulation prescribed by the Bureau § 1040.3(b)(5) to exclude employers to covered by § 1040.3(a)(6) because it is under section 1028(b) shall apply to any the extent they are offering or providing an account, then the consumer’s agreement between a consumer and a a product or service to an employee as agreement with the bank generally covered person entered into after the an employee benefit. The Bureau is would be covered because it is entered end of the 180-day period beginning on adopting this approach at this time for into by the bank, even if the payroll card the regulation’s effective date. (The final the reasons discussed herein, but notes also may be part of a general suite of rule refers to this date—the date after that it also expects to monitor these employee benefits such that the the end of the 180-day period beginning products and services and could adjust employer may be exempt under on the effective date—as the the scope of the rule to reach any that § 1040.3(b)(5).1019 ‘‘compliance date.’’ 1020) Pursuant to are not excluded from the Bureau’s Second, the exemption only applies this authority and the findings set forth rulemaking authority under Dodd-Frank when the consumer financial product or in greater detail in Part VI above, the section 1027(g). service is an employee benefit. Whether Bureau is finalizing § 1040.4, which sets For the sake of clarity, because the the product or service is an employee forth conditions or limitations on the term ‘‘employer’’ is not defined in the benefit will depend on the facts and use of pre-dispute arbitration Dodd-Frank Act, § 1040.3(b)(5) circumstances. As clarified in comment agreements between providers and incorporates a well-recognized 3(b)(5)–1, however, if an employer offers consumers entered into on or after the definition of employer from Federal or provides a consumer financial compliance date.1021 law, in section 203(d) of the Fair Labor product or service to its employee on Section 1028(b) of the Dodd-Frank Standards Act (FLSA).1018 The Bureau terms and conditions that it makes Act allows the Bureau to regulate the believes that this well-established available to the general public, that is ‘‘use’’ of the pre-dispute arbitration definition of an ‘‘employer,’’ has been not an employee benefit for purposes of agreements covered by this rule. The extensively interpreted by courts and is the exemption. To the extent that an Bureau believes that, under the ordinary familiar to a wide range of employers. employer is in the general business of meaning of this provision, a provider’s While the rule incorporates the case law providing covered consumer financial ‘‘use’’ of a pre-dispute arbitration interpreting the definition of employer, agreement broadly encompasses the 1019 See Prepaid Accounts Final Rule, 81 FR it does not incorporate other size or 83934, 83940 (Nov. 22, 2016) (explaining that inclusion of such an agreement in an industry related restrictions on the payroll card accounts are issued to consumers by agreement for a consumer financial financial institutions that partner with employers). product or service, the content of such In addition, a consumer advocate commenter urged an agreement, and the reliance on or benefit or compensation plan or arrangement, the Bureau to apply the rule to claims against including a plan that is subject to title I of the employers for violating the Regulation E prohibition invocation of such an agreement (for Employee Retirement Income Security Act of 1974, against compulsory use of payroll accounts, 12 CFR example, a motion to compel arbitration and a prepaid tuition program offered by a State). 1005.10(e)(2), which applies to persons other than of a claim filed as a class action). To the See also id. 5517(g)(3)(A) (generally excluding the financial institution where an account is held. Bureau authority over consumer financial products Employers are not subject to § 1040.3(a)(6)’s extent that the term ‘‘use’’ in Section or services that ‘‘relate to’’ any specified plan or coverage of providers of accounts subject to EFTA 1028(b) is ambiguous, the Bureau arrangement, absent specified interagency and Regulation E, which generally applies to believes that interpreting it to cover all proceedings with the IRS and the Department of financial institutions where the accounts are held. these circumstances would promote the Labor). See 12 CFR 1005.2(b)(1) (defining an ‘‘account’’ as 1018 The FLSA defines the term ‘‘employer’’ as one ‘‘held by a financial institution’’). As a result, ‘‘includ[ing] any person acting directly or indirectly the employer exemption in § 1040.3(b)(5) would not 1020 For additional discussion regarding the in the interest of an employer in relation to an reduce the coverage of these claims, as employers compliance date provision, see the section-by- employee, and includes a public agency, but does are not subject to this rule in connection with the section analysis for § 1040.5(a) below. not include any labor organization (other than when provision of accounts under Regulation E in the 1021 Under § 1040.5(a), compliance with part 1040 acting as an employer) or anyone acting in the first place. Consistent with the Bureau’s approach is required for any pre-dispute arbitration capacity of officer or agent of such labor in adopting § 1040.3(b)(5), the Bureau declines to agreement entered into ‘‘on or after’’ the compliance organization.’’ 29 U.S.C. 203(d). ‘‘Employ’’ is in expand the scope of § 1040.3(a)(6) to apply to more date. In this section-by-section analysis, the Bureau turn defined as ‘‘includ[ing] to suffer or permit to parties at this time, although it expects to continue uses the phrases ‘‘on or after the compliance date’’ work.’’ 29 U.S.C. 203(g). to monitor employer activities in this regard. and ‘‘after the compliance date’’ interchangeably.

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consumer protection, fair competition, 4(a)(1) Use of Pre-Dispute Arbitration case was filed as a putative class action and other objectives of the Dodd-Frank Agreements in Class Actions and a court had not yet ruled on a Act. As explained in Part VI.C, the The Bureau’s Proposal motion to certify the class, proposed Bureau’s rule—which prohibits a § 1040.4(a)(1) would have prohibited a The Bureau proposed § 1040.4(a)(1) in provider from including a pre-dispute motion to compel arbitration that relied accordance with its authority under arbitration agreement in a consumer on a pre-dispute arbitration agreement. section 1028(b) of the Dodd-Frank Act If the court denied a motion for class contract that would allow it to block a and in furtherance of its goal to ensure class claim and also prohibits a provider certification and ordered the case to that class actions are available to proceed on an individual basis, and the from relying on a pre-dispute arbitration consumers who are harmed by agreement to block such a claim—is for ruling may have been subject to providers of consumer financial interlocutory appellate review— the protection of consumers and in the products and services. Proposed public interest. pursuant to Federal Rule 23(f) of the § 1040.4(a)(1) would have stated that a Federal Rules of Civil Procedure or an Accordingly, final § 1040.4 contains provider shall not seek to rely in any analogous State procedural rule— three provisions. Final § 1040.4(a)(1) way on a pre-dispute arbitration proposed § 1040.4(a)(1) would have prohibits providers from relying on pre- agreement entered into after the rule’s prohibited a motion to compel dispute arbitration agreements entered compliance date with respect to any arbitration based on a pre-dispute into after the compliance date in class aspect of a class action that is related to arbitration agreement until the time to actions concerning consumer financial any of the consumer financial products seek appellate review elapsed or or services covered by proposed products covered by § 1040.3.1022 Final appellate review was resolved. If the § 1040.3 including to seek a stay or § 1040.4(a)(2) requires providers, upon court denied a motion for class dismissal of particular claims or the certification—and the ruling was either entering into pre-dispute arbitration entire action, unless and until the not subject to interlocutory appellate agreements for covered products after presiding court has ruled that the case review, the time to seek review elapsed, the compliance date, to include a may not proceed as a class action and, or the appellate court determined that specified plain-language provision in if that ruling may be subject to appellate the case could not proceed as a class their pre-dispute arbitration agreements review on an interlocutory basis, the action—proposed § 1040.4(a)(1) would disclaiming the agreement’s time to seek such review has elapsed or have no longer prohibited a provider applicability to class actions or provide the review has been resolved.1023 notices to consumers when they enter Proposed § 1040.4(a)(1) would have from relying on a pre-dispute arbitration into a pre-existing agreement. Final barred providers from relying on a pre- agreement. § 1040.4(b) requires providers that dispute arbitration agreement entered Proposed comment 4(a)(1)–1 would include pre-dispute arbitration into after the compliance date, as have provided a non-exhaustive list of agreements in their consumer contracts described above, even if the agreement six examples of impermissible reliance under proposed § 1040.4(a)(1). Proposed or enter into existing contracts with pre- did not include the provision required comments 4(a)(1)–1.i through iii would dispute arbitration agreements after the by proposed § 1040.4(a)(2). In the preamble to the proposal, the Bureau have described conduct by a defendant compliance date to submit specified in a class action lawsuit, and proposed arbitral and court records to the Bureau. gave several examples of such scenarios, such as where a third-party debt comments 4(a)(1)–1.iv through vi The Bureau notes that providers may collector obtained the right to collect on described conduct in arbitration. In the respond to the Bureau’s rule by an agreement entered into after the preamble to the proposal, the Bureau removing these provisions and adopting compliance date by a creditor that was stated that one purpose of proposed provisions in the agreement for the covered by proposed § 1040.3(a) but comments 4(a)(1)–1.iv through vi was to covered financial product or service that excluded from coverage under proposed prevent providers from evading waive consumers’ rights to participate § 1040.3(b). The proposal’s section-by- proposed § 1040.4(a)(1) by filing an in a class action. Providers could section analysis for proposed arbitration claim against a consumer attempt to block consumers from § 1040.3(a)(10) contained additional who had already filed a claim on the pursuing class actions by including examples, specific to debt collection by same issue in a putative class action in them in product agreements. Of course, merchants, of scenarios where proposed order to resolve that issue in arbitration the Bureau’s rule would not apply to § 1040.4(a)(1) would have applied even and stop the class action. The Bureau such waivers because they would not be where the pre-dispute arbitration noted that proposed § 1040.4(a)(1) part of a contract with a pre-dispute agreement itself was not required to would not have prohibited a provider arbitration agreement and outside the contain the provision outlined in from continuing to arbitrate a ‘‘first- filed’’ arbitration claim—i.e., an scope of Section 1028. The Bureau will proposed § 1040.4(a)(2). Proposed § 1040.4(a)(1) would have arbitration claim that was filed before actively monitor consumer financial prevented providers from relying on a the consumer filed a class action— markets for this practice—and for other pre-dispute arbitration agreement in a although the provider would not be practices that might function in such a class action unless and until the permitted to invoke the pre-dispute way as to deprive consumers of their presiding court ruled that the case may arbitration agreement to block the class ability to meaningfully pursue their not proceed as a class action, and, if the action. claims—and will assess whether such ruling may have been subject to Proposed comment 4(a)(1)–2 would practices could constitute unfair, interlocutory appellate review, the time have stated that where a class action deceptive, or abusive acts or practices to seek such review elapsed, or the concerns multiple products or services, under Dodd-Frank section 1031. review was resolved. For example, if a and only some of the products or services were covered by proposed 1023 In the proposal, the Bureau noted that the 1022 § 1040.3, the prohibition in proposed While Dodd-Frank section 1028 refers to prohibition in proposed § 1040.4(a)(1) would apply ‘‘consumer financial products or services,’’ the to providers when relying on provisions in pre- § 1040.4(a)(1) applied only to claims Bureau uses the term ‘‘products’’ in this section for dispute arbitration agreements, as well as on the that concern the covered products or the sake of brevity. overall agreement. services.

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Comments Received in its arbitration provision,’’ the expressed concern that proposed The Bureau received a wide range of proposal represents an endorsement of § 1040.4(a)(1)’s prohibition on reliance comments on proposed § 1040.4(a)(1). class arbitration. An individual on a pre-dispute arbitration agreement Some of the comments addressed commenter suggested that the Bureau in a class action ‘‘related to any of the whether the Bureau’s attempt to restrict extend proposed § 1040.4(a)(1) to ban consumer financial products or services the use of arbitration agreements in providers from relying on pre-dispute covered by § 1040.3’’ could include pre- proposed § 1040.4(a)(1) was authorized arbitration agreements in individual dispute arbitration agreements for non- by section 1028(b)—specifically, lawsuits brought by military covered products that were entered into whether proposed § 1040.4(a)(1) was in servicemembers and spouses of as part of a transaction involving some the public interest, for the protection of servicemembers. The commenter noted covered products. An individual consumers, and consistent with the that the MLA bars many types of commenter requested that the Bureau Study. The Bureau responds to these creditors from enforcing arbitration clarify that the rule would not preclude agreements against members of the a consumer from filing an individual comments in Part VI, above, and finds armed forces on active duty or active arbitration if the consumer so desires. that § 1040.4(a)(1), as discussed below, Guard and Reserve duty (and their In addition, a trade association of satisfies the requirements of section families); however, the commenter defense lawyers asserted that proposed 1028(b). Below, the Bureau responds to pointed out that the Bureau’s rule § 1040.4(a)(1) would exceed the the remaining comments, which would cover a wider range of consumer Bureau’s legal authority. According to generally addressed technical aspects of financial products and services than the the commenter, the prohibition in the regulatory text and commentary. MLA and its implementing proposed § 1040.4(a)(1) would raise Commenters recommended changes regulations.1024 separation-of-powers concerns under to the regulatory text that they thought A few commenters requested that the the Constitution, because it could be would clarify when providers may rely Bureau clarify the application of viewed as regulating a defendant’s on pre-dispute arbitration agreements in proposed § 1040.4(a)(1). A trade conduct in court, and would also exceed class actions. A consumer advocate association of defense lawyers stated the Bureau’s authority under the Dodd- commenter suggested that the Bureau that the Bureau should clarify whether Frank Act, because the Act does not add the phrase ‘‘such that a class action invoking arbitration against an absent grant the Bureau authority to regulate may not proceed’’ to the end of class member would constitute parties’ conduct in judicial proceedings. proposed § 1040.4(a)(1) in order to impermissible reliance under proposed An industry commenter requested clarify that the prohibition on reliance § 1040.4(a)(1). In the commenter’s view, that the final rule state that a company applies until interlocutory appellate if invoking arbitration under these does not violate the rule simply by review has been resolved ‘‘such that a circumstances would be impermissible, pursuing its legal rights in good faith. class action may not proceed’’—and that providers would face great difficulty The commenter expressed concern that providers may not rely on pre-dispute complying with the rule, because class if a company moves to compel arbitration agreements where review has action complaints often include vague arbitration based on a good faith belief been resolved such that a class action class definitions that can make it hard that the relevant product is not covered, may proceed. An industry commenter to know, at the outset of a case, which and the court determines that the suggested that the Bureau add the word consumers are part of the proposed product is covered, the company will ‘‘interlocutory’’ prior to each use of the class. The same commenter also have violated proposed § 1040.4(a)(1)— word ‘‘review’’ in the final clause of requested that the Bureau clarify and could face penalties under title X of proposed § 1040.4(a)(1) to help clarify whether, in the case of a first-filed the Dodd-Frank Act—for doing nothing that the waiting period being imposed arbitration—i.e., where there is an more than asserting what it believed to relates to interlocutory review by the ongoing arbitration regarding the same be its legitimate interpretation of the court. issue when the consumer files a class rule and the Act. The commenter Several commenters requested that action—a provider can plead that expressed concern that the proposal the Bureau revise proposed arbitral award as binding under the FAA would chill defendants from invoking § 1040.4(a)(1) to accomplish different and raise res judicata and mootness arbitration agreements where they had a policy outcomes based on various defenses to seek a dismissal of the class good faith basis to believe they could do objectives. An individual commenter action. An industry commenter asked so without violating part 1040. requested that the Bureau revise the Bureau to confirm that proposed Similarly, the trade association of proposed § 1040.4(a)(1) to permit § 1040.4(a)(1) would only preclude a defense lawyers stated that, under the providers to block class actions as long broker-dealer from enforcing an proposal, it was unclear whether a as they allow for class arbitration. This arbitration agreement in a class action defendant would violate the rule by commenter believed class arbitration against a consumer to the extent that the moving to compel arbitration or seeking might provide a lower-cost option in relevant class action ‘‘related to’’ a to plead its right to arbitrate in the event some cases. An industry commenter covered consumer financial product or that class certification is ultimately suggested that the Bureau further service. Another industry commenter denied. The commenter also expressed evaluate whether class arbitration could asked the Bureau to clarify whether a concern that arguing, in opposition to achieve the objectives of the rule and provider would be required to comply class certification, that individual suggested that such an inquiry might with proposed § 1040.4(a)(1) where a arbitration is a superior alternative to lead the Bureau to formulate a rule pre-dispute arbitration agreement does class litigation for resolving the dispute permitting providers to block class not apply to a covered product or could be construed as ‘‘relying’’ on an actions as long as class arbitration is service, but where the pre-dispute arbitration agreement in a class action available. This commenter also believed arbitration agreement was part of a and therefore would be a violation of that class arbitration might be more cost transaction that involved some covered the rule.1025 The commenter did not cite effective than class litigation. Another products or services. The commenter to examples of such pleadings. industry commenter stated that, because the proposal would ‘‘prohibit an 1024 See MLA, 10 U.S.C. 987, and its 1025 To certify a case as a class action, a Federal institution from inserting a class waiver implementing regulations, 32 CFR part 232. court must find, among other things, that a class

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Finally, a consumer advocate proposed § 1040.4(a)(1). In the Bureau’s raise questions about whether the rule commenter expressed support for view, the prohibition in proposed covers particular persons, particular comment 4(a)(1)–1—the non-exhaustive § 1040.4(a)(1) would have applied if agreements, or particular consumer list containing examples of conduct that review had been resolved such that a financial products and services. In some would constitute impermissible reliance case may proceed as a class action. instances, a person may be genuinely on a pre-dispute arbitration agreement However, the Bureau agrees with the uncertain about the rule’s application in under § 1040.4(a)(1)—as drafted. consumer advocate commenter’s a particular class action case. New assertion that this phrase more precisely comment 4(a)(1)–2 clarifies that a class The Final Rule conveys the scope of the provision’s action defendant does not violate Pursuant to the Bureau’s authority prohibition on reliance in a class action. § 1040.4(a)(1) by, for example, relying under Dodd-Frank section 1028(b) to Third, in response to the industry on a pre-dispute arbitration agreement impose conditions or limitations on the commenter that requested that the where it has a genuine belief that either use of pre-dispute arbitration Bureau clarify that both uses of the it is not a provider pursuant to agreements between covered persons word ‘‘review’’ in the final clause of § 1040.2(d) or that none of the claims and consumers for consumer financial proposed § 1040.4(a)(1) refer to asserted in the class action concern any products and services, the Bureau is interlocutory review, the Bureau has of the consumer financial products or finalizing § 1040.4(a)(1) with limited revised the phrase ‘‘or the review has services covered pursuant to § 1040.3. modifications as described below. For been resolved’’ to read ‘‘or such review The Bureau intends comment 4(a)(1)– the reasons described above in Part VI, has been resolved.’’ Fourth, instead of 2 to mirror the Noerr-Pennington the Bureau finds that § 1040.4(a)(1) prohibiting seeking to rely on an doctrine and therefore is using the term satisfies the requirements of section arbitration agreement in a class action, ‘‘genuine’’ to reflect the meaning of that 1028(b) because it is in the public the rule prohibits relying on the term in the context of the Noerr- interest and for the protection of arbitration agreement in a class action. Pennington doctrine. Under the Noerr- consumers, and because the related The Bureau believes the term ‘‘seek’’ is Pennington doctrine, where a statute findings are consistent with the Study not needed. A motion that seeks to does not provide otherwise, it is that the Bureau conducted pursuant to compel arbitration, for example, relies presumed not to penalize conduct that section 1028(a). on an arbitration agreement, as clarified implicates the protections afforded by Similar to what was proposed, the in comment 4(a)(1)–1.i. the First Amendment’s Petition Clause. Bureau is finalizing § 1040.4(a)(1) to The commentary to the final rule also But parties do not enjoy immunity for state that a provider shall not rely in any includes new comment 4(a)(1)–1.ii, ‘‘sham’’ petitioning, that is, petitioning way on a pre-dispute arbitration which contains an example of conduct that is not ‘‘genuine.’’ 1026 The Court has agreement entered into after the rule’s that does not constitute reliance. The held that litigation is a ‘‘sham’’ when (1) compliance date with respect to any comment 4(a)(1)–1.ii states that reliance it is objectively baseless in the sense aspect of a class action concerning any on a pre-dispute arbitration agreement that no reasonable litigant could of the consumer financial products or does not include seeking or taking steps realistically expect success on the services covered by § 1040.3, including to preserve a class action defendant’s merits, and (2) the litigant’s subjective to seek a stay or dismissal of particular ability to seek arbitration after the trial motivation conceals an attempt to use claims or the entire action, unless and court has denied a motion to certify the the governmental process in a manner until the presiding court has ruled that class and either an appellate court has that violates the relevant Federal the case may not proceed as a class affirmed that decision on an law.1027 Comment 4(a)(1)–2 mirrors the action and, if that ruling may be subject interlocutory appeal of that motion, or Noerr-Pennington doctrine in clarifying to appellate review on an interlocutory the time to seek such an appeal has that a class action defendant does not basis, the time to seek such review has elapsed. This comment is intended to violate § 1040.4(a)(1) where it relies on elapsed, or such review has been address the concern raised by the trade a pre-dispute arbitration agreement— resolved such that the case cannot association of defense lawyers’ such as by filing a motion to compel proceed as a class action. comment that a defendant could violate arbitration—in a manner that constitutes Final § 1040.4(a)(1) differs from the rule by moving to compel ‘‘genuine’’ petitioning under this two- proposed § 1040.4(a)(1) in several arbitration, or seeking to assert its part Noerr-Pennington test. However, respects. First, instead of using the contingent right to arbitrate in the future where a defendant relies on a pre- phrase ‘‘related to’’ to describe the in the event that the case cannot dispute arbitration agreement (such as nexus between the class action and the proceed as a class action (e.g., because by filing a motion to compel arbitration) covered consumer financial service or class certification is denied). in a manner that constitutes ‘‘sham’’ product that triggers application of the The commentary to the final rule also petitioning—because the motion is rule, the final rule uses the phrase includes new comment 4(a)(1)–2. This objectively baseless and subjectively in ‘‘concerning.’’ The Bureau is making comment is intended to address the bad faith—a Noerr-Pennington defense this change for consistency with other industry commenter’s concern that does not apply and the defendant provisions in the rule that use the § 1040.4(a)(1) would chill defendants violates § 1040.4(a)(1). phrase ‘‘concerning’’ to describe this from moving to compel arbitration when The Bureau has also made a technical nexus, including in § 1040.2(c) they have a good faith basis to believe corrections to comment 4(a)(1)–1 (definition of pre-dispute arbitration that they could do so without violating 1026 agreement), § 1040.4(a)(2) (contract the rule. The Bureau believes that, in See BE & K Const. Co. v. N.L.R.B., 536 U.S. the vast majority of cases, providers will 516, 524–26 (2002) (‘‘The right of access to the provisions), and § 1040.4(b) (monitoring courts is . . . but one aspect of the right of petition rule). Second, the Bureau has added the know whether the rule applies— . . . [yet] while genuine petitioning is immune phrase ‘‘such that the case cannot particularly because the Bureau has from antitrust liability, sham petitioning is not.’’), quoting California Motor Transport Co. v. Trucking proceed as a class action’’ to the end of defined coverage primarily in relation to existing statutes and, where applicable, Unlimited, 404 U.S. 508 (1972). their implementing regulations. 1027 See BE & K Const. Co., 536 U.S. at 526, action is superior to other available methods for quoting Professional Real Estate Investors, Inc. v. fairly and efficiently resolving the controversy. See However, the Bureau acknowledges Columbia Pictures Industries, Inc., 508 U.S. 49, 60– FRC.P. 23(b)(3). that, at the margins, some cases will 61 (1993).

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including to conform the language more lack of procedural safeguards.1032 The With respect to the trade association closely to the regulation text in Bureau received similar feedback from of defense lawyers’ comment that § 1040.4(a)(1) and (a)(2).1028 stakeholder groups during the extensive requesting clarification of the The Bureau declines to revise outreach the Bureau conducted during application of the rule to a litigant’s proposed § 1040.4(a)(1) to permit the Study process and during the pre- possible opposition to class certification providers to block class actions as long proposal stage of the rulemaking on the grounds that individual as they allow for class arbitrations. The process.1033 Without further evidence, arbitration is superior, the Bureau Bureau believes that allowing the Bureau cannot conclude that class disagrees that such a clarification is consumers to seek class action relief is arbitrations provide a viable alternative needed. The Bureau does not in the public interest, for the protection to class actions. For this reason, the understand from the comment how a of consumers, and consistent with the Bureau is not revising proposed company could assert that individual Study.1029 Consumers have brought § 1040.4(a)(1) to allow providers to arbitration pursuant to an arbitration consumer financial class actions under block class actions as long as they allow agreement is superior to a class action Federal Rule 23 of the Federal Rules of for class arbitration. if the company could not actually, Civil Procedure for approximately 50 The Bureau notes, however, that under the rule, be permitted to compel years, and they are a proven mechanism § 1040.4(a)(1) would not preclude the individual arbitration in a class action. by which consumers can enforce their use of class arbitration as a forum. Final Because individual arbitration of the legal rights and obtain redress when § 1040.4(a)(1) would permit an named plaintiff’s claims in a class those rights are violated. In contrast, the arbitration agreement that allows for action could not be compelled under the Bureau has not seen—and commenters class arbitration, if it also allowed a arbitration agreement, it appears did not offer—evidence to demonstrate consumer the option of pursuing class speculative that a company could assert that class arbitration would be able to litigation instead. In other words, a pre- superiority of such a method of dispute accomplish these objectives as dispute arbitration agreement that resolution in the context of a class effectively. The Bureau believes that, allows a consumer to choose whether to action governed by the Bureau’s rule. In compared with consumer finance class file a class claim in court or in any event, the Bureau’s rule does not actions, consumer finance class arbitration would be permissible under prohibit a defendant from arguing that arbitration is less proven, and may even proposed § 1040.4(a), although an a class action would not be superior to be characterized as mostly untested, as arbitration agreement that permits the individual resolution generally based on a procedure for adjudicating consumer claim to only be filed in class arbitration the facts at issue in a particular case. finance disputes. The Study identified would not be permissible. The Bureau The Bureau therefore does not believe only two consumer finance class expects that, if class arbitration proves the issue warrants clarification in the arbitrations filed between 2010 and to be an efficient procedure through final rule. The Bureau intends to 2012; one was still pending on a motion which consumers can enforce their monitor any specific practices that may to dismiss as of September 2014, and rights and obtain redress, providers will emerge in this regard, however, and may the other class arbitration contained no make the option available to consumers exercise its statutory authorities as information other than the arbitration and consumers will choose it over class appropriate to clarify the rule or to take demand that followed a State court litigation in court. Additionally, as with other appropriate action in order to decision granting the company’s motion individual arbitration and as discussed prevent circumvention or evasion of the seeking arbitration.1030 Further, as the in greater detail below in the section-by- rule. proposal noted, industry groups have section analysis of § 1040.4(b), the In response to the individual heavily criticized class arbitration on Bureau will monitor any class commenter’s request regarding the the ground that it lacks procedural arbitrations that do occur. MLA, the Bureau notes, as an initial safeguards. For example, arbitrator With respect to the industry matter, that the final rule will not decisions in class arbitrations—such as commenter’s assertion that the proposal supersede the MLA’s protections decisions to certify a class or award represents an endorsement of class because the final rule and the MLA’s damages—are generally subject to arbitration because it would prohibit prohibition on enforcing arbitration limited judicial review.1031 Consumer institutions from inserting class waivers agreements do not conflict. The MLA advocates have also criticized several into their arbitration agreements, the bans certain categories of creditors from aspects of class arbitration, including its Bureau believes the commenter using pre-dispute arbitration agreements misunderstood the proposal. Final in certain consumer credit agreements 1028 To reflect the fact that the provisions § 1040.4(a)(1)—like proposed and from enforcing existing pre-dispute specified in § 1040.4(a)(2) now use the term ‘‘rely § 1040.4(a)(1)—would prohibit arbitration agreements.1034 on,’’ the prefatory sentence for comment 4(a)(1)–1 Because now states that both § 1040.4(a)(1) and (a)(2) use the providers from relying on pre-dispute those consumer credit agreements are term ‘‘rely on.’’ Comment 4(a)(1)–1.i also is revised arbitration agreements in class action prohibited from having pre-dispute to clarify that the conduct that constitutes reliance lawsuits. It would not prohibit arbitration agreements going forward, is in relation to a pre-dispute arbitration agreement. providers from adopting terms there would be no such agreements that 1029 See supra Part VI (the Bureau’s findings that the final rule is in the public interest and for the preventing class arbitration. would trigger application of the protection of consumers). Bureau’s rule. Thus, where a particular 1030 See Study, supra note 3, section 5 at 86–87. 1032 For example, a consumer advocate agreement is covered by both part 1040 1031 In an amicus curiae filing, the U.S. Chamber commenter asserted that all arbitrations, including and the MLA’s prohibition, providers of Commerce argued that ‘‘[c]lass arbitration is a class arbitrations, are unfair due to—among other need not be concerned that the two legal worst-of-all-worlds Frankenstein’s monster: It things—the alleged repeat-player bias among combines the enormous stakes, formality and arbitrators, the more-limited discovery rights of the regimes create conflicting obligations expense of litigation that are inimical to bilateral plaintiff compared to court, and the limited judicial because the MLA bars the provider from arbitration with exceedingly limited judicial review review of arbitrators’ decisions. using a pre-dispute arbitration of the arbitrators’ decisions.’’ Brief of the Chamber 1033 See supra Parts III.A and III.C (describing agreement altogether. of Commerce of the United States of America as stakeholder outreach the Bureau conducted as part Amicus Curiae in Support of Plaintiffs-Appellants of the Study process) and Part IV (describing at 9, Marriott Ownership Resorts, Inc. v. Sterman, stakeholder outreach the Bureau conducted 1034 10 U.S.C. 987(e)(3) and (f)(4); 32 CFR 232.8(c) No. 15–10627 (11th Cir. Apr. 1, 2015). following the release of the Study). and 232.9(d).

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The Bureau declines to prohibit the comment refers to exclusions of persons rule contains an exemption for broker- enforcement of pre-dispute arbitration from a class ‘‘in a class action.’’ For dealers.1036 Persons covered by this agreements against servicemembers and example, defendants may file motions exemption are not providers and are the spouses of servicemembers in the in a pending class action to strike or therefore not subject to any of the final rule, as requested by the reform or narrow the class definition to requirements of part 1040.1037 commenter. As described elsewhere in exclude persons who have pre-dispute Finally, the Bureau disagrees with the this final rule, the Bureau considered arbitration agreements. The example in trade association of defense lawyers’ and rejected an alternative under which the comment clarifies that such comment asserting that proposed the Bureau would have prohibited exclusions are not permitted by the rule. § 1040.4(a)(1) would raise separation-of- altogether the enforcement of covered The example does not reach parallel powers concerns under the U.S. pre-dispute arbitration agreements individual litigation. In particular, that Constitution and would exceed the against consumers.1035 Neither the example does not apply to individual Bureau’s authority under the Dodd- Study nor the commenters offered litigation with consumers who may or Frank Act by regulating a defendant’s evidence demonstrating that individual may not be covered by alleged class conduct in court (i.e., by limiting a arbitrations involving servicemembers definitions in a pending class complaint defendant’s ability to enforce a pre- and their families are inferior to or class definitions in a certified class or dispute arbitration agreement in a class individual litigation in terms of preliminarily or finally approved class action). The Bureau is not aware of, and remedying consumer harm or unique settlement. If a consumer elects to file the commenter did not provide a legal from arbitration involving non- an individual lawsuit against a provider, basis for such a concern. In addition, the servicemembers. Consistent with the that consumer’s individual lawsuit will Bureau is issuing part 1040 pursuant to Bureau’s current consumer protection be subject to the rule on the same basis a direct grant of statutory authority: work involving servicemembers and as any individual lawsuit (i.e., a motion Dodd-Frank section 1028(b). That their families, the Bureau will continue to compel arbitration may be permitted statute authorizes the Bureau to prohibit to monitor the offering and provision of and the monitoring rule will apply), or impose conditions or limitations on consumer financial products and without regard to the existence of the use of pre-dispute arbitration services to servicemembers and their parallel class litigation that may or may agreements in contracts for consumer families. not affect that consumer. financial products and services. Because In response to the industry The trade association of defense parties frequently enforce such commenter that requested clarification lawyers’ comment also requested agreements through the judicial process, as to whether § 1040.4(a)(1) would ban clarification as to the preclusive effect of the authority to prohibit or impose reliance on a pre-dispute arbitration an arbitral award under a ‘‘first-filed’’ conditions or limitations on their use agreement for a non-covered product or arbitration—i.e., an arbitration that is necessarily includes the authority to service, where the original transaction ongoing when a consumer files a class regulate a defendant’s conduct in involved some covered products or action relating to the same dispute. As court.1038 services, the Bureau notes that a the Bureau stated in the preamble for provider that offers or provides non- proposed § 1040.4(a)(1), where a 4(a)(2) Provision Required in Covered covered products or services must consumer files a class action, and there Pre-Dispute Arbitration Agreements comply with part 1040 only for the is already a pending arbitration claim The Bureau’s Proposal relating to the same dispute, proposed products and services it provides that The Bureau proposed § 1040.4(a)(2) in § 1040.4(a)(1) would not prohibit the are covered under § 1040.3. The Bureau accordance with its authority under provider from continuing with the explains this issue further in comment Dodd-Frank section 1028(b) and in arbitration, but it would prohibit the 2(d)–1. furtherance of its goal to ensure that Regarding the trade association of provider from using an arbitration agreement to block the class action class actions are available to consumers defense lawyers’ comment that who are harmed by providers of requested that the Bureau clarify the claim. However, if the provider wins the first-filed arbitration, the provider could consumer financial products and rule’s application in relation to absent services. Proposed § 1040.4(a)(2)(i) class members of a putative class action, plead the arbitral outcome as binding under the FAA on any consumer who would have generally required the commenter appears to envision a providers, upon entering into a pre- scenario in which a provider moves to was a party in the arbitration pursuant to applicable res judicata and claim dispute arbitration agreement for a compel arbitration in an individual covered product or service after the lawsuit against a plaintiff who is also a preclusion law. Final § 1040.4(a)(1) would not prohibit the provider from compliance date, to ensure that the putative class member in a pending agreement contained a specified class action against the provider relating ‘‘relying on’’ the award in this context. In response to the individual provision stating that neither the to the same dispute. The commenter provider nor anyone else would use the asked whether such a motion to compel commenter that requested that the would constitute impermissible reliance Bureau clarify that the rule would not preclude a consumer from filing an 1036 See § 1040.3(b)(1)(i). under proposed § 1040.4(a)(1), 1037 individual arbitration, the Bureau In general, however, as to entities that are especially in light of proposed comment providers, the commenter’s understanding is 4(a)(1)–1.ii, which would have stated confirms that nothing in the rule would correct. Section 1040.4(a)(1)’s prohibition applies that reliance on an arbitration agreement preclude this. And in response to the only with respect to a class action that concerns any of the consumer financial products or services under § 1040.4(a)(1) includes ‘‘seeking industry commenter that requested that the Bureau confirm that proposed covered by § 1040.3(a). So even where a provider to exclude a person or persons from a is providing a product or service covered by class in a class action.’’ The Bureau § 1040.4(a)(1) would only preclude a § 1040.3(a), the provider may still rely on disagrees with the commenter that that broker-dealer from enforcing an arbitration agreements in class actions that do not concern a product or service covered by § 1040.3(a). comment was ambiguous. That arbitration agreement in a class action against a consumer to the extent that the 1038 See supra section-by-section analysis of § 1040.4(a)(1) (describing new comment 4(a)(1)–2 1035 The potential alternative of a complete ban relevant class action ‘‘related to’’ a clarifying that the rule does not burden conduct on arbitration agreements is discussed in the covered consumer financial product or protected by the First Amendment’s Petition Bureau’s Section 1022(b)(2) Analysis. service, the Bureau notes that the final Clause).

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agreement to stop the consumer from not have been permitted, for example, to into a pre-existing pre-dispute being part of a class action. Proposed include the required language as a arbitration agreement that did not § 1040.4(a)(2)(ii) would have contained separate notice or consumer advisory, contain either the provision required by an optional, alternative provision that except in certain circumstances under proposed § 1040.4(a)(2)(i) or the providers could use where a pre-dispute proposed § 1040.4(a)(2)(iii). The alternative permitted by proposed arbitration agreement applied to both proposal also noted that, similar to the § 1040.4(a)(2)(ii), presumably because covered and non-covered products and Bureau’s understanding of the provision the original agreement was entered into services. Where a pre-dispute arbitration required by the Holder in Due Course by person that was not a provider and agreement existed previously between Rule, the Bureau intended the provision thus was not subject to any of those other parties and did not contain either to create a binding legal obligation. As provisions or because the original of these two required provisions, a result, if a consumer or attorney were agreement was entered into before the proposed § 1040.4(a)(2)(iii) would have unaware of proposed § 1040.4(a)(1), the compliance date. Under proposed required providers entering into such Bureau expected that the provision § 1040.4(a)(2)(iii), within 60 days of agreements to either amend them to add required by proposed § 1040.4(a)(2)(i) entering into the pre-dispute arbitration a specified provision or send the would have had a substantially similar agreement, providers would have been consumer a notice with specified legal effect through the operation of required either to ensure that the language. The Bureau summarizes applicable contract law. agreement was amended to contain the proposed § 1040(a)(2)(i)–(iii) in greater As the proposal stated, the Bureau provision specified in proposed detail below. designed the § 1040.4(a)(2)(i) § 1040.4(a)(2)(iii)(A) or to provide any Proposed § 1040.4(a)(2)(i) would have provision—as well as the consumer to whom the agreement stated that, except as permitted by § 1040.4(a)(2)(ii) and (iii)(A) provisions applied with the written notice proposed § 1040.4(a)(2)(ii) and (iii) and and the § 1040.4(a)(2)(iii)(B) notice—to specified in proposed proposed § 1040.5(b), providers shall, use plain language. While the Bureau § 1040.4(a)(2)(iii)(B). For providers that upon entering into a pre-dispute did not believe that disclosure chose to ensure that the agreement is arbitration agreement for a consumer requirements or consumer education amended, the provision specified by financial product or service covered by could materially increase the filing of proposed § 1040.4(a)(2)(iii)(A) would proposed § 1040.3 after the compliance individual claims in arbitration or have been as follows: date, ensure that the agreement contains litigation, the Bureau believed that We agree that neither we nor anyone else the following provision: consumers who consulted their that later becomes a party to this pre-dispute We agree that neither we nor anyone else contracts should be able to understand arbitration agreement will use it to stop you will use this agreement to stop you from their dispute resolution rights. from being part of a class action case in court. being part of a class action case in court. You Where a pre-dispute arbitration You may file a class action in court or you may file a class action in court or you may agreement was in a contract for multiple may be a member of a class action even if you be a member of a class action even if you do products or services, only some of do not file it. not file it. which were covered under proposed For providers that chose to provide As noted in the proposal, the Bureau § 1040.3, proposed § 1040.4(a)(2)(ii) consumers with a written notice, the designed this requirement to make would have permitted (but not required) required notice provision specified by consumers, courts, and other relevant providers to include the following § 1040.4(a)(2)(iii)(B) would have been as third parties (including potential alternative contract provision in place of follows: the one required by proposed purchasers) aware that the agreement We agree not to use any pre-dispute may not be used to prevent a consumer § 1040.4(a)(2)(i): arbitration agreement to stop you from being from pursuing a class action. The We are providing you with more than one part of a class action case in court. You may Bureau intended this provision to be product or service, only some of which are file a class action in court or you may be a limited to class action cases concerning covered by the Arbitration Agreements Rule member of a class action even if you do not a consumer financial product or service issued by the Consumer Financial Protection file it. covered by proposed § 1040.3. In Bureau. We agree that neither we nor anyone As the proposal stated, the Bureau else will use this agreement to stop you being addition, the Bureau intended the part of a class action case in court. You may believed that the notice option afforded phrase ‘‘neither we nor anyone else file a class action in court or you may be a by proposed § 1040.4(a)(2)(iii)(B) would shall use this agreement’’ to inform member of a class action even if you do not have reduced the burden to providers consumers that the provision also file it. This provision applies only to class for whom amendment may be bound third parties that may seek to rely action claims concerning the products or impossible, challenging, or costly while on the agreement. services covered by that Rule. preserving the consumer awareness The proposal noted that the Bureau As the proposal stated, where providers benefits of § 1040.4(a)(2)(iii)(A). The intended the phrase ‘‘contains the use a single contract for both covered Bureau also noted that, whether the following provision’’ in proposed and non-covered products and services, provider elected to ensure that the § 1040.4(a)(2)(i) to clarify that the the Bureau believed that the alternative agreement is amended, chose to provide specified text should be included as a provision would have improved the required notice, or violated contractual provision within the pre- consumer understanding by alerting proposed § 1040.4(a)(2)(iii) by failing to dispute arbitration agreement—as, for consumers that the provision may not do either, the provider would still have instance, the Federal Trade apply to non-covered products or been required to comply with proposed Commission’s Holder in Due Course services. § 1040.4(a)(1). Rule also requires.1039 Providers would Proposed § 1040.4(a)(2)(iii) would The proposal also described how have set forth how to comply with buyers of medical debt would have 1039 This rule prohibits a person who, in the proposed § 1040.4(a)(2) in needed to perform due diligence, in ordinary course of business, sells or leases goods or some cases, to determine how the rule services to consumers from taking or receiving a circumstances where a provider entered consumer credit contract that fails to contain a would have applied to the debts they provision specified in the regulation stating that and defenses that the debtor could assert against the buy. In cases involving incidental credit any holder of the contract is subject to all claims seller. 16 CFR 433.2. that is subject to ECOA, debt buyers

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may have faced additional impacts from agreement.1042 Proposed comment Comments Received the rule from additional due diligence to 4(a)(2)–1 would have clarified this The Bureau received a wide range of determine which acquired debts arise distinction by stating that the comments on proposed § 1040.4(a)(2). from credit transactions 1040 or from the requirements of proposed § 1040.4(a)(2) Several comments addressed the 4(a)(2) additional class action exposure created would not apply to a provider that does provisions as a whole, while the other from sending consumer notices on debts not enter into a pre-dispute arbitration comments concerned individual that did not arise from credit agreement with a consumer. provisions. transactions (i.e., from potential over- Proposed comment 4(a)(2)–2 would Several commenters addressed the compliance). The Bureau described have provided an illustrative example Bureau’s overall approach to these impacts in detail in the proposal’s clarifying how proposed § 1040.4(a) § 1040.4(a)(2). An industry commenter Section 1022(b)(2) Analysis. applied in the context of portfolio requested that the Bureau give providers the flexibility to disclose the provisions mergers and acquisitions. The comment Proposed commentary. To clarify the ‘‘in substance’’ rather than verbatim (as described a hypothetical scenario in application of proposed § 1040.4(a)(2), required by the proposal). The the proposal contained three proposed which Bank A acquired Bank B after the commenter argued that providers need comments. Proposed comment 4(a)(2)-1 compliance date and Bank B had such flexibility because the provisions’ would have highlighted an important entered into pre-dispute arbitration terminology may not conform to the rest distinction between proposed agreements before the compliance date. of the provider’s agreement. The § 1040.4(a)(2) and proposed The comment stated that if, as part of commenter also stated that such § 1040.4(a)(1). In general, proposed the acquisition, Bank A acquired flexibility would also avoid class § 1040.4(a)(1) would have applied to products of Bank B’s that were subject actions over typographical errors and providers regardless of whether the to pre-dispute arbitration agreements other minor issues. Another industry provider itself entered into a pre-dispute (and thereby entered into such commenter expressed concern that arbitration agreement, as long as the agreements), proposed § 1040.4(a)(2)(iii) plaintiffs could construe the provisions agreement was entered into after the would have required Bank A to either as a waiver by the defendant of its right compliance date. For example, if a debt (1) ensure the account agreements are to assert certain defenses in a class collector had not entered into a pre- amended to contain the provision action, such as defenses to class dispute arbitration agreement that required by proposed certification. A State regulator applied to the debt, proposed § 1040.4(a)(2)(iii)(A) or (2) deliver the commenter requested that the Bureau § 1040.4(a)(1) would still have notice in accordance with proposed clarify whether the provisions would apply only to class actions brought prohibited the debt collector from § 1040.4(a)(2)(iii)(B). under Federal and State consumer Proposed comment 4(a)(2)–3 would moving to compel a class action case protection laws or also to class actions against it to arbitration on the basis of have clarified that providers may brought under other Federal and State that agreement, so long as the agreement provide the notice in any way the laws. A consumer advocate commenter was entered into after the compliance provider communicates with the suggested that the provisions be date by a creditor who extended consumer, including electronically. The reframed as a relinquishment of the consumer credit as described in proposed comment would have further provider’s right to rely on the pre- § 1040.3(a)(1)(i). This would be the case explained that providers may either dispute arbitration agreement in a class without regard to whether the creditor provide the notice as a standalone action (rather than merely as a binding was excluded from the rule by document or include it in another notice agreement not to do so). § 1040.3(b). In contrast, proposed that the customer receives, such as a A trade association of lawyers who § 1040.4(a)(2) would have applied to periodic statement, to the extent represent investors praised the providers only when they entered into permitted by other laws and regulations. provisions for conveying the consumer’s a pre-dispute arbitration agreement for a The Bureau stated in the proposal that rights in plain language, stating that the product or service.1041 Thus, proposed it believes that giving providers a wide proposed language is much simpler than § 1040.4(a)(2) would not have applied to range of options for furnishing the similar language required by FINRA for 1043 the debt collector in the example cited notice would accomplish the goal of securities contracts. This commenter previously; but it would have applied to informing consumers while reducing also suggested that the Bureau require a debt buyer that acquired or purchased the burden on providers. that the relevant provision be included in all pre-dispute arbitration a product covered by proposed § 1040.3 For ease of reference, in this section- agreements; that a separate notice after the compliance date and became a by-section analysis, the Bureau refers to containing the provision be sent to party to the pre-dispute arbitration the contract provision that would be consumers with existing agreements; required by proposed § 1040.4(a)(2)(i) as that the Bureau mandate that the 1040 As the proposal noted, the Bureau has the ‘‘required 4(a)(2)(i) provision’’; the provision be conspicuously placed and previously recognized that requiring such optional, alternative provision determinations across an entire portfolio of not in a smaller font size or otherwise collection accounts may be burdensome for buyers permitted by § 1040.4(a)(2)(ii) as the diminished in importance relative to the of medical debt because whether such debts ‘‘optional 4(a)(2)(ii) provision’’; and the rest of the agreement; and that covered constitute credit will turn on facts and provisions specified in § 1040.4(a)(2)(iii) firms be required to include the circumstances that are unique to the health care as the ‘‘4(a)(2)(iii) amendment’’ and the context and of which the debt buyer may not be provision on their Web sites. A aware. As a result, the Bureau exempted medical ‘‘4(a)(2)(iii) notice.’’ The Bureau also consumer advocate commenter debt from revenue that must be counted toward refers to the provisions specified in emphasized that, in its opinion, the larger participant status of a debt collector. See 77 § 1040.4(a)(2) collectively as the ‘‘4(a)(2) phrase ‘‘neither we nor anyone else’’ in FR 65775, 65780 (Oct. 31, 2012). provisions’’ or simply ‘‘the provisions.’’ 1041 See proposed § 1040.4(a)(2) (‘‘Upon entering each of the proposed provisions is vital into a pre-dispute arbitration agreement for a product or service covered by proposed § 1040.3 1042 See proposed comment 4–1.i (providing 1043 See FINRA, ‘‘Requirements When Using after the date set forth in § 1040.5(a) . . .’’) examples of entering into a pre-dispute arbitration Predispute Arbitration Agreements for Customer (emphasis added). agreement). Accounts,’’ at Rule 2268(f).

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because it would bind third parties who Further, several Tribal commenters separate product agreements, one for may be assigned the contract. expressed concerns about proposed covered products and one for non- A consumer advocate commenter § 1040.4(a)(2) related to sovereign covered products. A trade association of requested that the Bureau revise immunity.1044 Tribal commenters and consumer lawyers suggested that the proposed § 1040.4 to include additional participants in the Tribal consultation Bureau either require providers to sanctions on providers that violate on the proposal expressed concern that identify which products are covered or § 1040.4(a)(2). The commenter requested this provision could be misconstrued by to provide separate terms for each that the Bureau forbid providers from plaintiffs, their attorneys, and courts as product. An industry commenter relying on an arbitration agreement in a waiver of a Tribal government’s recommended that the Bureau give an individual (i.e., non-class) suit if the sovereign immunity from private suit, providers the option to disclose which provider failed to include the required insofar as they explicitly state that products are subject to the provision 4(a)(2)(i) provision. The commenter also consumers may file class actions even if, and which are not. A public-interest requested that the Bureau state that non- notwithstanding that statement, the consumer lawyer commenter requested compliant agreements may not be Tribal government enjoys sovereign that, where contracts are for both severed or reformed after litigation has immunity from class actions. The covered and non-covered products, the commenced. In the commenter’s view, commenters stated that requiring Tribal optional 4(a)(2)(ii) provision instead be these provisions would help deter governments to use the proposed mandatory, because allowing the providers from intentionally omitting provision was an affront to their provider to use the 4(a)(2)(i) provision, the required provision. The commenter sovereign immunity. These commenters which implies that all products are stated that providers may omit the stated that the rule should, at the very covered, would mislead the consumer. Commenters expressed additional provision in the hope that plaintiffs or least permit Tribes to use different concerns about the provision that would courts may be unaware of the Bureau’s language that does not impinge on or be required by proposed rule or with the expectation that, if potentially waive their sovereign § 1040.4(a)(2)(ii) apart from concerns caught omitting the provision, courts immunity claims. One Tribal related to the potential for consumer would merely require the provider to commenter suggested specific 1045 confusion. A consumer advocate reform the agreement, leaving the language. In addition to comments about commenter argued that the provision provider no worse off than if it had § 1040.4(a)(2) generally, the Bureau would hurt class action plaintiffs by initially complied with the rule. The received numerous comments about highlighting that the rule’s coverage was commenter additionally requested that specific provisions. The Bureau limited in scope, which, according to the Bureau add a provision stating that received one comment specific to the the commenter, would create a non-compliant arbitration agreements— proposed 4(a)(2)(i) provision. A public- ‘‘roadblock’’ in the consumer’s e.g., agreements that do not include a interest consumer lawyer commenter prosecution of a class action. provision required by § 1040.4(a)(2)— recommended that, to improve Several comments addressed are null and void. Other commenters readability, the Bureau revise the proposed § 1040.4(a)(2)(iii) specifically. raised issues specific to automobile provision to read: ‘‘No one can use this A consumer advocate commenter lending. An industry commenter agreement to stop you from being part argued that the phrase ‘‘who later expressed concern that automobile of a class action case in court. You can becomes a party’’ in the proposed finance companies would include one file a class action in court or you can be 4(a)(2)(iii)(A) amendment unduly limits of the 4(a)(2) provisions in retail a member of a class action filed by the amendment’s binding effect, relative installment sales contract or lease forms, someone else.’’ to the proposed 4(a)(2)(i) provision, and that, as a result, the provision Numerous commenters addressed the which states that neither the contracting would bind dealers otherwise exempt optional 4(a)(2)(ii) provision party ‘‘nor anyone else’’ may stop the from the Bureau’s jurisdiction pursuant specifically. Many of these commenters consumer from being part of a class to Dodd-Frank section 1029. The expressed concern that the provision action. The commenter suggested that commenter suggested that the final rule would confuse consumers and the Bureau require providers entering state expressly that proposed suggested that the Bureau modify the into pre-existing contracts that do not § 1040.4(a)(2) does not apply to any provision in various ways to make it contain the required provision to simply transaction originated by an excluded more understandable. Some insert the proposed 4(a)(2)(i) provision person pursuant to proposed commenters requested that, where via an amendment. Two commenters— § 1040.3(b). Another industry agreements are for both covered and a consumer advocate and a public- commenter stated that, in its view, non-covered products, the Bureau interest consumer lawyer—argued that proposed § 1040.4(a)(2) would require require providers to indicate, in their the Bureau should require amendments the use of two different contractual agreements, which products the in certain scenarios where the proposal provisions (the § 1040(a)(2)(i) provision Bureau’s rule covers and which it does would otherwise allow providers to and the § 1040.4(a)(2)(ii) provision), so not cover. A consumer advocate send notices. According to the lenders would need to use two separate commenter requested that the Bureau consumer advocate commenter, the loan agreements: one for loans the require providers to furnish two Bureau should only allow providers to lender makes directly and one for loans send the notice where the provider obtained from dealers or other financial 1044 For a more detailed summary of Tribal cannot amend the contract unilaterally, institutions. The commenter asked the comments on sovereign immunity, see the section- while the other commenter similarly Bureau to replace the 4(a)(2)(i) and by-section analysis for § 1040.3(b)(2), above. thought the Bureau should only permit 1045 ‘‘We agree that neither we nor anyone else 4(a)(2)(ii) provisions with a single will use this agreement to stop you from being part the notice when amendment is provision that lenders in its of a class action case in court. You may file a class ‘‘contractually impossible.’’ These predicament could use. The commenter action in court or you may be a member of a class commenters argued that amendments also asserted that replacing the action even if you do not file it; provided, however, are superior to notices from a consumer this shall not be deemed nor constitute a waiver of proposed 4(a)(2)(i) and (ii) provisions the rights, privileges and immunities of the Tribe, protection standpoint because with a single provision would reduce its Tribal government or any affiliate of its Tribal amendments, unlike notices, would consumer confusion. government.’’ bind third parties. An industry

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commenter expressed concern that § 1040.4(a)(2) with the modifications We are providing you with more than one proposed § 1040.4(a)(2)(iii) would cause described below. product or service, only some of which are the Bureau’s rule to apply to contracts Final § 1040.4(a)(2)(i) states that, covered by the Arbitration Agreements Rule originally entered into before the except as permitted by § 1040.4(a)(2)(ii) issued by the Consumer Financial Protection Bureau. The following provision applies only compliance date when they are assigned and (iii) and § 1040.5(b), providers shall, to class action claims concerning the after the compliance date. The upon entering into a pre-dispute products or services covered by that Rule: We commenter asserted that this is arbitration agreement for a product or agree that neither we nor anyone else will problematic because if a pre-dispute service covered by § 1040.3 after the rely on this agreement to stop you from being arbitration agreement was valid at compliance date, ensure that the part of a class action case in court. You may origination, it should remain valid in agreement contains the following file a class action in court or you may be a perpetuity. provision: member of a class action filed by someone else. Other commenters suggested revisions We agree that neither we nor anyone else that they believed would increase the will rely on this agreement to stop you from Final § 1040.4(a)(2)(iii) sets forth how binding effect of the proposed being part of a class action case in court. You to comply with § 1040.4(a)(2) where a 4(a)(2)(iii)(B) notice on third parties. may file a class action in court or you may pre-dispute arbitration agreement Two public-interest consumer lawyer be a member of a class action filed by existed previously between other parties commenters expressed concern that the someone else. and does not contain either the required notice, unlike the amendment, does not The Bureau has made three minor 4(a)(2)(i) provision or the optional contain the phrase ‘‘neither we nor revisions to § 1040.4(a)(2)(i) and the 4(a)(2)(ii) provision. Final anyone else’’ and therefore lacks a required 4(a)(2)(i) provision, compared § 1040.4(a)(2)(iii)(A) states that prohibition against successors to the with the proposal. First, the Bureau providers entering into such agreements contract from blocking consumer replaced the term ‘‘use’’ with the term shall either ensure the agreement is involvement in a class action. One of ‘‘rely on’’ to more closely mirror the amended to contain the provision these commenters suggested that the language in § 1040.4(a)(1).1046 As such, specified in paragraph (a)(2)(i) or phrase ‘‘neither we nor anyone else’’ be use of the term ‘‘rely on’’ clarifies that (a)(2)(ii) of this section or provide any included in the notice. The other the conduct prohibited by § 1040.4(a)(1) consumer to whom the agreement commenter suggested that the Bureau and the conduct specified by applies with the following written revise the first sentence of the notice to § 1040.4(a)(2) are the same.1047 Second, notice: read: ‘‘No one can use this agreement to in response to the public-interest We agree not to rely on any pre-dispute stop you from being part of a class consumer lawyer commenter’s arbitration agreement to stop you from being action case in court. You can file a class suggested revisions to improve part of a class action case in court. You may action in court or you can be a member readability, the Bureau has revised the file a class action in court or you may be a of a class action filed by someone else.’’ final sentence of the required 4(a)(2)(i) member of a class action filed by someone The commenter also contended that provision to state ‘‘You may file a class else. these revisions would improve the action in court or you may be a member The provider may add to the written notice’s readability and, for this reason, of a class action filed by someone else’’ notice the following optional language the amendment should use the same rather than ‘‘You may file a class action when the pre-dispute arbitration language. A consumer advocate in court or you may be a member of a agreement applies to multiple products commenter asked the Bureau to require class action even if you do not file or services, only some of which are contracts between providers and third it.’’ 1048 Third, the Bureau has corrected covered by § 1040.3: ‘‘This notice parties to waive the third parties’ right a reference to § 1040.5(b) (the temporary applies only to class action claims to rely on pre-dispute arbitration exception for providers of pre-packaged concerning the products or services agreements in class actions; to require general-purpose reloadable prepaid card covered by the Arbitration Agreements providers to consider the notice to be agreements). Rule issued by the Consumer Financial part of the agreement and supply the Final § 1040.4(a)(2)(ii) permits Protection Bureau.’’ The Bureau is notice whenever the agreement is providers, where a pre-dispute permitting this optional language in the requested by a third party; to require arbitration agreement is in a contract written notice so that the notice may be providers to store a record of the notice that applies to multiple products or structured similarly to the optional in the same way it would store an services, and only some of those contract provision in § 1040.4(a)(2)(ii). amendment, so that the documents, products or services are covered under Final § 1040.4(a)(2)(iii)(B) states that the together, would be considered to be the § 1040.3, to include the following provider shall ensure that the pre- complete agreement; and to add alternative contract provision in place of dispute agreement is amended or language to the notice stating that the the one required by § 1040.4(a)(2)(i): 1049 provide the notice to consumers within provider considers its promise to not 60 days of entering into it. stop the consumer from being part of a 1046 For the same reasons discussed here, the Final § 1040.4(a)(2)(iii) differs from class action to be binding on third Bureau has made this same revision to the optional the proposal in one other key respect: 4(a)(2)(ii) provision and the 4(a)(2)(iii) notice, both parties. discussed below. While proposed § 1040.4(a)(2)(iii)(A) The Final Rule 1047 See also comment 4(a)(1)–1 (provides a non- included specified language for the exclusive list of examples of ‘‘reliance’’ within the required amendment that was different In furtherance of the Bureau’s goal to meaning of § 1040.4). from the § 1040.4(a)(2)(i) and (2)(ii) ensure that consumers can seek relief 1048 For the same reasons discussed here, the provisions, final § 1040.4(a)(2)(iii)(A) Bureau has made this same revision to the optional through class actions when they are 4(a)(2)(ii) provision and the 4(a)(2)(iii) notice. requires providers to ensure their harmed by providers of consumer 1049 In this provision, the Bureau has moved the agreements are amended to contain financial products and services, and limiting sentence concerning applicability of the either the § 1040.4(a)(2)(i) or (2)(ii) based on the findings discussed above rule to covered products. This sentence now provisions. The proposed appears as the second sentence. The Bureau in Part VI made pursuant to the believes this will improve readability because this § 1040.4(a)(2)(iii)(A) amendment Bureau’s authority under section sentence is more directly related to the first differed from the proposed 1028(b), the Bureau is finalizing sentence in the provision. § 1040.4(a)(2)(i) and (2)(ii) provisions

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because it contained the phrase ‘‘who send the notice under § 1040.4(a)(2)(iii). any new products or services after the later becomes a party.’’ The Bureau had This applies to any subsequent buyers compliance date, the rule applies only intended for this phrase to prevent the as well. to these new products or services. The amendment from binding original As in the proposal, providers are Bureau therefore is allowing providers contracting parties who would not required to use the exact language of the to use the sentence in otherwise have been covered by the required 4(a)(2)(i) provision, the § 1040.4(a)(2)(iv)(A)(2) to clarify that the rule—such as providers who contracted optional 4(a)(2)(ii) provision, and the rule does not apply to other products with the consumer before the 4(a)(2)(iii) notice as applicable. The and services that are not newly compliance date or providers excluded final rule, however, contains three provided after the compliance date. under § 1040.3(b). However, the Bureau limited exceptions to this general rule. Final § 1040.4(a)(2)(iv)(B) authorizes agrees with the consumer advocate Three new provisions— providers to also include the sentence, commenter that the phrase ‘‘who later § 1040.4(a)(2)(iv) through (vi)—describe ‘‘This provision does not apply to becomes a party’’ is unduly limiting, these limited exceptions. persons that are excluded from the given that the rule could, in some cases, Final § 1040.4(a)(2)(iv) specifies three Consumer Financial Protection Bureau’s prevent non-parties from relying on pre- sentences that providers are allowed to Arbitration Agreements Rule.’’ The dispute arbitration agreements.1050 add at the end of the 4(a)(2)(i) and Bureau is allowing providers to use this Rather than mandating unique 4(a)(2)(ii) provisions. Final sentence to clarify that the 4(a)(2)(i) or language for the amendment containing § 1040.4(a)(2)(iv)(A)(1) authorizes 4(a)(2)(ii) provisions do not bind the phrase ‘‘who later becomes a party,’’ providers to include the sentence, ‘‘This persons that are excluded under the Bureau is allowing providers to use provision does not apply to parties that § 1040.3(b). One scenario, among others, the § 1040.4(a)(2)(i) or 4(2)(ii) provisions entered into this agreement before [the in which providers may wish to use this in any amendment pursuant to compliance date].’’ 1051 The Bureau is sentence is when entering into a pre- § 1040.4(a)(2)(iii) and is separately allowing providers to use this sentence dispute arbitration agreement along finalizing § 1040.4(a)(2)(iv)—described to make clear that the 4(a)(2)(i) and with excluded persons. The sentence in greater detail below—which would 4(a)(2)(ii) provisions do not bind parties will clarify that the phrase ‘‘neither we allow providers to add sentences to the that entered into the agreement before nor anyone else’’ in the 4(a)(2)(i) and required contract provision stating, for the compliance date. One scenario, 4(a)(2)(ii) provisions does not refer to example, that the provision does not among others, in which providers may excluded persons. apply to parties that entered into the wish to use this sentence is when they Final § 1040.4(a)(2)(iv)(C) authorizes agreement before the compliance date are entering into a pre-dispute providers to also include the sentence, and that the provision does not apply to arbitration agreement that existed ‘‘This provision also applies to the persons excluded under the rule. The previously between the consumer and delegation provision.’’ As discussed final rule’s approach also benefits another party, and where the other party above, comment 2(d)–2 to the final rule providers entering into pre-existing entered into that agreement with the clarifies that a delegation provision is agreements for both covered and non- consumer before the compliance date. itself a pre-dispute arbitration covered products and services, because For example, where a creditor and a agreement. However, if a provider has they can amend the agreement to consumer enter into a loan agreement included the 4(a)(2) contract provision include the optional § 1040.4(a)(2)(ii) that includes a pre-dispute arbitration in its pre-dispute arbitration agreement provision. The contractual amendment agreement before the compliance date, already with this additional sentence, that would have been required by and a debt buyer purchases the loan the Bureau does not believe it is proposed § 1040.4(a)(2)(iii)(A), in agreement after the compliance date, the necessary for the 4(a)(2) provision to be contrast, included no language debt buyer may choose to add the included separately in the related pertaining to agreements for both sentence permitted by delegation provision. The added covered and non-covered products. § 1040.4(a)(2)(iv)(A) to clarify that the sentence already clarifies that the 4(a)(2) The Bureau also notes that, where a phrase ‘‘neither we nor anyone else’’ in provision applies to the delegation provider is entering into a pre-dispute the 4(a)(2)(i) or 4(a)(2)(ii) provisions provision as well as the broader pre- arbitration agreement that existed does not refer to the original creditor. dispute arbitration agreement. previously between other parties and The Bureau also is adding Accordingly, § 1040.4(a)(2)(iv)(C) states does not contain either the § 1040.4(a)(2)(iv)(A)(2), which that a provider using the sentence § 1040.4(a)(2)(i) or (2)(ii) provisions, the authorizes providers to include the specified in paragraph (a)(2)(iv)(C) as Bureau expects the provider to comply sentence, ‘‘This provision does not part of the 4(a)(2)(i) or 4(a)(2)(ii) with § 1040.4(a)(2)(iii) by amending the apply to products and services first provisions in a pre-dispute arbitration agreement or providing a notice. For provided to you before [the compliance agreement is not required to separately example, where Lender X enters into a date] that are subject to an arbitration insert the 4(a)(2)(i) or 4(a)(2)(ii) loan agreement subject to a pre-dispute agreement entered into before that provisions into a delegation provision arbitration agreement before the date.’’ 1052 The Bureau believes this that relates to such a pre-dispute compliance date, then sells the account arbitration agreement. Otherwise, as sentence may be useful to align the to Buyer A after the compliance date, explained in comment 4(a)(2)–4, if the scope of the 4(a)(2) provision with the and Buyer A chooses to provide the provider uses a delegation provision reach of the rule as described in notice (instead of amending the and does not include the additional comment 4–1.i.A. As that comment agreement), Buyer B—who subsequently sentence in § 1040.4(a)(2)(iv)(C), then clarifies, if a provider became party to purchases the account from Buyer A— the provider would be required to a pre-dispute arbitration agreement with must either amend the agreement or include the 4(a)(2) provision both in the a consumer before the compliance date, delegation provision as well as in the and then provides the consumer with 1050 For example, where a provider and consumer broader pre-dispute arbitration enter into a pre-dispute arbitration agreement after agreement to which it relates. the compliance date, § 1040.4(a)(1) prohibits a debt 1051 The Bureau will instruct the Office of the collector from relying on that agreement in a class Federal Register to insert a date certain upon Further, the Bureau has added action, even though the debt collector would not be Federal Register publication. § 1040.4(a)(2)(v) in response to the a party to the arbitration agreement. 1052 Id. industry commenter that requested that

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providers be permitted to disclose the address the Tribal government has revised the first sentence of required contract provisions in commenters’ concern that plaintiffs and comment 4(a)(2)–2 to reflect that substance rather than verbatim. The courts could misconstrue the 4(a)(2) § 1040.4(a)(2)(iii)(A) requires providers Bureau believes that allowing providers provisions in this fashion. to amend existing agreements to include to disclose the required provisions in As noted above, the Bureau is either the 4(a)(2)(i) or the 4(a)(2)(ii) substance would undermine the clarifying that the optional language in provisions—rather than to include an consumer protection benefits of the rule. § 1040.4(a)(2)(vi) may be used when amendment with language unique from The Bureau has designed the language there is a genuine belief that sovereign those two provisions, as specified in the of the required provisions carefully to immunity under applicable law may proposal. Third, the Bureau has convey the consumer’s rights accurately apply. This standard—‘‘genuine removed the phrase ‘‘stating the and, to the extent possible, in plain belief’’—is derived from case law provision’’ from the first sentence of language. The Bureau is concerned that governing certain rights to petition a proposed comment 4(a)(2)–3, so the slight linguistic changes that may seem court, which are discussed further in the sentence in the comment now provides innocuous to a provider could section-by-section analysis of comment that § 1040.4(a)(2)(iii) requires a dramatically alter the provisions’ effect. 4(a)(1)–2 above. By using this standard provider that enters into a pre-dispute However, the Bureau also recognizes to describe when the optional provision arbitration agreement that does not that the provisions’ use of pronouns may be used, the Bureau is providing an contain the provision required by could cause confusion if they are avenue for persons who may not be § 1040.4(a)(2)(i) or (ii) to either ensure inconsistent with the way a particular certain whether they are eligible for the the agreement is amended to contain a provider uses pronouns in the rest of the exemption in § 1040.3(b)(2) to preserve specified provision or to provide any contract. For this reason, any sovereign immunity to which they consumers to whom the agreement § 1040.4(a)(2)(v) states that, in any may ultimately be entitled. For example, applies with written notice.’’ This provision or notice required under a person may not be certain that that revision reflects the fact that the written § 1040.4(a)(2), if the provider uses a they are entitled to immunities under notice contains different language than standard term in the rest of the applicable law (such as an entity that the 4(a)(2)(i) and 4(a)(2)(ii) provisions. agreement to describe the provider or works with a State or Tribe but might Additionally, the Bureau is adding the consumer, the provider may use that not meet the common law test for being comment 4(a)(2)–4 to clarify the term instead of the term ‘‘we’’ or ‘‘you.’’ an arm of the State or arm of the Tribe), relationship between comment 2(c)–2, The Bureau also notes that one or their immunity might not be based on which explains that delegation commenter’s concern about class action their status as an arm of the Tribe or arm provisions are pre-dispute arbitration liability for typographical errors in of the State (such as a local government agreements within the meaning of compliance with this provision is in circumstances when it is not an arm § 1040.2(c), and § 1040.4(a)(2), which misplaced because there is no private of the State). requires providers to include specified Finally, the Bureau is adding right of action for violations of this part. language in their pre-dispute arbitration § 1040.4(a)(2)(vii) to clarify that a The Dodd-Frank Act authorizes only the agreements. Comment 4(a)(2)–4 clarifies provider may provide any provision or Bureau, State attorneys general, and that if a provider has included in its pre- notice required by § 1040.4(a)(2) in a prudential regulators to bring dispute arbitration agreement the language other than English if the pre- enforcement actions for non-compliance language required by § 1040.4(a)(2), and dispute arbitration agreement is also the provider’s pre-dispute arbitration with regulations issued pursuant to written in that other language. This agreement contains a delegation section 1028(b). clarification is to ensure consumers provision, the provider must include the In response to concerns about Tribal reading other languages are able to language required by § 1040.4(a)(2) in sovereign immunity, the Bureau has understand the required provision or the delegation provision itself. Thus the also added § 1040.4(a)(2)(vi), which notice. The Bureau did not receive 4(a)(2) provision must be included in provides that, in any provision or notice comment on proposed comments two places—in both the delegation required under § 1040.4(a)(2), if a 4(a)(2)–1 through 4(a)(2)–3, but the provision and the pre-dispute person has a genuine belief that Bureau is making three technical arbitration agreement to which it sovereign immunity from suit under corrections to these provisions to relates—unless the latter pre-dispute applicable law may apply to any person improve clarity. First, the Bureau has arbitration agreement includes the that may seek to assert the pre-dispute added the phrase ‘‘after the compliance 4(a)(2) provision and the optional arbitration agreement, then the date set forth in § 1040.5(a)’’ to the first sentence specified in provision or notice may include, after sentence of comment 4(a)(2)–1, so the § 1040.4(a)(2)(iv)(C) discussed above. In the sentence reading ‘‘You may file a comment now provides that that case, the provider need not include class action in court or you may be a § 1040.4(a)(2) sets forth requirements the 4(a)(2) provision separately within member of a class action filed by only for providers that enter into pre- the delegation provision. someone else,’’ the following language: dispute arbitration agreements for a As described above, the Bureau ‘‘However, the defendants in the class covered product or service after the received several comments on proposed action may claim they cannot be sued compliance date set forth in § 1040.5(a). § 1040.4(a)(2) generally (as opposed to due to their sovereign immunity. This Accordingly, the requirements of comments on its individual provisions). provision does not create or waive any § 1040.4(a)(2) do not apply to a provider In response to the State regulator such immunity.’’ The word ‘‘notice’’ that does not enter into a pre-dispute commenter that requested clarification, may be substituted for the word arbitration agreement with a consumer.’’ the Bureau affirms that, based on the ‘‘provision’’ if the language is included This edit ensures that the comment plain meaning of the regulatory text, the in a notice. The Bureau notes that, even accurately reflects the requirements of 4(a)(2) provisions apply not only to without this optional language, none of the Rule by noting that providers are class actions brought under Federal and the 4(a)(2) provisions would limit a subject to § 1040.4(a)(2) only with State consumer protection laws, but to Tribe’s sovereign immunity from class respect to pre-dispute arbitration any class actions brought against action lawsuits. Nevertheless, the agreements that they enter into after the providers concerning covered products Bureau is adopting § 1040.4(a)(2)(vi) to compliance date. Second, the Bureau and services. In response to the industry

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commenter’s concern, the Bureau does not believe that specific disclosure judges that the provision applies only to affirms that inclusion of a 4(a)(2) requirements (e.g., for font size) would class action claims concerning covered provision in a pre-dispute arbitration better protect consumers.1054 products. A provider of a covered and agreement should not constitute a Furthermore, the Bureau has not a non-covered product could use the waiver of any defenses that a company observed a trend of providers using language in 4(a)(2)(i). Although that may assert in a class action, including contract design to diminish the would not be required by the rule, if defenses to class certification, that are importance of consumer-friendly they did so, that language may apply to unrelated to the pre-dispute arbitration provisions in arbitration agreements. the non-covered product as well. As a agreement. The Bureau also declines to impose a result, the Bureau believes that most In response to the industry general requirement that providers providers providing covered and non- commenter that requested that the final include the relevant 4(a)(2) provision on covered products will use the optional rule state expressly that proposed their Web sites. The Bureau believes 4(a)(2)(ii) provision. § 1040.4(a)(2) does not apply to any inclusion of the provision in pre-dispute The Bureau further notes, in response transaction that originated with an arbitration agreements is sufficient to to the industry commenter’s excluded person pursuant to proposed effectuate the purposes of § 1040.4(a)(2). recommendation that providers be given § 1040.3(b), the Bureau declines to Of course, if the provider’s pre-dispute the option to disclose which products revise § 1040.4(a)(2) in this manner arbitration agreement is on a Web site, are subject to the provision and which because it would be inconsistent with the rule still applies to a pre-dispute are not, nothing in § 1040.4(a)(2) would the overall framework of the rule. Under agreement that is posted on a Web site. prevent providers from including this the rule, agreements that initially As explained in comment 2(c)–3, the information in their arbitration originated between a consumer and an term pre-dispute arbitration agreement agreements; indeed, the Bureau excluded person can become subject to is not specific to any particular form or encourages providers to do so. § 1040.4 generally in two situations: structure. The Bureau also declines to replace First, where an agreement was initially The Bureau also declines to require the 4(a)(2)(i) and 4(a)(2)(ii) provisions entered into by an excluded person providers to identify in their agreements with a single provision, as an industry before the compliance date and then which products are covered or to commenter suggested. The Bureau entered into by a provider after the provide separate contracts for covered believes that, where a contract is for compliance date, and second, where an and non-covered products. The Bureau both covered and non-covered products, agreement was initially entered into by believes that these requirements would the rule should permit providers to use an excluded person after the compliance be significantly more burdensome than the optional 4(a)(2)(ii) provision because date and then relied on by a inserting a provision supplied by the that language is consistent with the provider.1053 Bureau. At the same time, the benefits scope of the rule as well as the scope of The Bureau also declines, in response to consumers from such requirements section 1028. The Bureau also does not to the consumer advocate’s comment, to would be limited. The Bureau believe, as the commenter suggested, reframe the 4(a)(2) provisions as express acknowledges that, where a contract is that § 1040.4(a)(2) would effectively relinquishments of a provider’s right to for both covered and non-covered require lenders to use separate loan use the contract to stop the consumer products, it may not be immediately agreements for loans that lenders make from being part of a class action. The apparent to most consumers which directly and loans obtained from dealers Bureau notes that it has not framed the products are subject to the provision. or other financial institutions. required contract provisions in the However, the Bureau believes that In response to the consumer advocate proposal and final rule in terms of consumers can obtain this information, commenter’s concern that the optional rights; instead, the provisions constitute for example, by reviewing any 4(a)(2)(ii) provision would create an agreement not to undertake specified information the provider voluntarily additional hurdles for consumers in conduct. The Bureau believes that the provides in the agreement about these class actions by explicitly addressing framing of the rule affords consumers products (as discussed below), by the issue of coverage, the Bureau the intended protections and allows for contacting their provider or by checking disagrees. The Bureau would not those protections to be stated in plain the Bureau’s Web site for more characterize the question of coverage as language. information about the scope of the rule. a hurdle for consumers as application of The Bureau further declines to adopt The Bureau also notes that the 4(a)(2)(ii) a law or regulation can be an additional disclosure requirements in provision is intended to communicate appropriate threshold question in any response to the comment from the trade the consumer’s dispute resolution rights litigation. Providers may raise it to the association of lawyers who represent not only to the consumer, but also extent they deem it relevant and courts investors. In response to the courts and third parties such as will address it regardless of which association’s recommendations that the potential purchasers, which are likely to provision the contracting party uses. Bureau require providers to include a either know which products are covered With respect to proposed 4(a)(2) provision in all pre-dispute or conduct an appropriate analysis to § 1040.4(a)(2)(iii), the Bureau declines to arbitration agreements and send a make an informed determination. require providers to amend their separate notice containing the language The Bureau also declines to make use agreements—instead of sending the to consumers with existing agreements, of the 4(a)(2)(ii) provision mandatory optional notice—wherever providers the Bureau believes that this when a contract is for both covered and have the authority to amend their requirement would impact some pre- non-covered products and services. The agreements unilaterally or wherever dispute arbitration agreements that are Bureau believes that most providers will amending the agreement is not beyond the scope of agreements covered have a strong incentive to use the ‘‘contractually impossible.’’ The Bureau by section 1028. Moreover, the Bureau optional 4(a)(2)(ii) provision instead of believes this approach would be the 4(a)(2)(i) provision, because it will burdensome to providers, because it 1053 The Bureau addresses the commenter’s make clear to consumers, attorneys, and may not be clear whether a provider can broader comment—that the Bureau is exceeding its unilaterally change the terms. The authority by effectively regulating automobile dealers—in the section-by-section analysis of 1054 See infra Part VIII (responding to comments Bureau further notes that, even where § 1040.3(a) above. on potential alternatives suggested by commenters). providers send the notice instead of

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amending the agreement, many third believes that title X penalties—which Proposed comment 4–1.i would have parties—such as debt collectors—would the Bureau and State attorneys general provided three illustrative examples of still be subject to the prohibition in may seek for violations of the rule, when a provider enters into a pre- § 1040.4(a)(1). In addition, the Bureau including failure to include the required dispute arbitration agreement. First, declines to revise proposed provision—will adequately deter proposed comment 4–1.i.A would have § 1040.4(a)(2)(iii) in response to an potential violations.1055 explained that a provider enters into a industry commenter’s concern that the Finally, the Bureau declines to add a pre-dispute arbitration agreement where requirement to amend contracts or provision stating that non-compliant it provides to a consumer a new product provide the notice effectively makes the arbitration agreements are null and that is subject to a pre-dispute rule ‘‘retroactive.’’ This rule has no void. Where a provider fails to comply arbitration agreement, and the provider retroactive effect; § 1040.4(a)(2)(iii) with the rule by omitting the contract is a party to the agreement. The Bureau would only apply once a provider enters provision required by § 1040.4(a)(2), stated in the proposal that it did not into an agreement after the compliance § 1040.4(a)(1) still prevents the provider interpret this example to include new date. from relying on an arbitration agreement charges on a credit card covered by a Additionally, the Bureau declines to in a class action. For this reason, pre-dispute arbitration agreement take additional steps that several declaring that a non-compliant pre- entered into before the compliance date. commenters suggested would increase Second, proposed comment 4–1.i.B the binding effect of the notice on third dispute arbitration agreement is null and void, and thus unenforceable, would have explained that a provider parties. The Bureau declines to use the enters into a pre-dispute arbitration phrase ‘‘neither we nor anyone else’’ or would not be necessary because pursuant to § 1040.4(a)(1), the agreement where it acquires or ‘‘no one’’ in the notice because it is not purchases a product covered by possible for a notice to bind third agreement is already unenforceable with respect to class actions. Further, the proposed § 1040.3 that is subject to a parties and it would be misleading to pre-dispute arbitration agreement and suggest otherwise to consumers. The Bureau believes that providers will be deterred from intentionally omitting the becomes a party to that agreement, even Bureau also declines to require contracts if the person selling the product is between providers and third parties to required contract provision because such an omission would violate the rule excluded from coverage under proposed waive the third parties’ right to rely on § 1040.3(b). Third, proposed comment pre-dispute arbitration agreements in and subject the provider to title X penalties. 4–1.i.C would have explained that a class actions, because Dodd-Frank provider enters into a pre-dispute section 1028(b) authorizes the Bureau to Comments on the Bureau’s arbitration agreement where it adds a regulate the use of an agreement Interpretation of ‘‘Entered Into’’ pre-dispute arbitration agreement to an ‘‘between a covered person and a The Bureau’s Proposal existing product. The Bureau stated in consumer.’’ The Bureau further declines the proposal that it interpreted Dodd- to require that providers ‘‘consider the Dodd-Frank section 1028(d) states Frank section 1028(b) to authorize the notice to be part of the agreement;’’ that any rule prescribed by the Bureau Bureau to require that providers comply supply the notice whenever the under section 1028(b) shall apply to any with proposed § 1040.4 to the extent agreement is requested by a third party; pre-dispute arbitration agreement they choose to add pre-dispute store a record of the notice in the same ‘‘entered into’’ after the compliance arbitration agreements to existing way the provider would store an date. Consistent with section 1028(d), consumer agreements after the amendment so that the documents proposed § 1040.4(a)(1), § 1040.4(a)(2), compliance date. together would be considered the and § 1040.4(b) used the term ‘‘entered complete agreement; or add language to Proposed comment 4–1.ii would have into’’ or ‘‘entering into’’ to describe the notice stating that the provider provided two illustrative examples of when the requirements imposed by considers its promise to not stop the when a provider does not enter into a those provisions would begin to apply consumer from being part of a class pre-dispute arbitration agreement. First, to a particular agreement.1056 To aid action to be binding on third parties. proposed comment 4–1.ii.A would have interpretation of proposed § 1040.4, the Such requirements would effectively stated that a provider does not enter into Bureau proposed a series of examples in transform the notice into an a pre-dispute arbitration agreement comment 4–1 of what would have and amendment, and, for the reasons where it modifies, amends, or described in the previous paragraph, the would not have constituted ‘‘entering implements the terms of a product that Bureau declines to require providers to into’’ a pre-dispute arbitration is subject to a pre-dispute arbitration amend the agreement in situations agreement for purposes of the proposal. agreement entered into before the where it has permitted a notice. The Bureau also stated in the proposal compliance date. In the proposal, the The Bureau also declines to forbid that it interpreted the phrase ‘‘entered Bureau stated that it believed that the providers from relying on arbitration into’’ in section 1028(d) generally to phrase ‘‘entered into an agreement’’ as agreements in individual suits if the include any circumstance in which a used in section 1028 could be provider has not included the required person agrees to undertake obligations interpreted to permit application of a contract provision or to state that non- or gains rights in an agreement. The Bureau regulation issued under the compliant arbitration agreements may Bureau stated in the proposal that it provision to agreements modified or not be severed or reformed after believed that this interpretation best amended after the compliance date, in litigation has commenced. Because the effectuated the purposes of section certain circumstances. However, the Bureau’s Study showed that providers 1028, was practical and clear in its Bureau proposed to interpret the phrase rarely face individual suits, the Bureau meaning, and was reasonable. more narrowly for purposes of the does not believe that banning reliance proposal. The Bureau solicited comment on non-compliant arbitration 1055 See 12 U.S.C. 5565. on whether, for the purposes of the agreements in such suits would 1056 As later noted, the phrase ‘‘entered into an proposal, it should instead interpret the agreement’’ as used in section 1028 could be meaningfully change providers’ interpreted more broadly than the Bureau has phrase more broadly to encompass incentives to include the required proposed to interpret the phrase for purposes of the certain modifications or amendments of contract provision. Further, the Bureau proposal. an agreement after the compliance date

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and what the impacts of such an would have then noted that, similarly, after the compliance date to add class interpretation would be. § 1040.4(a)(1) prohibits the debt actions waivers. The Bureau noted in the proposal that collector from relying with respect to A nonprofit commenter and a comment 4–1.ii.A would include a any aspect of such a class action on a consumer advocate commenter provider’s modification, amendment, or pre-dispute arbitration agreement recommended that the Bureau interpret implementation of the terms of a pre- entered into by a merchant creditor who ‘‘entered into’’ yet more expansively. dispute arbitration agreement itself. The was excluded from coverage by The nonprofit commenter recommended Bureau also stated, however, that a § 1040.3(b)(5) after the compliance date. that the Bureau subject all agreements to provider enters into a pre-dispute the rule, regardless of when they were arbitration agreement where the Comments Received entered into. The consumer advocate modification, amendment, or commenter stated that after a period of The Bureau received several no more than one year, all existing implementation constituted the comments on proposed comment 4–1. 1057 contracts should be subject to the rule. provision of a new covered product. More than two dozen commenters— Second, proposed comment 4–1.ii.B In contrast, an industry commenter primarily consumer advocates, stated that the final rule should adopt would have stated that a provider does consumer law firms, public-interest not enter into a pre-dispute arbitration the proposal’s approach to this issue by consumer lawyers, and nonprofits— agreement where it acquires or retaining comment 4–1.ii.A as proposed. urged the Bureau to expand its purchases a product that is subject to a Another commenter, a public-interest interpretation of ‘‘entered into’’ such pre-dispute arbitration agreement but consumer lawyer, recommended that that product agreements entered into does not become a party to that the Bureau remove proposed comment before the compliance date would be agreement. 4–1.ii.A and leave the question of subject to § 1040.4 if modified after the Proposed comment 4–2 would have whether modifications constitute compliance date.1059 The primary clarified that § 1040.4(a)(1) applies to a ‘‘entering into’’ to the courts when they rationale offered by commenters was provider even where the provider itself have occasion to interpret part 1040. that this approach would benefit In addition, a number of commenters does not enter into a pre-dispute addressed the relationship between arbitration agreement. Proposed consumers by increasing the number of proposed comments 4–1.i.A and 4–1– comment 4–2.i would have explained agreements that would be subject to the ii.A,1061 including the Bureau’s that, under § 1040.4(a)(1), a provider rule over time, relative to the approach statement in the proposal’s section-by- cannot rely on a pre-dispute arbitration the Bureau proposed. Commenters section analysis that a provider enters agreement entered into by another offered numerous examples of into a pre-dispute arbitration agreement person after the compliance date with contractual modifications that they where a contractual modification respect to any aspect of a class action believed should trigger the rule’s constitutes the provision of a new concerning a covered product.1058 The application, including, among other covered product. Some industry comment would have then clarified things, amendments to the pre-dispute commenters asserted that contractual that, under § 1040.4(b), such providers arbitration agreement, pricing changes, modifications should not cause the rule may be required to submit certain and the addition of language regarding to apply even if they constitute the specified records related to claims filed class actions. Some commenters stated provision of a new product. These in arbitration pursuant to pre-dispute that ‘‘material’’ modifications should commenters also asked the Bureau to arbitration agreements. The comment trigger the rule’s coverage, while other clarify its view as to what types of then would have cross-referenced commenters referred to contractual 1060 contractual modifications would comment 4(a)(2)–1, which would have modifications generally. Another constitute the provision of a new noted that § 1040.4(a)(2) does not apply commenter, a consumer law firm, product. One of these industry to providers that do not enter into pre- requested that the Bureau interpret commenters stated that agreements dispute arbitration agreements. ‘‘entered into’’ such that a provider should not be subject to the rule as long Proposed comment 4–2.ii would have enters into an agreement when it as the underlying product continues to illustrated comment 4–2.i with an modifies a pre-dispute arbitration serve the purpose for which the example. The proposed comment would agreement, but not when it modifies the consumer originally entered into the have stated that, where a debt collector other terms of the contract. The agreement. (The commenter also collecting on consumer credit covered commenter stated that this approach asserted that, for this reason, agreements by § 1040.3(a)(1)(i) has not entered into would deter providers from amending should not be subject to the rule when a pre-dispute arbitration agreement, their pre-dispute arbitration agreements they are sold or assigned, even when § 1040.4(a)(1) nevertheless prohibits the modified in a manner that constitutes debt collector from relying on a pre- 1059 Commenters used a variety of terms to refer the provision of a new product.) dispute arbitration agreement entered to the contractual change, including ‘‘modification,’’ ‘‘amendment,’’ and ‘‘material Further, one industry commenter and into by the creditor after the compliance change.’’ Although each of these terms may have one consumer advocate commenter date with respect to any aspect of a class discrete meanings under contract law, for the asked the Bureau to clarify whether, if action filed against the debt collector purposes of this rule, the Bureau views these terms a contract is amended in a manner that concerning its covered debt collection as interchangeable and is using the term ‘‘modification’’ in this section for the sake of products or services. The comment simplicity. 1061 Proposed comment 4–1.i.A would have stated 1060 Commenters offered numerous examples of that a provider enters into a pre-dispute arbitration 1057 See proposed comment 4–1.i.A (stating that contractual changes they believed would be agreement where it provides to a consumer a new a provider enters into a pre-dispute arbitration ‘‘material,’’ including pricing changes, the addition product or service that is subject to such an agreement where it provides to a consumer a new of language regarding class actions, the addition of agreement, and the provider is a party to that product or service that is subject to a pre-dispute requirements that the consumer waive legal rights, agreement. Proposed comment 4–1.ii.A would have arbitration agreement, and the provider is a party changes to the State law governing the agreement, stated that a provider does not enter into a pre- to the pre-dispute arbitration agreement). and the addition of a new party or co-signer (not dispute arbitration agreement where it modifies, 1058 Proposed comment 4–2 referred to the just an authorized user). One consumer advocate amends, or implements the terms of a product or effective date rather than the compliance date. As commenter suggested that the Bureau add to the service that is subject to a pre-dispute arbitration discussed below, the Bureau has corrected this error commentary a non-exhaustive list of amendments agreement that was entered into before the in the final rule. that would be considered material. compliance date.

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constitutes the provision of a new purchasers to evade coverage where the to undertake obligations or gains rights product, the rule would apply only with original provider ‘‘de-coupled’’ its in an agreement. However, the Bureau respect to the new product or whether product agreements and arbitration notes that the rule does not treat every it would also apply to the existing agreements—e.g., by providing the conceivable circumstance in which a product. The industry commenter stated arbitration agreement in a separate person gains rights in a pre-dispute that, in this scenario, the rule should document—and transferred only the arbitration agreement to constitute apply only with respect to the new product agreement to the acquirer or entering into the agreement. For product, while the consumer advocate purchaser. The commenter argued that example, a person who is not a party to commenter stated that the rule should an acquirer or purchaser in this type of an agreement but is entitled to use the apply with respect to existing products transaction could still rely on the pre- agreement may gain third-party as well. dispute arbitration agreement, if the beneficiary rights, but as discussed in Other commenters addressed the product agreement would remain the section-by-section analysis of proposal’s application to acquirers and subject to it. But, the commenter comments 4–1 and 4–2 below, that purchasers of covered products. An asserted that under proposed comment person would not generally be entering industry commenter stated that a 4–1.ii.B, the acquirer or purchaser into the pre-dispute arbitration provider who was not a party to the would not enter into the arbitration agreement for purposes of the rule. original agreement between a company agreement because it would not become The Bureau is adopting the examples and a consumer should not be subject to a party to the arbitration agreement— in comment 4–1 largely as proposed, but the rule, even if the provider acquires or enabling the acquirer or purchaser to with some additional clarifications as purchases a covered product after the avoid coverage (at least where the described below. As in the proposal, compliance date or if the product contract had been entered into before comment 4–1.i provides three agreement states that third parties (such the compliance date). illustrative examples of when a provider as purchasers and assignees) may Finally, a consumer advocate enters into a pre-dispute arbitration enforce the agreement. According to the commenter expressed concern about the agreement after the compliance date for commenter, such a third party already first sentence of proposed comment 4– purposes of § 1040.4. Comment 4–1.i.A had rights in the arbitration agreement 1, which prefaced the comment’s explains that a provider enters into a before the compliance date; therefore, examples of when providers do and do pre-dispute arbitration agreement when the agreement is not newly entered into not enter into agreements for purposes it provides to a consumer, after the as to that third party. Another industry of proposed § 1040.4 by stating, compliance date, a new product or commenter stated that pre-dispute ‘‘Section 1040.4 applies to providers service covered by § 1040.3(a) that is arbitration agreements originally that enter into pre-dispute arbitration subject to a pre-existing agreement to entered into by excluded persons, such agreements after the [compliance date].’’ arbitrate future disputes between the as automobile dealers, should not be The commenter asserted that this parties, and the provider is a party to subject to the rule when entered into by sentence is inaccurate because proposed that agreement, regardless of whether providers after the compliance date § 1040.4(a)(1) would have applied to that agreement predates the compliance because, according to the commenter, providers that do not themselves enter date.1064 The comment further clarifies the enforceability of a contract provision into pre-dispute arbitration that, in such cases, § 1040.4 applies only cannot depend on the identity of the agreements.1063 The commenter with respect to the new product or party enforcing it. An industry suggested that the Bureau remove the service. Comment 4–1.i.B explains that commenter asked the Bureau to clarify phrase ‘‘providers that enter into’’ from a provider enters into a pre-dispute how the rule would apply where a bank this sentence. The same commenter also arbitration agreement where it acquires acquires another institution after the requested that the final rule adopt each or purchases a covered product or compliance date and account holders of the examples in proposed comments service after the compliance date that is might receive a new account agreement 4–1.i and 4–2. Additionally, a public- subject to a pre-dispute arbitration from the acquiring institution. A trade interest consumer lawyer stated that it agreement and becomes a party to that association of consumer lawyers stated agreed with the Bureau’s statement in pre-dispute arbitration agreement or to that the rule should cover providers that the proposal’s preamble that the Bureau the agreement for the consumer receive assignments of contracts. interprets the phrase ‘‘entered into’’ financial product or service, even if the Another trade association of consumer lawyers stated that it supported the generally to include any circumstance seller is excluded from coverage under Bureau’s proposed application of the in which a person agrees to undertake § 1040.3(b) or the pre-dispute arbitration rule to acquirers and purchasers. obligations or gains rights in an agreement was entered into before the Other commenters expressed agreement. compliance date. Comment 4–1.i.C explains that a provider enters into a concerns about comment 4–1.ii.B.1062 The Final Rule Two public-interest consumer lawyers pre-dispute arbitration agreement where expressed concern that comment Having considered the issues raised it adds a pre-dispute arbitration 4–1.ii.B would exempt non-party by commenters, the Bureau is finalizing agreement after the compliance date to acquirers from § 1040.4 altogether, even comments 4–1 and 4–2, containing its an existing product or service.1065 though such entities seek to enforce pre- interpretation of the term ‘‘entered into’’ Further, as in the proposal, comment dispute arbitration agreements. A in this Part with certain modifications 4–1.ii provides two illustrative consumer advocate commenter as described below. expressed concern that comment 4– The Bureau continues to interpret the 1064 As the Bureau stated in the proposal, it does phrase ‘‘entered into’’ in Dodd-Frank not interpret this example to include new charges 1.ii.B would enable acquirers and on a credit card covered by a pre-dispute arbitration section 1028(d) as generally including agreement entered into before the compliance date. 1062 Proposed comment 4–1.ii.B would have circumstances in which a person agrees 1065 See also comment 2(c)–2 (clarifying that a stated that a party does not enter into a pre-dispute delegation provision is a pre-dispute arbitration arbitration agreement where it acquires or 1063 See proposed comment 4–2 (describing how agreement). If a provider adds a delegation purchases a product that is subject to such an proposed § 1040.4 would have applied to providers provision to a pre-existing pre-dispute arbitration agreement but does not become a party to that that do not enter into pre-dispute arbitration agreement, the rule would apply to the delegation agreement. agreements). provision.

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examples of when a provider does not acquires or purchases the product after contractual modifications should not enter into a pre-dispute arbitration the compliance date (and becomes a constitute ‘‘entering into’’ even if they agreement for purposes of § 1040.4. party to that arbitration agreement), the constitute the provision of a new Comment 4–1.ii.A states that a provider acquiring or purchasing provider would product. The Bureau does not agree does not enter into a pre-dispute be considered to be entering into the with the industry commenter that stated arbitration agreement where it modifies, pre-dispute arbitration agreement for that agreements originally entered into amends, or implements the terms of a purposes of § 1040.4. before the compliance date should product or service that is subject to a The Bureau is adopting these always continue to be exempt, even if pre-dispute arbitration agreement interpretations to clarify that providers modified after the compliance date, as without engaging in the conduct cannot avoid application of the rule long as the underlying product described in comment 4–1.i after the after the compliance date by linking continues to serve the purpose for compliance date. The comment clarifies new products or newly-acquired or which the consumer originally entered that a provider does enter into a pre- newly-purchased products with into the agreement. Dodd-Frank section dispute arbitration agreement, however, arbitration agreements that predate the 1028(d) authorizes any regulation issued when the modification, amendment, or compliance date and purport to govern by the Bureau under section 1028(b) to implementation constitutes the the provider’s future relationship with apply to any agreement between a provision of a new product or service. the consumer. This language clarifies consumer and covered person entered Comment 4–1.ii.B states that a provider that when providing new products after into after the compliance date. The does not enter into a pre-dispute the compliance date, providers will Bureau believes that, when a provider arbitration agreement where it acquires need to review their product agreements provides a new product or service after or purchases a product or service that is that predate the compliance date to the compliance date, the pre-dispute subject to a pre-dispute arbitration determine whether the new product arbitration agreement for that product is agreement but does not become a party agreement is subject to a pre-existing entered into at that time with respect to to any pre-dispute arbitration agreement pre-dispute arbitration agreement that that new product or service, regardless that applies to the product or service. was not subject to the rule. The Bureau of whether the pre-dispute arbitration Final comment 4–1 differs from the notes that providers can alleviate any agreement had been entered into proposal in several respects. First, the burden with respect to this review previously with respect to other Bureau has deleted the first sentence of either by inserting language in the new products or services. Thus, section proposed comment 4–1 (‘‘Section product agreement stating that the new 1028(d) authorizes the Bureau to apply 1040.4 applies to providers that enter product agreement is not subject to the rule, as to that new product or into pre-dispute arbitration agreements arbitration, or by including the rule’s service, at that time. Further, the after the [compliance date].’’). The required contract provision with respect approach recommended by the industry Bureau agrees with the consumer to that new product so that, in effect, the commenter would undermine coverage advocate commenter that the sentence provider is amending the application of of new agreements. Were the Bureau to would be inaccurate, given that any earlier arbitration agreement to the adopt the approach recommended by § 1040.4(a)(1) applies to providers that new product or service. the three industry commenters, do not themselves enter into pre-dispute Third, the Bureau has revised providers could potentially evade the arbitration agreements.1066 comment 4–1.ii.A to clarify the rule in perpetuity, with respect to Second, the Bureau is adding relationship between comments 4–1.i.A existing consumers, by providing new additional clarifying language to and 4–1.ii.A. In the preamble to the products to their existing consumers comments 4–1.i.A and 4–1.i.B. This proposal, the Bureau noted that, even through what such providers would language clarifies an important aspect of though a provider does not enter into a assert are modifications of existing the rule: That, for purposes of the rule, pre-dispute arbitration agreement where contracts. With respect to the comments a provider enters into an agreement in it modifies the terms of a product, a that asked the Bureau to clarify what the scenarios described in those provider does enter into a pre-dispute types of contractual modifications comments even if the arbitration arbitration agreement where the would, in its view, constitute the agreement was originally entered into modification constitutes the provision provision of a new product, the Bureau before the compliance date. Therefore, of a new product. The Bureau believes believes that such modifications final comment 4–1.i.A explains that this explanation would better aid include, without limitation, those that when a person, before the compliance compliance if it is in the commentary result in the provision of a new account date, enters into an agreement to because it addresses what some (such as a deposit account or credit card arbitrate future disputes with a commenters viewed as an apparent account) or a new closed-end credit consumer, and then provides the conflict between two other provisions of transaction.1067 consumer with a new product that is the commentary. To address concerns Fifth, to conform to the rest of the subject to that agreement after the raised by commenters, final comment regulatory text and commentary, the compliance date, the provider would be 4–1.i.A also includes an additional Bureau has revised comment 4–1.i.B considered to be entering into that sentence clarifying that, where a and 4–1.ii.B to use the term ‘‘product or arbitration agreement for the new contractual modification constitutes the service’’—not simply ‘‘product,’’ as in product after the compliance date for provision of a new product, § 1040.4 the proposal. purposes of § 1040.4. Similarly, under applies only with respect to the new final comment 4–1.i.B, when a person product. The Bureau believes this 1067 For instance, Regulation Z sets out rules for when a new closed end consumer credit transaction and consumer enter into a pre-dispute interpretation strikes the appropriate balance between preserving the occurs for purposes of determining whether new arbitration agreement for a product disclosures are required. See, e.g., 12 CFR described in § 1040.3(a) before the consumer protections available for new 1026.20(a) and comment 20(a)–1 (‘‘A refinancing is compliance date, and a provider products and preserving reliance and a new transaction requiring a complete new set of expectations with respect to existing disclosures. Whether a refinancing has occurred is determined by reference to whether the original 1066 See Comment 4–2 (describing how § 1040.4 products. obligation has been satisfied or extinguished and applies to providers that do not enter into pre- The Bureau declines to adopt replaced by a new obligation, based on the parties’ dispute arbitration agreements). commenters’ recommendation that contract and applicable law.’’).

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The Bureau declines to expand its that would be subject to the rule over a critical mass of a provider’s consumers interpretation of ‘‘entered into’’ for time, relative to the Bureau’s proposed would be able to participate in any class purposes of § 1040.4 to include approach. The Bureau believes, actions relating to a given product line. situations where a provider purchases however, that this would not yield such The Bureau believes that, once this or acquires a product that is subject to significant consumer protection benefits occurs for a given product line, the a pre-dispute arbitration agreement, but to warrant the additional complexity provider will have the incentive does not become party to the pre- and uncertainty that such a standard provided by class exposure to avoid dispute arbitration agreement. The would create. potentially illegal practices in relation Bureau recognizes that sellers of loans First, this approach would not benefit to that product, and that these actions may place two separate agreements into consumers in markets for most covered will generally benefit all consumers, two different documents—a product products. The Bureau understands that even those who cannot participate in a agreement and a pre-dispute arbitration product agreements for many covered class action. agreement. The Bureau understands this products are not typically modified after For these reasons, the Bureau believes ‘‘de-coupling’’ may be common in they are entered into. (For example, that expanding its interpretation of automobile finance, for example. The agreements for closed-end credit ‘‘entered into’’ for purposes of § 1040.4 Bureau also recognizes that buyers may products are rarely modified, and to include modifications generally (even purchase or acquire the product products that are provided on a one- when there is no provision of a new agreement and become a party to that time basis do not allow for an product) would not yield significant agreement, without purchasing the pre- opportunity to amend the agreement). consumer benefit. At the same time, dispute arbitration agreement or For the remaining products—among such an approach would increase the becoming party to that agreement. In which credit cards and checking rule’s complexity and uncertainty by these circumstances, the buyer may accounts are the most significant in requiring providers, the Bureau, other become a third-party beneficiary to the terms of market size—the Bureau lacks regulators, and the courts to determine, pre-dispute arbitration agreement. data on the frequency of contractual for purposes of the rule, what types of However, the Bureau disagrees that, by modifications (and commenters did not modifications of existing products not treating such a buyer to be entering cite any such data). However, regardless constitute entering into and which do into the pre-dispute arbitration of how frequently modifications occur, not. For example, determining what agreement, the rule encourages the Bureau believes that the rule will modifications are sufficiently ‘‘material’’ evasions. Such a buyer does not, in fact, apply to a significant majority of would be a complicated line-drawing evade the rule. The buyer, though not consumer agreements within a relatively process. For these reasons, the Bureau is entering into the pre-dispute arbitration brief period, even if the Bureau does not not expanding its interpretation of agreement, nonetheless remains subject expand its interpretation of ‘‘entered ‘‘entered into’’ for the purposes of to the rule against reliance in a class into’’ to include modifications, due to § 1040.4 to include modifications of action in § 1040.4(a)(1), which generally the frequency of account turnover in existing contracts after the compliance 1068 applies to a provider regardless of these markets. Further, the Bureau date that do not represent the provision whether it has entered into the pre- believes that even those consumers who of a new product or service. Similarly, the Bureau declines to dispute arbitration agreement. The maintain older accounts to which the expand its interpretation of ‘‘entered provider would also be required to rule does not apply will benefit from the into’’ for purposes of § 1040.4 such that submit certain specified records rule because of the rule’s deterrent agreements entered into before the concerning claims filed in arbitration effect. Due to the frequency of account compliance date would be subject to the pursuant to such pre-dispute arbitration turnover, it often will not be long before rule if the provider modifies the pre- agreements. While such a buyer would 1068 dispute arbitration agreement (but not not be subject to the contract provision For example, in the credit card market, the number of new accounts opened per year since the overall product agreement after the or notice requirements in § 1040.4(a)(2), 2011 has ranged from approximately 80 million to compliance date). As described above, a the Bureau does not believe that is an approximately 100 million, and the number of open credit card accounts has held steady since 2011 at commenter asserted that this approach evasion of the rule. That outcome is, would deter providers from amending rather, a natural reflection of the approximately 600 million. See Bureau of Consumer Fin. Prot., ‘‘The Consumer Credit Card their pre-dispute arbitration agreements position the buyer is in vis-a`-vis the pre- Market,’’ at 89 fig. 2 (Dec. 2015), available at http:// after the compliance date to add class _ _ dispute arbitration agreement. files.consumerfinance.gov/f/201512 cfpb report- actions waivers and thus expand the Moreover, making the buyer subject to the-consumer-credit-card-market.pdf (number of new accounts opened per year) and at 33 fig. 4 reach of the proposal. The Bureau § 1040.4(a)(2) in these circumstances (number of open accounts over time). As a result, believes that some of the same would be inconsistent with the rule’s the Bureau estimates that, within five years, about considerations about complexity and overall approach to coverage of third 80 percent of credit card accounts would be covered uncertainty, described above, that parties, such as debt collectors who are by the rule, even if contractual modifications do not subject an agreement to the rule. In the checking warranted not expanding its hired by a creditor and may acquire account market, attrition data indicate that interpretation of ‘‘entered into’’ to third-party beneficiary rights under a consumers close about half of all checking accounts include modifications to product pre-dispute arbitration agreements. within three years and two-thirds of all accounts agreements also apply in the context of within five years. See Harland Clarke, ‘‘State of the The Bureau also declines to expand Industry 2012 Financial Services Benchmarking modifications to arbitration agreements its interpretation of ‘‘entered into’’ for Analysis,’’ (2012), available at http:// themselves. Additionally, in response to purposes of § 1040.4 such that harlandclarke.com/solutions/docs/industry- the consumer law firm’s comment that agreements entered into before the benchmarking-report. Thus, assuming that interpreting ‘‘entered into’’ to include consumers continue to open new accounts at about compliance date would become subject the same rate, the Bureau estimates that, within five modifications to arbitration agreements to the rule if modified in ways that do years, about two-thirds of checking accounts will be would deter providers from amending not constitute the provision of a new covered by the rule, even if contractual their pre-dispute arbitration agreements product. As discussed above, numerous modifications do not subject an agreement to the after the compliance date to add class rule. (If consumers open new accounts at a higher commenters asserted that that this rate than the rate at which they close old accounts, action waivers, the Bureau does not approach would benefit consumers by an even higher share of accounts would be covered believe that providers covered by the increasing the number of agreements by the rule.). rule will have an incentive to add class

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action waivers to their arbitration and after the compliance date, then the date) and has made other minor agreements, because part 1040 will rule generally would not apply. modifications to improve readability. render such provisions ineffective. With respect to the assertion by a 4(b) Submission of Arbitral Records The Bureau also declines to subject all different industry commenter that acquirers or purchasers should not be As discussed above in Part VI, while agreements to the rule regardless of proposed § 1040.4(a) would have when they were entered into (as subject to the rule because the enforceability of a contract provision prevented providers from relying on requested by the nonprofit commenter) pre-dispute arbitration agreements in and to subject all existing contracts to cannot depend on the identity of the party enforcing it, the Bureau does not class actions, it would not have the rule after a period of one year (as prohibited covered entities from believe that this is accurate. Different requested by the consumer advocate maintaining pre-dispute arbitration parties to a contract may be subject to commenter). Section 1028(d) requires agreements in consumer contracts different regulatory requirements, some that any regulation prescribed by the generally; nor would it have prevented of which may limit their ability to Bureau shall apply to agreements providers from still invoking such enforce certain provisions. Thus, if a entered into after the compliance date, agreements to compel arbitration in party has in fact entered into a contract and both of these approaches would cases not filed as putative class actions. after the compliance date, then that cause the Bureau’s rule to apply to some Thus, the Bureau separately considered party may be subject to this rule, even agreements not entered into after the in the proposal whether regulatory if a different person entered into the compliance date. The Bureau also interventions pertaining to these declines to adopt the public-interest contract before the compliance date and ‘‘individual’’ arbitrations would be in consumer lawyer’s recommendation to is not subject to the rule. the public interest and for the protection delete comment 4–1.ii.A. The Bureau In response to the industry of consumers, as well as whether the believes the comment promotes a commenter that requested that the findings for such interventions are uniform approach to the application of Bureau clarify how the rule applies in consistent with the Bureau’s Study. The the rule, which will thus facilitate the context of bank acquisitions, the Bureau ultimately decided not to compliance and reduce burden and Bureau notes that, as comment 4–1.i.B propose to prohibit specific practices in uncertainty. explains, an acquiring bank enters into individual arbitration, but rather to an acquired bank’s pre-dispute Moreover, the Bureau declines to propose an ongoing monitoring regime arbitration agreements for purposes of in light of historical precedent adopt the interpretation requested by § 1040.4 where it becomes a party to the industry commenters that a provider suggesting that there could be risks to acquired bank’s arbitration agreements consumers in certain circumstances does not enter into a pre-dispute (or product agreements subject to from biased arbitration administrators or arbitration agreement where, after the arbitration agreements) after the other practices. compliance date, it acquires or compliance date, even if the agreements Accordingly, pursuant to its authority purchases a covered product that were entered into by the acquired bank under sections 1028(b) and 1022(c)(4) of predated the compliance date. The before the compliance date.1070 As the Dodd-Frank Act, the Bureau Bureau disagrees with the industry comment 4–1.ii.B clarifies, the acquiring proposed § 1040.4(b), which would have commenter’s assertion that an bank does not enter into the acquired required providers to submit copies of agreement is not entered into in this bank’s pre-dispute arbitration certain arbitral records to the Bureau. scenario because the acquirer or agreements for purposes of § 1040.4 Specifically, proposed § 1040.4(b)(1) purchaser already had rights under the where it does not become a party to the would have required providers, for any agreement. Even where an agreement acquired bank’s pre-dispute arbitration pre-dispute arbitration agreement states that it is enforceable by a agreements or product agreements, even entered into after the compliance date, purchaser, a particular purchaser if the agreements were entered into to submit copies to the Bureau of generally does not gain rights in a before the compliance date. In response claims, judgments or awards, and product agreement until it actually to the trade association of consumer certain other records concerning purchases—or enters into—the product lawyers’ comment that the final rule specific arbitration proceedings, as well agreement. That is, such a person does should state expressly that assignees as certain decisions by an arbitration not become a purchaser until it engages enter into pre-dispute arbitration administrator concerning the fairness of in purchasing.1069 If the industry agreements (in addition to acquirers and the underlying arbitration agreements. commenter was asserting that a purchasers), the final rule uses the terms The Bureau explained in the proposal particular third party could acquire acquiring and purchasing because those that it intended to develop, implement, some rights in a pre-dispute arbitration are the terms used in the Dodd-Frank and publicize an electronic submission agreement before the compliance date, Act’s definition of financial product or process before the compliance date if and then additional rights after the service.1071 The Bureau believes that proposed § 1040.4(b) were adopted. compliance date, it provided no whether a particular assignment Proposed § 1040.4(b)(2) addressed the concrete details as to when such a constitutes an acquisition or purchase timing of records submissions, while scenario would occur. If such a third will depend on the particular facts and proposed § 1040.4(b)(3) would have set party is engaged in providing the same circumstances of the relevant forth the information that providers product or service, such as debt transaction. shall redact before submitting records to 1072 collection, to the same consumer on the The Bureau is finalizing comment 4– the Bureau. Using the records collected and other same consumer credit account before 2 largely as proposed. The Bureau has sources, the Bureau stated that it revised comment 4–2 to refer to the intended to continue to evaluate the 1069 For instance, where there is a contract compliance date (instead of the effective between a lender and a consumer, a debt buyer cannot enforce an arbitration agreement in that 1072 Pursuant to Dodd-Frank section 1022(c)(4)(C), product agreement before it acquires or purchases 1070 See also comment 4(a)(2)–2 (explaining how the Bureau may not obtain information under its the product agreement, even if the product § 1040.4(a)(2) applies in the context of bank section 1022(c)(4) authority ‘‘for the purposes of agreement confers rights on third-party acquisitions). gathering or analyzing the personally identifiable beneficiaries. 1071 See 12 U.S.C. 5481(15)(A). financial information of consumers.’’

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impacts on consumers of arbitration and into after the compliance date, providers arbitrators are enforcing consumer arbitration agreements and draw upon submit a copy of the arbitration records financial laws consistently, the Bureau all of its statutorily authorized tools to specified by proposed § 1040.4(b)(1) to disagrees with the comment’s premise. address conduct that harms consumers the Bureau, in the form and manner The Bureau cites provisions other than to the extent necessary and appropriate. specified by the Bureau.1074 Proposed section 1021(b) as legal authority for the The Bureau also noted its willingness to § 1040.4(b)(1) would have listed the monitoring requirement.1075 Here, the consider conducting additional studies arbitral records that providers would be Bureau cites section 1021(b) because it on consumer arbitration pursuant to required to submit to the Bureau. expresses one of several public interest Dodd-Frank section 1028(a) to evaluate Compliance with this provision would goals that the Bureau is charged with whether further rulemaking would be in have been required for pre-dispute furthering. The Bureau finds that the public interest and for the protection arbitration agreements entered into after monitoring enables more consistent of consumers,1073 improving its the compliance date. The Bureau enforcement of the consumer financial consumer education tools, or, where received a number of comments on the laws by permitting the Bureau and appropriate, undertaking enforcement or structure and content of the various public to review provider behavior in supervisory actions. subparts of proposed § 1040.4(b)(1) arbitration proceedings and business Proposed comment 4(b)–1 would have (from proposed § 1040.4(b)(1)(i) through practices that may give rise to such clarified that providers are not required new § 1040.4(b)(1)(iii)), which are proceedings. to submit records themselves if they addressed further below. The Bureau As to various commenters that arrange for another person, such as an also received several comments on challenged the Bureau’s authority to arbitration administrator or an agent of proposed § 1040.4(b)(1) more generally. adopt the rule, the Bureau relies on the provider, to submit the records on An industry commenter pointed to a sections 1028 and 1022 of the Dodd- the providers’ behalf, but that the reference in the proposal to section Frank Act as set out in greater detail in obligation to comply with § 1040.4(a) 1021(b) of the Dodd-Frank Act, which the Parts V and VI.D, above. Those nevertheless remains on the provider. defines the Bureau’s objectives to provisions authorize the Bureau to The provider must ensure that the include ‘‘ensuring . . . [that] Federal collect documents from providers of person submits the records in consumer financial law is enforced consumer financial products, even with accordance with § 1040.4(b). consistently.’’ The commenter asserted regard to entities for which it does not Proposed comment 4(b)(3)–1 would that this section may grant the Bureau exercise supervisory authority under have clarified that providers are not the authority to determine if Federal sections 1024 through 1026. The Bureau required to perform the redactions consumer financial law is being applied finds that its market monitoring themselves and may arrange for another consistently, but does not grant the authority under section 1022 person, such as an arbitration Bureau authority to determine whether encompasses the dispute resolution administrator, or an agent of the arbitrators are applying Federal mechanisms that providers of consumer provider, to redact the records. The consumer financial law consistently financial products adopt to resolve obligation to comply with § 1040.4(b) thus this part of the proposal exceeded conflicts with their customers. Contrary nevertheless remains on the provider the Bureau’s authority. Some to the commenters’ assertions, and thus the provider must ensure that commenters argued that the Bureau monitoring does not create a new de the person redacts the records in lacked authority to collect arbitration facto ‘‘channel’’ for examining small accordance with § 1040.4(b). materials. One industry commenter entities not subject to the Bureau’s As set forth in more detail below, the argued that the monitoring proposal larger participant rulemakings. Bureau is finalizing § 1040.4(b)(1) created a new and direct ‘‘channel’’ of Monitoring simply permits the Bureau through (b)(3) largely as proposed with supervision by the Bureau for small to understand fairness and quantity of the addition of two additional categories entities, which are generally not subject the specific arbitration proceedings that of records. In addition the Bureau is to the Bureau’s examination authority. arise. In any case, many providers that finalizing new provisions § 1040.4(b)(4) Another industry commenter expressed are not subject to the Bureau’s through (b)(6), which require the Bureau doubts over whether the Bureau could supervision authority otherwise are to redact and then publish to the collect documents from financial subject to the Bureau’s market internet the records received by the institutions for which it was not the monitoring authority and the Bureau’s Bureau pursuant to § 1040.4(b)(1) primary regulator. Another industry enforcement authority for unfair, through (b)(3). commenter argued that arbitration is not deceptive, and abusive acts and The Bureau finalizes comment 4(b)–1, a consumer financial product or service practices. The Bureau believes having received no comments on this and, therefore, cannot be regulated by consumers will benefit if records specific commentary. The Bureau also the Bureau under its authority under pertaining to individual arbitration finalizes proposed comment 4(b)(3)–1, section 1022(c), which permits market proceedings are submitted to the renumbered as 4(b)–2, having received monitoring as to the ‘‘offering or Bureau. Further, as to the industry no comments on this specific provision of’’ consumer financial comment that arbitration is not a commentary. products. consumer financial product for 4(b)(1) Records To Be Submitted Section 1040.4(b)(1) is largely purposes of collecting data under finalized as proposed, with several 1022(c) of the Dodd-Frank Act, the As stated above, proposed § 1040.4(b) additions set out below in Bureau interprets its market monitoring would have required that, for any pre- § 1040.4(b)(1)(i) through (b)(1)(iii). under 1022(c)(1)), which authorizes dispute arbitration agreement entered As to the comment that Dodd-Frank ‘‘monitor[ing] for risks to consumers in section 1021(b) does not give the Bureau the offering or provision of consumer 1073 The Bureau interprets section 1028 to allow it, as appropriate, to further study the use of pre- authority to determine whether financial products or services’’ dispute arbitration agreements and, if appropriate, to promulgate rules that would prohibit or impose 1074 The Bureau stated in the proposal that it 1075 As set out above in Part V, the Bureau relies conditions or limitations on the use of a pre-dispute anticipated that it would separately provide on sections 1028(b) and 1022 of the Dodd-Frank Act arbitration agreement or to amend any rule that it technical details pertaining to the submission as legal authority to promulgate a rule requiring the would finalize pursuant to this proposal. process. submission and publication of documents.

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(emphasis added) by the Bureau, arbitration hearing was held, and the that the arbitrator could make decisions broadly to include documents that assist date on which the award was issued) to without access to the protected group the Bureau in understanding markets permit the Bureau to understand how status of consumer participants to and mechanisms (such as dispute often providers delayed arbitration arbitrations. The commenter admitted resolution tools) that providers use to proceedings. The consumer advocate that it was unsure, practically, how the administer consumer financial products. commenter also suggested that the Bureau could collect this information In any case, the Bureau is not using its Bureau should require providers to and avoid disclosure to the arbitrator. authority to monitor arbitrators or submit information on the relationship A Tribal commenter requested that arbitration administrators, but rather the of the administrator with the parties, the Bureau exclude Tribal entities from providers that use arbitration. including any ex parte communications complying with the formal aspects of With regard to the commenter that between a provider and an arbitrator or the monitoring proposal and suggested expressed doubts over whether the arbitral administrator to see if the instead that the Bureau could receive Bureau could collect documents from provider made any attempts to influence similar information by collaborating financial institutions for which it was the outcome of arbitration with Tribal regulatory bodies to not the primary regulator, the Bureau proceedings,1077 and records of any potentially engage in information disagrees, given the affirmative grant of financial relationship between a sharing. authority to the Bureau under sections provider and the arbitrator or arbitral Based on the Bureau’s responses to 1022 and 1028 of the Dodd-Frank Act. administrator, citing NAF’s conflict more general comments on arbitral The Bureau has routinely interpreted its issues as an example.1078 This consumer records, and for the more specific section 1022 market monitoring advocate commenter suggested that reasons set out below in the section-by- authority to reach all entities covered by these materials would help the Bureau section analyses of § 1040.4(b)(1)(i)(A) the Dodd-Frank Act. and other groups monitor the extent of through (i)(E), the Bureau is finalizing specific arbitration harms, including the 4(b)(1)(i) § 1040.4(b)(1)(i). Section 1040.4(b)(1)(i) use of delay as a tactic in arbitration sets forth what arbitration related Proposed § 1040.4(b)(1)(i) would have proceedings to prevent consumers from documents providers must submit, required, in connection with any claim obtaining relief, and the use of influence largely as proposed, with the addition of filed by or against the provider in or pre-existing financial connections one new category of arbitration-related arbitration pursuant to a pre-dispute with arbitrators and administrators by record in new (b)(1)(i)(B), which arbitration agreement entered into after providers to change the outcome of requires the submission of answers to the compliance date, that providers arbitration awards. initial claims and counterclaims. submit: (A) The initial claim form and Another consumer lawyer commenter any counterclaim; (B) the pre-dispute suggested that the Bureau should The Bureau disagrees that the final arbitration agreement filed with the require providers to submit information rule should require providers to submit arbitrator or administrator; (C) the to the Bureau on the protected group additional types of documents suggested judgment or award, if any, issued by the status of consumers—including race, by commenters, other than one category arbitrator or arbitration administrator; ethnicity and gender—subject to pre- of document set out in and (D) if an arbitrator or arbitration dispute arbitration agreements, whether § 1040.4(b)(1)(i)(B) below. The Bureau administrator refuses to administer or or not the consumers were parties to an believes that the documents required by dismisses a claim due to the provider’s arbitration proceeding, so that the § 1040.4(b)(1)(i) capture significant data failure to pay required filing or Bureau and others can analyze the on the timing of arbitration proceedings administrative fees, any communication disparate impact of such agreements on and any delays. Specifically, the the provider receives from the arbitrator protected groups. The consumer lawyer documents the Bureau will receive— or an arbitration administrator related to commenter noted that, in its experience, claims, answers to claims, and awards— such a refusal. pre-dispute arbitration agreements are will themselves show dates and permit Specific comments relating to each of used to deter formal claims by the Bureau to determine the time the individual proposed categories of consumers before they are raised between filing and awards in many records are discussed separately below. generally, that this deterrence has a cases. The submission of additional Separately, the Bureau received several disparate impact on protected groups, documents on timing would likely general comments that suggested and that the Bureau should thus collect increase burden on providers without a expansions in the categories of records data on protected group status to clear benefit to consumers, the subject to the submission requirement of analyze this. The commenter suggested policymaking of the Bureau, or others. proposed 1040.4(b)(1)(i) and urged the that such data on the protected group The Bureau also disagrees with the Bureau to exclude some providers from status of consumers should be collected consumer advocate commenter that the complying with the proposed in such a way that it is not disclosed final rule should require the submission requirement.1076 inappropriately to the arbitrator, such of records, information or ex parte One consumer advocate commenter communications pertaining to potential suggested that the Bureau should 1077 Specifically, the consumer advocate conflicts of interests (including financial require providers to submit a number of commenter referred to an example outside of the relationships between providers and an context of consumer finance in which a company other documents or data related to the put pressure on the arbitration administrator to arbitrator or arbitral administrator), or timing of arbitration proceedings overrule or reverse an arbitrator who had attempts to influence arbitrators or (including the date on which the determined that the relevant pre-dispute arbitration administrators. The Bureau believes statement of claim was filed, the date on agreement permitted classwide arbitration. such requirements would be redundant According to the commenter, such communications which the provider paid administration between the company and the arbitration in that attorneys and arbitrators in or arbitration fees, the date on which the administrator were not disclosed to the consumer. arbitral proceedings are already subject 1078 Specifically, the consumer advocate referred to ethical or professional rules requiring 1076 The Bureau addressed comments regarding to the example, discussed above, of the relationship the disclosure of any relationships or its preliminary finding that the monitoring proposal between the NAF and a debt collection company, was in the public interest and for the protection of both of which were owned by the same parent communications that may create the consumers above in Part VI.B. company. appearance of a conflict of interest or

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unfairness.1079 The Bureau believes that the Bureau to develop ad hoc new § 1040.4(b)(1)(i)(B), described the commenter’s suggestion could information-sharing schemes with each below, requires providers to submit involve complicated questions as to Tribal regulator and lender subject to answers to statements of claim, giving what types of records fall within the that regulator. providers the opportunity to address scope of the requirement and heighten any potentially erroneous or misleading 4(b)(1)(i)(A) burdens on all providers subject to the statements made by consumers. monitoring rule. The Bureau believes Proposed § 1040.4(b)(1)(i)(A) would 4(b)(1)(i)(B) that § 1040.4(b)(i) will substantially have required providers to submit any increase transparency into arbitration initial claims filed in arbitration In the final rule, the Bureau is proceedings. The Bureau intends to pursuant to a pre-dispute arbitration adopting new § 1040.4(b)(1)(i)(B) continue to monitor arbitration agreement and any counterclaims. By (proposed § 1040.4(b)(1)(i)(B) is proceedings going forward for conflicts ‘‘initial claim,’’ the Bureau meant the renumbered as § 1040.4(b)(1)(i)(C)), of interest, and other issues, and may filing that initiates the arbitration, such which requires that providers should consider further measures or as the initial claim form or demand for also submit answers to arbitration requirements as needed. arbitration. statements of claim. The Bureau agrees with a consumer One industry commenter suggested The Bureau is adopting advocate commenter that the receipt of that proposed § 1040.4(b)(1)(i) should be § 1040.4(b)(1)(i)(B) in response to information on the protected group modified to require that providers several commenters’ concern that the status of consumers subject to pre- submit only the ‘‘substance of’’ initial original proposal, which only required dispute arbitration agreements, whether statements of claims and any the submission of initial claims and or not the consumers were parties to an counterclaim in arbitration. The counterclaims, could result in a one- arbitration proceedings, could be industry commenter reasoned that sided presentation of the facts in an potentially useful in analyzing the consumers often submit additional arbitration proceeding, especially where disparate impact of such agreements on documents as attachments to statements no award was issued. Specifically, the protected groups. However, the Bureau of claim, such as bank statements, that Bureau adopts the suggestion by one views the collection of such data about would require extensive and Tribal commenter that providers be consumers that were deterred from burdensome redactions. required to submit answers to initial making claims at all as impracticable in Section 1040.4(b)(1)(i)(A) is finalized claim filings. the context of this rulemaking. The as proposed. The Bureau concludes that As the Study demonstrated, most consumer lawyer admitted in its a statement of claim is necessary to arbitration proceedings do not result in comment the difficulties of devising a understand the nature of a dispute. As a final award or judgment issued by a practicable means to obtain such discussed in detail above, the Bureau neutral arbitrator.1081 Under the information without drawing the believes that collecting claims will Bureau’s original proposal, in the attention of arbitrators to the protected permit the Bureau to monitor absence of an award, the only group status of the consumer. arbitrations on an ongoing basis and information on the substantive dispute The Bureau disagrees with the identify trends in arbitration at issue in most arbitration proceedings comment that Tribal entities should be proceedings, such as changes in the would have been the initial claims and excluded from the monitoring proposal frequency with which claims are filed, counterclaims. The Bureau believes that because the Bureau could instead the subject matter of the claims, and requiring providers to submit answers to collaborate with Tribal regulatory who is filing the claims. Based on the initial claims and counterclaims will bodies to engage in information sharing. Bureau’s expertise in handling and result in a more balanced understanding The Bureau believes that practically monitoring consumer complaints as of arbitration proceedings and that the speaking, this part of the proposal well as monitoring private litigation, the additional burden will be minimal. The should have no or minimal impact on monitoring of claims will also help the Bureau believes that § 1040.4(b)(1)(i)(B) most Tribal entities, given that the final Bureau identify business practices that should alleviate the concerns of rule’s exemption. The Bureau also harm consumers. industry commenters noted above. believes that those entities that do use The Bureau disagrees that providers Section 1040.4(b)(1)(i)(B) also requires arbitration agreements should find it should be permitted to summarize the the submission of consumers’ answers simpler and less time-consuming to ‘‘substance of’’ initial statements of to statements of claim filed against comply with the relatively simple claims simply because consumers may them. This will similarly help offer a provisions of the rule, rather than attach additional documents to more balanced view of provider-filed waiting for collaborations between statements of claim that may require statements of claims (or counterclaims). different Tribal regulatory bodies and redaction before submission. The 4(b)(1)(i)(C) Bureau believes that any redaction 1079 See, e.g., American Bar Ass’n, ‘‘Model Rules burden will be limited in cost, even for Proposed § 1040.4(b)(1)(i)(B) would of Professional Conduct,’’ at Rule 3.5 (A lawyer lengthier additional documents, based have required providers to submit, in shall not: (a) Seek to influence a judge . . . or other connection with any claim filed in official by means prohibited by law; (b) on its experience of having reviewed communicate ex parte with such a person during statements of claim in the course of the arbitration by or against the provider, the proceeding unless authorized to do so by law Study,1080 and that writing a summary the pre-dispute arbitration agreement or court order . . . .’’); AAA, ‘‘Code of Ethics for could be more burdensome than filed with the arbitrator or arbitration Arbitrators in Commercial Disputes,’’ at Canon II administrator. The Bureau noted in the (‘‘An arbitrator should disclose any interest or redacting text. Further, the Bureau relationship likely to affect impartiality or which believes that a provider’s summary of a proposal that, due to concerns relating might create an appearance of partiality.’’); JAMS, consumer’s statement of claim may not ‘‘Arbitrator Ethics Guidelines,’’ at V.A. (‘‘An fully express the consumer’s 1081 Id. section 5 at 11 (‘‘As with other systems Arbitrator should promptly disclose, or cause to be of dispute resolution, only a minority of consumer disclosed all matters required by applicable law and understanding of a dispute. In any case, financial arbitrations reached the point where there any actual or potential conflict of interest or was a decision on the merits of the parties’ claims. relationship or other information, of which the 1080 See Study, supra note 3, section 5 at 19–32 Specifically, arbitrators resolved less than a third Arbitrator is aware, that reasonably could lead a (analyzing 1,847 individual consumer arbitration (32.2 percent) of the consumer financial arbitration Party to question the Arbitrator’s impartiality.’’). claims before the AAA). disputes on the merits.’’).

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to burden on providers and the Bureau be expanded to require all providers to argued that this provision of the rule itself, the Bureau did not propose to submit pre-dispute arbitration may disincentivize arbitrators from collect all pre-dispute arbitration agreements to the Bureau. The Bureau making certain findings. Indeed, the agreements that are provided to noted in its proposal that, due to Bureau believes publication will make consumers. Instead, it proposed only to concerns relating to burden on arbitrators more deliberative in their require submission in the event an providers and the Bureau itself, the decision-making, and that this is in the arbitration filing occurs.1082 By Bureau did not propose to collect all public interest and for the protection of collecting the pre-dispute arbitration pre-dispute arbitration agreements that consumers. The Bureau agrees with the agreement in such situations, the are provided to consumers. None of the commenter that suggested that this Bureau would have been able to monitor comments suggested ways to mitigate provision may also subject some the impact that particular clauses in the such burdens. Further, the Bureau providers to further Bureau scrutiny, agreement have on the conduct of an believes that many providers that use especially if they are repeatedly arbitration. For example, collecting pre- pre-dispute arbitration agreements, but involved in arbitrations. The Bureau dispute arbitration agreements pursuant will not be required by believes that such an outcome is a to which arbitrations were filed— § 1040.4(b)(1)(i)(C) to submit such potential benefit. The Bureau believes combined with collecting awards agreements to the Bureau because they that it is in the public interest and for pursuant to proposed are not a party to an arbitration the protection of consumers to subject § 1040.4(b)(1)(i)(C)—would have proceeding, may be required by other certain providers—especially those that permitted the Bureau to gather Bureau regulations to submit pre- have multiple final awards against them information on whether clauses dispute arbitration agreements in any from consumers on the same issue—to specifying that the parties waive certain case. Pursuant to Regulation Z, credit further scrutiny from the Bureau, other substantive rights when pursuing the card issuers are already required to regulators, and the public regarding the claim in arbitration affect outcomes in submit their consumer agreements to providers’ business and compliance arbitration. the Bureau. See 12 CFR 1026.58. The practices. Overall, the Bureau believes A nonprofit commenter and a Bureau also will require the collection that the submission of awards will aid consumer advocate commenter of prepaid account agreements. See 12 the Bureau in its ongoing review of suggested that all entities covered by the CFR 1005.19(b) (effective October 1, arbitration and help the Bureau assess rule should submit all pre-dispute 2018). Further, the Bureau may monitor whether arbitrations are being arbitration agreements covered by the the arbitration activities and review the conducted fairly and without bias. rule to the Bureau. The same nonprofit arbitration records of the providers commenter suggested that all subject to the Bureau’s supervision 4(b)(1)(i)(E) amendments to pre-dispute arbitration authority in examinations. Proposed § 1040.4(b)(1)(i)(D) would agreements should also be subject to the 4(b)(1)(i)(D) have applied where an arbitrator or submission requirement, and that any arbitration administrator refuses to information on pre-dispute arbitration Proposed § 1040.4(b)(1)(i)(C) would administer or dismisses a claim due to agreements that require hearings in fora have required providers to submit the the provider’s failure to pay required inconvenient to consumers should be judgment or award, if any, issued by the filing or administrative fees. If this were submitted to the Bureau. Another arbitrator or arbitration administrator in to occur, proposed § 1040.4(b)(1)(i)(D) consumer advocate suggested that an arbitration subject to proposed would have required the provider to entities supervised by the Bureau that § 1040.4(b). This proposed requirement submit any communication the provider are also providers under the rule be was intended to reach only awards receives from the arbitration required to submit all of their covered issued by an arbitrator that resolved an administrator related to such a refusal or pre-dispute arbitration agreements to arbitration and not settlement dismissal. As the proposal explained the Bureau. These commenters argued agreements that are not incorporated with regard to communications relating that such additional steps were into an award. The Bureau believes that to nonpayment of fees, the Bureau warranted because they believed that the proposed submission of these understands that arbitrators or individual arbitration proceedings awards would aid the Bureau in its administrators, as the case may be, ongoing review of arbitration and help themselves were problematic and unfair typically refuse to administer an the Bureau assess whether arbitrations to consumers, that smaller providers arbitration proceeding if filing or are being conducted fairly and without were not likely to drop their pre-dispute administrative fees are not paid. The bias. arbitration agreements, and that pre- Bureau understands that arbitrators or An industry commenter suggested dispute arbitration agreements administrators will typically send a that the Bureau should not collect themselves could be reviewed for letter to the parties indicating that the awards or judgments for a number of unfairness to consumers. arbitration has been suspended due to reasons, including that the proposal Proposed § 1040.4(b)(1)(i)(B), nonpayment of fees.1083 Pre-dispute would discourage arbitrators from renumbered in this final rule as arbitration agreements often mandate making explicit findings, knowing that § 1040.4(b)(1)(i)(C), is finalized as that the provider, rather than the the Bureau might subject the provider to proposed. By collecting the pre-dispute consumer, pay some of the consumer’s further scrutiny, and that the proposal arbitration agreement in filed arbitration fees.1084 would put the onus on arbitrators to arbitrations, the Bureau will be able to Where providers successfully move to assess the fairness of arbitration monitor the impact that particular compel a case to arbitration (and obtain agreements when it is the role of courts clauses in an agreement have on the its dismissal in court), but then fail to to analyze the fairness of such conduct of arbitrations. The Bureau pay the arbitration fees, consumers may disagrees with consumer advocate agreements. Proposed § 1040.4(b)(1)(i)(C), be left unable to pursue their claims in commenters that this provision should renumbered as § 1040.4(b)(1)(i)(D), is 1083 See AAA, Consumer Arbitration Rules, supra 1082 As noted below, credit card and prepaid finalized as proposed. As discussed in note 137, at 32; JAMS Streamlined Arbitration account issuers are already required to submit their detail in Part VI.D, the Bureau disagrees Rules, supra note 139, at 9. consumer agreements to the Bureau. with the industry commenter that 1084 Study, supra note 3, section 5 at 58.

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either forum. The Study identified at Proposed § 1040.4(b)(1)(i)(D), permit the Bureau to review fee least 50 instances of such nonpayment renumbered as § 1040.4(b)(1)(i)(E), is structures and fee-shifting provisions of fees by companies in cases filed by finalized as proposed. The Bureau faced by consumers while limiting consumers.1085 The Bureau had believes this provision will provide additional burden on providers. proposed § 1040.4(b)(1)(i)(D) to permit it transparency as to fee practices 4(b)(1)(ii) to monitor nonpayment of fees by generally, and that companies providers whose consumer contracts submitting communications pursuant to The Bureau’s Proposal include pre-dispute arbitration final § 1040.4(b)(1)(i)(E) can indicate in Proposed § 1040.4(b)(1)(ii) would agreements and whether particular their submission that nonpayment have required providers to submit to the entities appear to be not paying fees as resulted from settlement. The Bureau Bureau any communication from an part of a tactical effort to avoid believes that the general attention to this arbitrator or arbitration administrator arbitration, which essentially forecloses issue will discourage providers from related to a determination that a a consumer’s ability to bring a claim if claiming in bad faith that the provider’s pre-dispute arbitration the claim is governed by a pre-dispute nonpayment of fees is due to ongoing agreement does not comply with the arbitration agreement. The Bureau had settlement talks when in fact they are administrator’s fairness principles, further expected that requiring engaged in a tactical maneuver to rules, or similar requirements. The submission of communications related prevent a consumer from pursuing the Bureau was concerned about providers’ to nonpayment of fees would discourage consumer’s claim. use of arbitration agreements that may providers from engaging in such The Bureau disagrees with consumer violate arbitration administrators’ activity. advocate commenters that it should fairness principles or rules. Several of Proposed § 1040.4(b)(1)(i)(D) would require that providers submit additional the leading arbitration administrators have required providers to submit records on the cost of the arbitration. maintain such principles or rules, communications from arbitration The Bureau does not believe that the which the administrators use to assess administrators related to the dismissal additional data commenters have the fairness of the company’s pre- or refusal to administer a claim for suggested collecting would be useful dispute arbitration agreement.1087 These nonpayment of fees even when such enough to justify the additional burden administrators may refuse to hear an nonpayment is the result of a settlement it would pose to collect and analyze arbitration if the company’s arbitration between the provider and the consumer. such documents. The final rule already agreement does not comply with the The Bureau believed this requirement addresses the most serious cost-related relevant fairness principles or rules.1088 would have prevented providers who issue identified in the Study and At least one administrator will also engage in strategic nonpayment of § 1040.4(b)(1)(i)(E) requires the review a company’s agreement arbitration fees to claim, in bad faith, submission of records pertaining to a preemptively—before an arbitration ongoing settlement talks to avoid the party’s refusal to pay required arbitrator claim has been filed—to determine if disclosure to the Bureau of or administrator costs or fees. There the agreement complies with the communications regarding their may be some incremental benefit to relevant fairness principles or rules.1089 nonpayment. The Bureau had receiving further documents detailing The Bureau believed that requiring anticipated that companies submitting costs, such as documents on in forma submission of communications from communications pursuant to proposed pauperis applications or hardships administrators concerning agreements § 1040.4(b)(1)(i)(D) could indicate in requests consumers make to arbitration that do not comply with arbitration their submission that nonpayment administrators for exceptions from administrators’ fairness principles or resulted from settlement and not from a paying filing fees. However, the Bureau rules would allow the Bureau to tactical maneuver to prevent a consumer believes that § 1040.4(b)(1)(i)(E) will monitor which providers could be from pursuing the consumer’s claim. alert the Bureau to certain cost-related attempting to harm consumers or Further, as stated above in the issues identified in the Study that can discourage the filing of claims in discussion of proposed stop consumers from pursuing claims arbitration by mandating that disputes § 1040.4(b)(1)(i)(C), the Bureau would completely while keeping the burden on be resolved through unfair pre-dispute have required submission of the providers of submitting records arbitration agreements. The Bureau also underlying settlement agreement or a relatively low.1086 The Bureau further believed that requiring submission of notification that a settlement has believes that it may be possible to such communications could further occurred. estimate such cost data from arbitration discourage covered entities from One consumer advocate commenter administrator rules and documents it inserting pre-dispute arbitration suggested that the Bureau should will collect, including pre-dispute agreements in consumer contracts that require providers to submit a number of arbitration agreements and arbitrators’ do not meet arbitrator fairness other documents or data related to costs awards, which will inform the Bureau principles or rules. and fees in arbitration proceedings, on general cost structures, indicate Proposed comment 4(b)(1)(ii)–1 including documents on the arbitration whether fee-shifting is allowed, and would have clarified that, in contrast to and administrative costs paid by document fee awards. The Bureau the other records the Bureau proposes to providers and consumers in arbitration understands that the cost structure of collect under proposed § 1040.4(b)(1), to ensure that the Bureau would be many arbitration provisions is proposed § 1040.4(b)(1)(ii) would have aware of general cost levels, documents potentially burdensome on many required the submission of relating to requests or grants of a consumers, and that other cost communications both when the reduction in arbitration costs for the provisions such as fee-shifting can consumer to see how often providers exacerbate this potential burden. The 1087 See AAA Consumer Due Process Protocol, helped make arbitration proceedings collection of many pre-dispute supra note 142; JAMS Policy on Consumer arbitration agreements giving rise to Arbitrations, supra note 140. affordable for consumers. 1088 specific arbitration proceedings See AAA Consumer Arbitration Rules, supra note 137, at 10; JAMS Streamlined Arbitration 1085 Id. section 5 at 66 n.110. The Bureau has pursuant to § 1040.4(b)(1)(i)(C) will Rules, supra note 139, at 6. similarly received consumer complaints involving 1089 See AAA Consumer Arbitration Rules, supra entities’ alleged failure to pay arbitral fees. 1086 See id. section 5 at 76. note 137, at 16.

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determination occurs in connection comments that implicated proposed arbitration agreements discourage with the filing of a claim in arbitration § 1040.4(b)(1)(ii) from a consumer consumers from filing claims in court or as well as when it occurs if no claim has advocate that argued that the Bureau in arbitration and discourage attorneys been filed. Proposed comment should promulgate specific due process from representing consumers in such 4(b)(1)(ii)–1 would have stated further or fairness standards for the content of proceedings. that, if such a determination occurs with pre-dispute arbitration agreements or After the publication of proposed respect to a pre-dispute arbitration the actual actions of providers in the § 1040.4(b), other consumer lawyer and agreement that the provider does not course of arbitration proceedings rather consumer advocate commenters enter into with a consumer, submission than relying on the administrators to do suggested that the Bureau require of any communication related to that so. The consumer advocate commenter providers to submit records anytime determination is not required. The asserted that individual arbitration itself they rely on a pre-dispute arbitration Bureau proposed this comment because is unfair and systematically favors agreement, specifically in the context of it had understood that providers may providers and urged that if the Bureau court filings in which, for instance, a submit pre-dispute arbitration is not going to prohibit arbitration party invokes a pre-dispute arbitration agreements to administrators before altogether it should prescribe minimum agreement to compel arbitration. The incorporating the agreements into actual standards for arbitration. commenters asserted that requiring contracts.1090 The proposed comment providers to submit litigation filings that The Final Rule would have stated that, if the provider rely on pre-dispute arbitration submits a prototype pre-dispute The Bureau finalizes § 1040.4(b)(1)(ii) agreements would be an important arbitration agreement for review by the as proposed. For the reasons set out means of monitoring the extent to which arbitration administrator and never above in Part VI.B, the Bureau disagrees providers were using such filings to actually includes it in any consumer that it should adopt due process or block individual litigation from agreements, the pre-dispute arbitration fairness standards or should otherwise proceeding (insofar as they could no agreement would not be entered into by regulate provider conduct in arbitration longer be used to block class actions). a consumer and thus submission to the proceedings. In the absence of More specifically, commenters Bureau of communication related to a additional data presented by suggested that the addition of such data determination made by the commenters showing systematic would make it clear whether providers administrator concerning the pre- unfairness in individual arbitrations, the filed such motions to move consumers dispute arbitration agreement would not Bureau believes that requiring providers to arbitration as a preferred forum for be required. The Bureau believes that to submit correspondence from formal dispute settlement instead of this clarification is needed to avoid administrators on the non-compliance litigation, or whether providers were discouraging providers from submitting of pre-dispute arbitration agreements filing motions to compel arbitration to prototype pre-dispute arbitration with administrator due process or discourage consumers from proceeding agreements to administrators for their fairness rules will aid the Bureau in at all. According to commenters, the review. identifying potential widespread absence of arbitration proceedings Proposed comment 4(b)(1)(ii)–2 unfairness to consumers while imposing corresponding to motions made in would have clarified that what minimal burden. In addition, the Bureau litigation to compel arbitration would constitutes an administrator’s fairness expects to use its supervisory function suggest that providers may have used principles or rules pursuant to proposed and may review other data—including arbitration agreements as a means to § 1040.4(b)(ii)(B) should be interpreted credit card agreements and prepaid suppress claims outright, thus broadly. Further, that comment would account agreements that providers are or discouraging consumers from filing any have provided current examples of such will be required to submit to the type of formal claim. principles or rules, including the AAA’s Bureau 1092—to further aid its efforts to In response to these comments and Consumer Due Process Protocol and the review providers’ pre-dispute other concerns, the Bureau adopts new JAMS Policy on Consumer Arbitrations arbitration agreements for potential § 1040.4(b)(1)(iii), which requires Pursuant to Pre-Dispute Clauses fairness issues. providers to submit certain records that Minimum Standards of Procedural The Bureau is also finalizing providers file in court. Specifically, new Fairness.1091 comments 4(b)(1)(ii)–1 and –2 as § 1040.4(b)(1)(iii)(A) requires that a proposed, having received no comments provider submit to the Bureau any Comments Received on this specific commentary. motion or filing sent by that provider to a court that relies on a pre-dispute The Bureau did not receive specific 4(b)(1)(iii) comments addressing the requirement arbitration agreement. Pursuant to this in proposed § 1040.4(b)(1)(ii) that Prior to the publication of the provision, providers are required to providers submit communications monitoring proposal, consumer submit motions attempting to dismiss, related to non-compliance with an advocates and some other stakeholders defer, or stay any aspect of a case in arbitration administrator’s fairness had expressed concern that a proposal court where such motions rely in whole protocols. The Bureau received under consideration similar to proposed or in part on an arbitration agreement. § 1040.4(b) that the Bureau described in The Bureau believes that collecting 1090 A business that intends to provide the AAA its SBREFA Outline would allow the materials related to the invocation of an as a potential arbitrator in a consumer contract must Bureau to monitor certain arbitration arbitration agreement will aid it in notify the AAA at least 30 days before the planned trends, but not to monitor or quantify determining the frequency with which effective date of the contract and provide a copy of the claims that consumers may have providers compel arbitration in the arbitration agreement to the AAA. AAA Consumer Arbitration Rules, supra note 137, at 16. been deterred from filing because of the response to individual litigation claims, 1091 AAA Consumer Due Process Protocol, supra existence of a pre-dispute arbitration the content of such motions to compel, note 138; JAMS Policy on Consumer Arbitrations, agreement. In particular, consumer and whether such claims actually end supra note 140. The Bureau notes that it would be advocates and some other stakeholders up being heard in arbitration rather than offering these specific principles or rules merely to assist providers with compliance; this comment had expressed concern that pre-dispute simply disappearing. The Bureau also does not represent an endorsement by the Bureau agrees with the concern expressed by of these specific principles or rules. 1092 See 12 CFR 1026.58; 12 CFR 1005.19(b). consumer advocates and some other

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stakeholders that a requirement like New comment 4(b)(1)(iii)–2 sets out arbitrations infrequently,1095 and, as a proposed § 1040.4(b) would not have examples of certain types of court result, might not have a regularized permitted the Bureau to monitor or documents that do not trigger the process for redacting and submitting the quantify the claims that consumers may obligation under § 1040.4(b)(1)(iii)(A) to required records. This proposed 60-day have been deterred from filing because submit records to the Bureau because period is consistent with feedback the of the existence of a pre-dispute they are not relying upon an arbitration Bureau received from the SERs during arbitration agreement. The Bureau agreement in support of an attempt to the Small Business Review panel believes that the collection of motions to seek dismissal, deferral, or stay of any process who expressed concern that a compel arbitration, in conjunction with aspect of a case.1094 New comment short deadline might burden companies the other arbitral records it will receive, 4(b)(1)(iii)–2.i clarifies that given the relative infrequency of will help track whether such claims are § 1040.4(b)(1)(iii)(A) does not require arbitration and, thus, their potential ultimately heard in arbitration rather providers to submit to the Bureau unfamiliarity with this particular than being dropped entirely, which objections to discovery requests or requirement. could in turn shed more light on the motions seeking a protective order in A group of State attorneys general extent to which consumers are deterred response to a discovery request if either commenters agreed generally with from pursuing individual claims more relies on an arbitration agreement, since proposed § 1040.4(b)(2), stating that generally because of arbitration such motions would not shed light on some manner of timing obligation was agreements. whether individual litigation claims are needed to ensure that providers did not The Bureau also finalizes new refiled in arbitration or are dropped delay submitting required records to the § 1040.4(b)(1)(iii)(B), which requires completely. New comment 4(b)(1)(iii)– Bureau. The group of State attorneys that the provider submit to the Bureau 2.ii clarifies that under general also suggested that the Bureau the pre-dispute arbitration agreement § 1040.4(b)(1)(iii)(A), providers are not establish a penalty regime for providers relied on in the provider’s motion to required to submit answers to a that fail to comply with proposed dismiss, defer or stay a case, which the complaint or the answers to a § 1040.4(b)(2). An industry commenter provider is required to submit pursuant requested a good cause exception from to § 1040.4(b)(1)(iii)(A). The Bureau counterclaim if those materials only proposed § 1040.4(b)(2) in the event of believes that § 1040.4(b)(1)(iii)(B) is refer to an arbitration agreement. New natural disasters or unforeseen technical needed to capture all pre-dispute comment 4(b)(1)(iii)–2.iii clarifies that errors, on the grounds that any arbitration agreements relied on in under § 1040.4(b)(1)(iii)(A), providers inadvertent non-compliance would documents responsive to new are not required to submit motions or result in further class action liability. § 1040.4(b)(1)(iii)(A). While such pre- filings that have as attachments a dispute arbitration agreements are often consumer’s contract that contains a pre- The Bureau finalizes § 1040.4(b)(2) as attached to motions to dismiss or stay dispute arbitration agreement if the proposed. The Bureau does not agree that are filed to compel arbitration, the provider does not rely on or cite to the with the group of State attorneys general Bureau has noted, in reviewing such arbitration agreement in the motion. that a new penalty regime is necessary to obtain the compliance of providers. records during the course of the Study, 4(b)(2) Deadline for Submission that occasionally some documents are The Bureau believes that the Dodd- simply cross-referenced to other Proposed § 1040.4(b)(2) would have Frank Act already contains sufficient documents filed in the litigation. The stated that a provider shall submit any penalty mechanisms to incentivize Bureau believes that it is important to record required by proposed compliance with the deadlines set by 1096 gather data on the frequency of filings § 1040.4(b)(1) within 60 days of filing by § 1040.4(b)(2). relying on pre-dispute arbitration the provider of any such record with the The Bureau also disagrees with the agreements, and whether the content of arbitration administrator and within 60 industry commenter that said that an such arbitration agreements discourages days of receipt by the provider of any explicit ‘‘good cause’’ exception is or induces a consumer (or her attorney) such record filed or sent by someone necessary given the time providers have to file the same claim against the other than the provider, such as the to submit records required by provider in arbitration rather than arbitration administrator or the § 1040.4(b)(1). The commenter did not litigation. consumer. The Bureau proposed a 60- explain why a 60-day period was The Bureau also adopts new day period for submitting records to the insufficient to cope with unexpected commentary to clarify the application of Bureau to allow providers a sufficient delays in complying with a relatively § 1040.4(b)(1)(iii). Comment 4(b)(1)(iii)– amount of time to comply with these simple requirement—to electronically 1 clarifies that § 1040.4(b)(1)(iii)(A) requirements. The Bureau proposed send a small quantity of documents to requires the submission of court filings what it believed to be a relatively the Bureau. As to the industry only if they rely on pre-dispute lengthy deadline because it expected commenter’s concern that late-filing arbitration agreements entered into after that providers would continue to face records in violation of § 1040.4(b)(2) the compliance date set forth in could lead to class action liability, there § 1040.5(a). Providers are only required is no private right of action for a docket number set out in the initial motion and to submit the initial motion relying searching for other documents in public sources or upon a pre-dispute arbitration databases available to the Bureau. By contrast, the 1095 See Study, supra note 3, section 5 at 9 agreement; they need not submit later Bureau cannot obtain arbitration records on its own. (stating that, from 2010 to 2012, 1,847 individual response documents, such as a 1094 The comment is intended in part to AAA cases, or about 616 per year, were filed for six emphasize that the focus of inquiry under consumer financial product markets). consumer’s opposition to the motion, or 1096 1093 § 1040.4(b)(1)(iii) is whether a provider is relying See Dodd-Frank Act Section 1055(a)(1) (‘‘The a provider’s reply. upon an arbitration agreement in support of an court (or the Bureau, as the case may be) in an attempt to seek dismissal, deferral, or stay of any action or adjudication proceeding brought under 1093 To limit the potential burden on providers, aspect of a case, in order to assist the Bureau in Federal consumer financial law, shall have the Bureau will only require providers to submit the tracking whether such individual cases are jurisdiction to grant any appropriate legal or initial motion relying on an arbitration agreement. eventually refiled in arbitration. In contrast, equitable relief with respect to a violation of The Bureau expects to be able to collect other § 1040.4(a) focuses on whether providers rely on Federal consumer financial law, including a related documents, such as the order ruling on the arbitration in any aspect of class litigation, which violation of a rule or order prescribed under a motion or opposition or reply briefs by taking the is a broader focus for different purposes. Federal consumer financial law’’).

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provider’s failure to comply with this information relating to third-party balance between protecting consumer Part. individuals, such as individual privacy and imposing a reasonable employees of the provider. redaction burden on providers, 4(b)(3) Redaction Proposed § 1040.4(b)(3)(ii) would particularly given that the Bureau The Bureau’s Proposal have required redaction of street proposed to conduct further review and Proposed § 1040.4(b)(3) would have addresses of individuals, but not cities, redaction prior to any public release as required providers to redact certain States, and zip codes. The Bureau discussed in the proposal and what is specific types of information that can be believes that collecting such high-level now new § 1040.4(b)(5). location information for arbitral records used to directly identify consumers Comments Received before submitting arbitral records to the could, among other things, help the Bureau pursuant to proposed Bureau match the consumer’s location The Bureau did not receive comments § 1040.4(b)(1). The Bureau endeavors to to the arbitral forum’s location in order that addressed the specific categories of to monitor issues such as whether protect the privacy of consumer redactions set out in § 1040.4(b)(3)(i) consumers are being required to information. Additionally, as discussed through (ix). Some comments expressed arbitrate in remote fora, and could assist more fully above, the Bureau had more general privacy concerns about the the Bureau in identifying any local or proposed § 1040.4(b), in part, pursuant Bureau’s proposed collection of regional patterns in consumer harm as to its authority under Dodd-Frank materials, although these comments did well as arbitration activity. The Bureau section 1022(c)(4), which provides that not explicitly acknowledge that the believes that collecting city, State, and the Bureau may not obtain information Bureau had proposed to require zip code information would pose ‘‘for purposes of gathering or analyzing redactions or state whether the limited privacy risk, and that any the personally identifiable financial proposed redactions actually addressed residual risk would be balanced by the information of consumers.’’ The Bureau their concerns. Some industry benefit derived from collecting this commenters expressed general concerns stated that it had no intention of information. gathering or analyzing information that that the submission of arbitration Proposed § 1040.4(b)(3)(vi) through records would expose consumers to a directly identifies consumers. At the (ix) would have required redaction from same time, the Bureau sought to risk of privacy and data security any arbitral records submitted to the violations. These comments did not minimize the burden on providers by Bureau, of account numbers, social detail the nature of this risk. Another providing clear instructions for security and tax identification numbers, industry commenter expressed concern redaction. driver’s license and other government that the Bureau was forcing the Accordingly, the Bureau had identification numbers, and passport exposure of the private data of proposed § 1040.4(b)(3), which would numbers. These redaction requirements consumers without their consent. require that providers, before submitting would not have been limited to Another industry commenter argued arbitral records to the Bureau pursuant information for individual persons that the submission requirement to proposed § 1040.4(b), redact nine because the Bureau believes that the compromised the privacy of the specific types of information that privacy of any account numbers, social provider’s employees. directly identify consumers. The Bureau security, or tax identification numbers believed that these nine items would be should be maintained to the extent they Final Rule easy for providers to identify and, may be included in arbitral records. therefore, that redacting them would The Bureau noted that it did not The Bureau finalizes § 1040.4(b)(3)(i) impose minimal burden on providers. broadly propose to require providers to through (ix) as proposed. The more Proposed comment 4(b)(3)–1 would redact all types of information that general comments concerning privacy, have clarified that providers are not could be deemed to be personally data security, and employee required to perform the redactions identifiable financial information (PIFI). confidentiality are addressed in Part themselves and may assign that Because Federal law prescribes a broad VI.D. No comments suggested specific responsibility to another entity, such as definition of PIFI,1097 the Bureau additional redactions to further an arbitration administrator or an agent believed that generally requiring minimize privacy risks to consumers or of the provider. redaction of all PIFI could impose a other parties, or suggested that Pursuant to proposed § 1040.4(b)(3)(i) significant burden on providers while additional categories of PIFI are likely to through (v), the Bureau would have affording few, if any, additional be included in records submitted under required providers to redact names of protections for consumers relative to the § 1040.4(b)(1). The Bureau continues to individuals, except for the name of the redactions the Bureau proposed to believe that the redaction requirements provider or arbitrator where either is an require. As such, the list of items in substantially reduce privacy and data individual; addresses of individuals, proposed § 1040.4(b)(3)(i) through (ix) security risks. To address the concern excluding city, State, and zip code; identified the examples of PIFI that the one industry commenter expressed email addresses of individuals; Bureau anticipated were likely to exist about the privacy of its employees’ telephone numbers of individuals; and in the arbitral records that would be names, the Bureau affirms that photographs of individuals from any submitted under § 1040.4(b)(1). The § 1040.4(b)(3)(i), which requires the arbitral records submitted to the Bureau. Bureau’s preliminary view was that the redaction of the names of all individuals The Bureau noted that, with the list of items struck the appropriate other than the arbitrator or the provider, exception of the names of providers or applies to the names of providers’ arbitrators where either are individuals, 1097 Federal regulations define ‘‘personally employees. information related to any individuals— identifiable financial information’’ as ‘‘any The Bureau also finalizes proposed information: (i) A consumer provides to you to not merely the consumer to whom the obtain a financial product or service from you; (ii) comment 4(b)(3)–1, now renumbered as consumer financial product is offered or About a consumer resulting from any transaction comment 4(b)–2, as set out above. The provided—would have been required to involving a financial product or service between Bureau received no comments on be redacted pursuant to proposed you and a consumer; or (iii) You otherwise obtain whether providers should be permitted about a consumer in connection with providing a § 1040.4(b)(3)(i) through (v). This would financial product or service to that consumer.’’ 12 to have another entity perform have included names or other items of CFR 1016.3(q)(1). redactions, such as an arbitration

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administrator or an agent of the Specifically, academic commenters that such a rule may conflict with State provider. supported the publication of arbitration- laws regarding the confidentiality of related records and noted the arbitral records. Industry commenters 4(b)(4) Internet Posting of Arbitration- importance of the publication of such opposed the publication of records on Related Records records to academic research on the grounds that the rule would The Bureau’s Proposal consumer arbitration, which otherwise disregard confidentiality as a standard The Bureau stated in the proposal that relied on the limited amount of data that feature of arbitration. it intended to publish arbitral records arbitral administrators permitted non- Finally, some industry commenters collected pursuant to proposed parties to review. Academic, State requested an additional round of notice § 1040.4(b)(1). The Bureau had attorneys general, and consumer and comment on the Bureau’s intent to considered whether to publish such advocate commenters also noted that publish records, especially to comment records individually or in the form of the importance of such records to help on the particulars of the process by aggregated data. Prior to publishing regulators, including the Bureau and which the Bureau intends to collect, such records, the Bureau stated that it other State and Federal entities, analyze secure, and disseminate arbitration data. the impact of arbitration agreements on would have ensured that they had been The Final Rule redacted, or that the data was consumers. Consumer advocate aggregated, in accordance with commenters also suggested that the The Bureau is finalizing new applicable law, including Dodd-Frank transparency created by publishing § 1040.4(b)(4), under which the Bureau section 1022(c)(8), which requires the records would improve the quality of shall establish and maintain on its Web Bureau to ‘‘take steps to ensure that arbitrator decisions because arbitrators site a central repository of the records proprietary, personal, or confidential would know that their decisions would collected pursuant to § 1040.4(b)(1). be scrutinized, would help providers consumer information that is protected Section 1040.4(b)(4) requires that the that were not parties to the arbitration from public disclosure under [the Bureau make the arbitration-related understand what activities might run Freedom of Information Act or the records it collects from providers easily afoul of the law, and might help Privacy Act] or any other provision of accessible and retrievable by the public consumers themselves learn to avoid law[] is not made public under this on its Web site. In practice, the Bureau harms. expects to comply with this rule by title.’’ A number of other commenters The Bureau sought comment on the publishing the records, further redacted, generally opposed the Bureau’s stated if necessary, in accordance with new publication of the records that would intention of publishing records have been required to be submitted by § 1040.4(b)(5), as discussed below, as received. Several industry commenters PDF files. The Bureau expects that such proposed § 1040.4(b)(1), including expressed the concern that plaintiff’s whether it should limit publication of records will be made searchable by the attorneys would review the published text of the records, as well as by date, particular items even after redaction arbitration-related records and file based on particular consumer privacy the name of the arbitration frivolous claims, including class action administrator, the name of the provider concerns or whether commenters had litigation and individual arbitration other confidentiality concerns. Along and the type of consumer financial proceedings regarding the claims made product or service at issue. similar lines, in the past some plaintiff’s in the published records. A commenter attorneys had noted their frustration As discussed in detail in Part VI.D, that is an association of State regulators the Bureau continues to believe it is with arbitral privacy. Some plaintiff’s opposed the publication of records on important to publish the records it attorneys had noted in the past, for the grounds that it would lead to more collects, with appropriate redactions. example, that arbitration did not allow class action cases, which would The Bureau believes that its experience them to file cases that can develop the exacerbate the difficulties of regulators’ with the Study and other market law (because the outcomes are usually assessing the risks posed by class monitoring efforts has clarified the private and do not have precedential actions to providers. An industry 1098 importance of publishing arbitration effect). In addition, the Bureau commenter expressed the concern that records to assist research (by academics sought comment on whether it should the published records themselves would and policymakers) on consumer finance publish arbitral records individually or be the subject of class action litigation arbitration and to help regulators, in the form of aggregated data. The against providers that made any errors Bureau also sought comment on in redacting submitted records as including the Bureau and other State whether there were alternatives to required by proposed § 1040.4(b)(1), or and Federal bodies, to analyze publication by the Bureau—such as that failed to include the language consumers’ experiences with arbitration publication by other entities—that required by proposed § 1040.4(a)(1) in and determine if further action is would have furthered the purposes of pre-dispute arbitration agreements. The needed. The Bureau agrees that the publication described above. commenter also suggested that the publication of these records—including records on the resolution of arbitrations Comments Received Bureau itself pursue any important information derived from the records (many of which will not be available in A number of commenters expressed rather than permitting third parties to published litigation records)—will also general support for the Bureau’s stated review and exploit such information. assist parties in arbitration and litigation intention to publish the records it Another industry commenter more accurately determine whether would receive. Academic, State suggested that the Bureau should not their claims or defenses are likely to attorneys general, and nonprofit publish arbitral records because the succeed or fail. The Bureau understands commenters agreed that the Bureau Bureau’s existing consumer complaint from the Study that most records should publish records it received. database already serves a similar pertaining to consumer financial function in publishing data on arbitrations are kept private. However, 1098 See, e.g., ‘‘Arbitration: Is It Fair When consumer disputes. such privacy is not inherent to Forced?,’’ Hearing before the S. Comm. on the arbitration, given that other arbitration Judiciary, 112th Cong. 177 (2011) (Prepared A commenter that is an association of Statement of F. Paul Bland, Senior Attorney, Public State regulators opposed the Bureau’s fora publish individual arbitration Justice), at 81–82. publication of records on the grounds records by default (such as FINRA), and

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that AAA has begun to publish records other regulators—to also monitor offered comments on the scope of the of some consumer arbitrations.1099 arbitration for fairness issues. Bureau’s monitoring proposal, as As discussed above in connection The Bureau disagrees with the summarized above. Further, new with final § 1040.4(b)(1)(i)(D), the industry commenter that suggested that provisions discussed below offer details Bureau agrees with consumer advocate the Bureau’s existing consumer on the collection and submission of commenters that suggested that complaint database can serve the same documents, including deadlines for collecting and publishing records might function as a dedicated page or area on providers to submit documents, improve the quality of some arbitrators’ the Bureau’s Web site focused on deadlines for the Bureau to publish decisions because they know that their arbitral records and that an arbitration documents, and the address where decisions may be more broadly database would be duplicative of the redacted records will be posted. scrutinized. The records that the Bureau complaint database. The complaint The Bureau expects to release details reviewed in the Study suggested that database is not designed to receive or of how providers should comply with arbitration awards were short or publish the variety of arbitration records the requirements of § 1040.4(b) in due summary in nature at least compared to that providers are required to submit course. The Bureau expects that such instructions will be published in the reasoned decisions in litigation; the pursuant to this rule. The Bureau disagrees with industry Federal Register, the Bureau’s Web site, Bureau believes that if publication commenters as it does not believe that and in a small business compliance results in more fulsome arbitrator the Bureau’s publication of records guide the Bureau will publish to assist decisions, this would be an added would conflict with State laws on the companies redact and submit in accord benefit of the rule. confidentiality of arbitral records. with the final rule. The Bureau further agrees with the Published records will be redacted, by consumer advocate commenter that 4(b)(5) Further Redaction Prior to providers and by the Bureau, and thus Internet Posting suggested that the publication of records the Bureau will take steps to will likely help providers understand appropriately reduce re-identification The Bureau sought comment on the what activities might run afoul of the risk to individuals who are parties to the publication of the records that would law, and would help consumers learn arbitrations. The Bureau also disagrees have been required to be submitted by about certain harmful practices resulting with industry commenters that proposed § 1040.4(b)(1), including in arbitral awards for consumers. For confidentiality is standard in consumer whether it should limit publication of example, the AAA consumer arbitration arbitration. As noted above, many other particular items even after redaction records the Bureau reviewed in the arbitration administrators publish their based on particular consumer privacy course of its Study contained filings on decisions, most notably AAA and concerns or whether commenters had subjects that were not found in FINRA, which publishes records in all other confidentiality concerns. individual litigation. The Bureau agrees arbitrations without redacting the names Industry commenters asserted that the with industry commenters that the of individuals. The AAA, further, collection of both public and non-public publication of records may lead to some already publishes some case-level information by financial regulators class action litigations, but the Bureau information on individual consumer poses a threat to consumer privacy. One industry commenter argued that the disagrees that any increase is arbitrations.1100 Further, prevailing collection of even redacted records, necessarily detrimental, as set out in its parties in arbitrations routinely make combined with other publicly available analysis of class actions in the findings such awards public in their filings to information, could be used to re-identify section above. The Bureau disagrees that enforce them in court.1101 In any event, consumers. One industry commenter the act of producing the records to the extent that there is a conflict with expressed skepticism about permitting themselves would be the subject of class State law and the rule, the Bureau finds government regulators to collect data action litigation against providers. that rule would govern and would be in because of data security issues at While providers may make errors in the public interest. financial regulators and reports about redacting records as required by The Bureau disagrees with the data security at the Bureau.1103 § 1040.4(b)(3) or may make errors in industry commenter that an additional For the reasons provided below, the inserting into pre-dispute arbitration round of notice and comment is Bureau is finalizing new § 1040.4(b)(5), agreements the language required under necessary to detail the process by which § 1040.4(a)(1), the rule is not privately the Bureau intends to collect, secure should limit any publication based on consumer enforceable and the Bureau will further and disseminate arbitration data. The privacy concerns arising out of the publication of review and redact records before proposal specifically solicited such records after their redaction pursuant to publishing. In any event, the Bureau comments on the Bureau’s intention to proposed § 1040.4(b)(3) or if providers would have does not expect such class actions could other confidentiality concerns. In addition, the publish arbitration-related records, and Bureau seeks comment on whether it should occur given the low number of sought comments on how the Bureau publish arbitral records individually or in the form arbitrations per company. The Bureau should publish arbitration-related of aggregated data. The Bureau also seeks comment agrees that it should pursue and further records it received.1102 Many providers on whether there are alternatives to publication by investigate important information the Bureau—such as publication by other entities— that would further the purposes of publication derived from the records it receives. The 1100 AAA Consumer Arbitration Statistics, supra described above.’’). Bureau disagrees however that this note 804. 1103 The commenter referred to an Office of the information should be limited to the 1101 See, e.g., 9 U.S.C. 9 (Federal Arbitration Act Inspector General report on the security of the Bureau alone rather than to the public provision setting out procedures for the Bureau’s complaints database. See Office of the enforcement of awards). Inspector General, ‘‘Security Control Review of the and other enforcement agencies. Making 1102 81 FR 32830, 32893 (May 24, 2016) (‘‘[T]he CFPB’s Data Team Complaint Database,’’ (July 23, arbitration records transparent via Bureau seeks comment on its plan to make an 2015), available at https://oig.federalreserve.gov/ publication would permit third electronic submission process operational before reports/cfpb-dt-complaint-database-summary- parties—including private litigants and the compliance date, including what features of jul2015.htm (finding overall that the Bureau had such a system would be useful to providers, their taken steps to secure the Complaint Database, agents, or the general public.’’); see also id. (‘‘The identifying needed improvements, and 1099 FINRA, ‘‘Awards,’’ at Rule 12904(h) (‘‘All Bureau seeks comment on the publication of the acknowledging that the Bureau agreed with OIG’s awards shall be made publicly available.’’); AAA records that would be required to be submitted by recommendations and would take steps to make Consumer Arbitration Statistics, supra note 804. proposed § 1040.4(b)(1), including whether it improvements).

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which will require the Bureau to make the Bureau addresses the comments rule ‘‘is not retroactive to accounts such further redactions as are needed to received on these proposed provisions. opened prior to the implementation comply with applicable privacy laws. In date.’’ Other commenters requested that 5(a) Compliance Date particular the Bureau will review the Bureau modify the compliance records submitted by providers to Dodd-Frank section 1028(d) states period. Two industry commenters urged ensure that providers’ redactions were that any regulation prescribed by the the Bureau to adopt a longer compliance made in compliance § 1040.4(b)(3). In Bureau under section 1028(b) shall period. One of these industry addition, before publishing records apply to any agreement between a commenters, a trade association pursuant to § 1040.4(b)(4), the Bureau consumer and a covered person entered representing the consumer credit will, to the extent necessary, make into ‘‘after the end of the 180-day period industry, requested a compliance period further redactions to records to beginning on the effective date of the of 18 months, which would be an appropriately reduce the risk of re- regulation, as established by the additional 11 months beyond what the identification. Bureau.’’ As the proposal stated, the Bureau had proposed. The commenter The Bureau disagrees with the Bureau interprets this language to mean asserted that the Bureau had industry commenter that said that the that the rule may begin to apply on the underestimated how time-consuming Bureau’s collection of public and non- 181st day after the effective date, as this the required contractual changes would public information by financial day would be the first day ‘‘after the end be for some providers. For example, regulators poses a threat to consumer of’’ the 180-day period starting on the according to the commenter, many privacy. Section 1040.4(b)(3) will effective date as is required by section States have a single document rule that require providers to redact personal and 1028(d). Given that the Bureau proposed limits the ability of vehicle finance financial information before the records an effective date of 30 days after companies to modify contracts with an ever reach the Bureau. In addition, the publication of the rule in the Federal addendum or side letter, so that such Bureau will employ the same data Register, compliance with the proposal companies need sufficient time to security measures that it employs for would have been required starting on modify the agreements themselves and other sensitive data that it currently the 211th day after publication of the provide them to dealers well before the maintains. rule in the Federal Register. Proposed effective date. The commenter also § 1040.5(a) would have adopted the stated that one of its members had more 4(b)(6) Deadline for Internet Posting of term ‘‘compliance date’’ to refer to this Arbitral and Court Records than 200 forms that the provider would date and would have stated that need to revise, check, correct, review, The Bureau adopts final compliance with part 1040 is required and approve. According to the § 1040.4(b)(6), under which the Bureau for any pre-dispute arbitration commenter, finance companies typically shall begin to make records submitted to agreement entered into after the date modify contracts in batches; each batch the Bureau by providers under final that is 211 days after publication of the can take three to five months; and that § 1040.4(b)(1) accessible and retrievable 1104 rule in the Federal Register. printing, distribution, and by the public on the Bureau’s Web site The Bureau proposed a 30-day implementation would take additional no later than July 1, 2019, and at least effective date based on Administrative time. The commenter also asserted that annually each year thereafter for Procedure Act (APA) section 553(d), removing a ‘‘Notice of Arbitration’’ documents received by the end of the which requires that, with certain signature box would cause programming prior calendar year. enumerated exceptions, a substantive issues for automobile dealers. The Bureau believes that making rule be published in the Federal Additionally, the commenter also stated records available on a timely basis will Register not less than 30 days before its that if the Bureau does not extend the make them most useful to third parties. effective date.1105 As the Bureau compliance date, it should adopt a safe For instance, State and Federal explained in the proposal, the Bureau harbor within which providers would regulators may need access to recent did not believe that a longer period for not face potential consequences for records if they are to be effectively the effective date was needed to having non-compliant agreements so responsive to potentially problematic facilitate compliance, given that section long as the provider does not enforce business practices or unfairness in 1028(d) mandates an additional 180-day the arbitration agreements in a class arbitration proceedings early in their period between the effective date and action. existence. Similarly, private attorneys the compliance date. The Bureau stated may need access to recent records to in the proposal that it believes that a The other industry commenter, a more effectively guide their forecasting 211-day period between Federal small-dollar lender, requested a of the success of claims and defenses in Register publication and the compliance compliance period of 452 days. This arbitration and litigation. Were the date (referred to herein as the commenter stated that it would need to Bureau to delay such action, the ‘‘compliance period’’) would afford revise its agreements to include the information could become stale and less providers sufficient time to comply.1106 contract provision required by proposed useful. The Bureau believes based on its Three commenters—a consumer § 1040.4(a)(2) and that it may also experience with other data posting that advocate, an individual, and a research remove its arbitration provisions. The an annual cycle strikes an appropriate center—urged the Bureau to adopt commenter noted that it had at least 113 and practicable balance in light of § 1040.5(a) as proposed. An industry separate consumer agreements or Bureau resources. trade association commenter stated that disclosure documents containing it supported § 1040.5(a) as long as the arbitration agreements. According to the Section 1040.5 Compliance Date and commenter, 211 days is not enough time Temporary Exception 1104 Proposed § 1040.5(a) would have instructed to program, test, and deploy 113 new Proposed § 1040.5 would have set the Office of the Federal Register to insert a specific agreements, especially given that it uses forth the compliance date for part 1040 date upon publication in the Federal Register. four different point-of-sale software as well as a limited and temporary 1105 5 U.S.C. 553(d). systems (in addition to its primary 1106 Proposed § 1040.5(b) would have created a exception to compliance with proposed limited, temporary exception for certain pre- software package). The commenter also § 1040.4(a)(2) for certain consumer packaged general-purpose reloadable prepaid card noted that it would need to destroy non- financial products and services. Below, agreements. complaint hard-copy agreements at each

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of its storefronts and replace them with is discussed below). The Bureau As a result, the Bureau does not believe new hard-copy agreements. acknowledges—as noted by the industry a safe harbor is needed. Additionally, one consumer advocate trade association commenter and small- 5(b) Exception for Pre-Packaged commenter urged the Bureau to shorten dollar lender commenter—that some General-Purpose Reloadable Prepaid the compliance period to 90 days or 180 providers will need to implement Card Agreements days. revisions to a large number of consumer The Bureau is finalizing § 1040.5(a) as agreements and related forms. However, As described above, § 1040.5(a) states Proposed except that it is extending the the Bureau believes that the revisions that compliance with part 1040 is effective date by an additional 30 days, required for each document will be required starting on the 241st day after to 60 days after publication in the modest, and the Bureau notes that publication of the final rule in the Federal Register, and is making one providers do not provide evidence to Federal Register. As of this date, technical correction. While the proposal the contrary. The rule requires only that providers would, among other things, be stated that compliance with part 1040 is providers insert either the provision required to ensure that their pre-dispute required for any pre-dispute arbitration mandated by § 1040.4(a)(2)(i) or the arbitration agreements contain the agreement entered into after the alternative provision permitted by provision required by § 1040.4(a)(2)(i) or compliance date, the final rule states § 1040.4(a)(2)(ii)—and the Bureau has the alternative provision permitted by that compliance with part 1040 is already provided the specific language § 1040.4(a)(2)(ii). As stated above, the required for any pre-dispute arbitration for these provisions with a view toward Bureau believes this period generally agreement entered into on or after the reducing burden. Because both of these affords providers sufficient time to compliance date.1107 The Bureau revisions are modest, the Bureau comply. intended proposed § 1040.5(a) to convey believes that making them will not As the proposal stated, however, the Bureau assessed whether this that providers would be required to impose a substantial burden, even compliance period may pose special comply starting on the compliance date. where providers have multiple difficulties for providers of certain types The Bureau believes the phrase ‘‘on or agreements. And by making the effective of products. The Bureau was concerned after’’ the compliance date better date 30 days later than it had proposed, that providers of certain types of GPR captures this intent.1108 the Bureau is providing additional time prepaid cards may not be able to ensure Regarding the industry trade for this to be completed. The Bureau that only compliant products are offered association’s comment about believes that providers can make these for sale or provided to consumers after retroactivity, the Bureau notes that the modest revisions and update their the compliance date. Prepaid providers rule would not have retroactive effect. software or deliver hard copies of As is explained above in the section typically enclose cards in a package that agreements, as needed, within 241 contains a card and a cardholder entitled ‘‘Comments on the Bureau’s 1110 days. agreement.1111 Providers typically print Interpretation of Entered Into,’’ this part The Bureau has carefully considered these packages well in advance of sale will only apply to agreements entered whether providers of certain products and are distributed to consumers into after the compliance date. may have difficulty complying within through third-party retailers such as Regarding the consumer advocate’s 241 days and is adopting a temporary drugstores, check cashing stores, and comment that urged the Bureau to adopt exception for pre-packaged general- convenience stores. To comply with the a shorter compliance period, the Bureau purpose reloadable prepaid card rule by the compliance date, providers declines to adopt a compliance period agreements under § 1040.5(b). In of such products would need to search of 90 or 180 days because it believes addition, the Bureau expects that the each retail location that sells their that a compliance period that includes vast majority of providers could products for any non-compliant a 180-day period after the effective date continue to provide non-compliant packages; remove them from the is most consistent with its authority hard-copy agreements as long as they shelves; and print new packages. The under section 1028(d) of the Dodd- simultaneously gave consumers a notice 1109 Bureau believes that this process would Frank Act and the APA. or amendment including the required involve considerable expense and that The Bureau is adopting a compliance provision as part of the agreement. The this represents a unique situation not period that is one month longer than the Bureau is aware, as the industry trade present with other products and compliance period in the proposal, for industry commenter noted, that services that proposed part 1040 would a total of approximately eight months, providers subject to a single-document have covered. and declines to adopt a longer rule will not be able to use a separate For these reasons, proposed compliance period because the Bureau notice or amendment. For this reason, § 1040.5(b) would have established a does not believe that the contractual the Bureau has considered whether such limited exception from proposed change required by this rule will take providers should be eligible for the § 1040.4(a)(2)’s requirement that the more than eight months to implement temporary exception in § 1040.5(b). The provider’s pre-dispute arbitration (except for certain prepaid providers, as Bureau has decided not to make such agreement contain a specified provision providers eligible for the § 1040.5(b) by the compliance date. Proposed 1107 Like the proposal, final § 1040.5(a) would exception, because the Bureau instruct the Office of the Federal Register to insert § 1040.5(b) would have stated that a specific date upon publication in the Federal believes—for the reasons stated in the proposed § 1040.4(a)(2) shall not apply Register. paragraph above—that the compliance to a provider that enters into a pre- 1108 In this preamble, the Bureau uses the terms period affords enough time to update dispute arbitration agreement for a ‘‘on or after the compliance date’’ and ‘‘after the consumer agreements while complying general-purpose reloadable prepaid card compliance date’’ interchangeably. with applicable single-document rules. 1109 See Dodd-Frank section 1028(d) (stating that if certain conditions are met. For a any rule prescribed by the Bureau under section provider that could not contact the 1028(b) shall apply to agreements entered into after 1110 Regarding the industry trade association’s consumer in writing, proposed the end of the 180-day period beginning on the comment that removing a ‘‘Notice of Arbitration’’ § 1040.5(b)(1) would have set forth the effective date of the regulation) and APA section signature box would cause programming issues for 553(d) (stating that, in general, the required automobile dealers, the rule does not require following conditions: (1) The consumer publication or service of a substantive rule shall be providers to remove it, because the rule does not made not less than 30 days before its effective date). ban the use of pre-dispute arbitration agreements. 1111 See 81 FR 83934 (Nov. 22, 2016).

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acquires the card in person at a retail by providers in accordance with entered into the agreement) before or store; (2) the agreement was inside of proposed § 1040.5(b)(2)(ii) would have after the compliance date. packaging material when it was been required to include the provision The Bureau also received a comment acquired; and (3) the agreement was required by proposed § 1040.4(a)(2)(i) or from an industry trade association packaged prior to the compliance date the alternative permitted by proposed representing prepaid card providers. of the rule. For a provider that had the § 1040.4(a)(2)(ii). In addition, providers This commenter expressed concern that ability to contact the consumer in would still have been required to submit the proposal would be burdensome for writing, proposed § 1040.5(b)(2) would certain arbitral records to the Bureau, providers in combination with the have imposed the previous three pursuant to proposed § 1040.4(b), in Bureau’s prepaid account rule (which, conditions as well as one additional connection with pre-dispute arbitration after the close of the comment period for requirement: Within 30 days of agreements entered into after the this rule, the Bureau published in obtaining the consumer’s contact compliance date. The Bureau also stated November 2016).1112 The commenter information, the provider would have in the proposal that it did not anticipate asserted that, even with the proposed been required to provide to the that permitting prepaid providers to sell temporary exception, providers would consumer an amended pre-dispute existing card stock containing non- ‘‘incur the double expense’’ of having to arbitration agreement that is compliant compliant agreements would affect update their disclosures and related with proposed § 1040.4(a)(2). Proposed consumers’ shopping behavior, as, materials a second time to comply with comment 5(b)(2)–1 would have clarified currently, consumers are typically the Bureau’s arbitration rule. The that the 30-day period would not begin unable to review the enclosed terms and commenter also stated that GPR prepaid to elapse until the provider is able to conditions before purchasing a GPR providers may have to pull products off contact the consumer and would also prepaid product (although the Bureau retail store shelves on multiple have stated that a provider is able to would expect that corresponding occasions within a relatively short contact the consumer when, for product Web sites would contain an period. example, the provider has the accurate arbitration agreement). The Bureau adopts § 1040.5(b) and consumer’s mailing address or email The Bureau received several comment 5(b)(2)–1 as proposed with a address. comments on proposed § 1040.5(b). A minor revision to comment 5(b)(2)–1 for As the proposal stated, this exception consumer advocate commenter urged clarity.1113 As stated above, the Bureau would have permitted prepaid card the Bureau not to adopt proposed believes the exception is warranted providers to avoid the considerable § 1040.5(b), expressing concern that the because it would allow prepaid card expense of pulling and replacing provision would give providers an providers to avoid the considerable packages at retail stores while incentive to package a large supply of expense of pulling and replacing adequately informing consumers of their 1114 cards before the compliance date in an packages at retail stores. At the same dispute resolution rights, where effort to use misleading agreements for time, the impact of the exception on feasible, due to the notification as long as possible after the compliance consumers would be limited, because requirement in proposed § 1040.5(b)(2). date. The commenter requested that, if § 1040.4(a)(1) would continue to apply, The proposal also noted that proposed the Bureau adopts § 1040.5(b), the and because § 1040.5(b)(2)(ii) would § 1040.5(b)(2) would not have imposed Bureau should (1) add commentary require providers to provide amended on providers an obligation to obtain a stating that, even for providers covered agreements to consumers where consumer’s contact information. Where by § 1040.5(b), proposed § 1040(a)(1) feasible. providers are able to contact the The Bureau is persuaded that adding consumer in writing, the Bureau continues to apply; (2) limit the exception to GPR prepaid cards not in a comment clarifying that § 1040.4(a)(1) expected that they could satisfy remains in effect, even where the proposed § 1040.5(b)(2) by, for example, the provider’s possession after the compliance date (as opposed to GPR temporary exception applies, would sending the compliant agreement to the help consumers better understand their consumer when the consumer called to prepaid cards packaged before the compliance date); (3) limit the exception rights, and providers better understand register the account and provided a their obligations, under the rule. For mailing address or email address; to GPR prepaid cards packaged 60 days after Federal Register publication, not this reason, the final rule includes new sending the revised terms when the comment 5(b)–1, which states that, provider sent a personally-embossed 211 days; and (4) require providers to deactivate non-compliant card packages where § 1040.4(a)(2) does not apply to a card to the consumer; or communicating provider that enters into a pre-dispute the new terms on the provider’s Web that have not been activated six months after the compliance date. The arbitration agreement on or after the site. compliance date by virtue of the In the proposal, the section-by-section commenter also stated that it supported temporary exception in § 1040.5(b)(2), analysis clarified that providers availing proposed § 1040.5(b)(2)(ii)’s the provider must still comply with themselves of the exception in proposed requirement that providers able to § 1040.4(a)(1), which generally prohibits § 1040.5(b) would still have been contact the consumer in writing provide reliance on a pre-dispute arbitration required to comply with proposed the consumer with an amended pre- § 1040.4(a)(1) and proposed § 1040.4(b) dispute arbitration agreement. agreement in a class action related to a as of the compliance date. Pursuant to Additionally, a research center covered consumer financial product or proposed § 1040.4(a)(1), such providers commenter stated that the Bureau service. The Bureau declines to limit the would still have been prohibited, as of should craft the exception narrowly and 1112 the compliance date, from relying on a apply it only where necessary. The 81 FR 83934 (Nov. 22, 2016). 1113 The comment gives a more specific example pre-dispute arbitration agreement commenter pointed out that, even of when the provider has the consumer’s mailing entered into after the compliance date though proposed § 1040.4(a)(1) would or email address, referring to when the consumer with respect to any aspect of a class still apply, it may be unclear whether a registers the card and gives that information to the action concerning any of the consumer given agreement is covered by provider. 1114 In the Prepaid Rule, the Bureau similarly financial products or services covered § 1040.4(a)(1), as there may not be adopted a disclosure regime that does not require by proposed § 1040.3. The amended pre- evidence of whether the consumer providers to pull non-compliant materials from dispute arbitration agreement submitted purchased the prepaid card (and thereby store shelves. Id.

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exception to GPR prepaid cards not in that occurred before or after the and the Bureau requested comments the provider’s possession after the compliance date). and submissions of additional data that compliance date. The Bureau believes Regarding the industry trade could inform the Bureau’s analysis of that when an agreement is packaged is association commenter’s concern about the benefits, costs, and impacts of the a clearer compliance standard than compliance burden due to the Bureau’s proposal. In response, the Bureau whether a package is in the provider’s final prepaid account rule, the Bureau received a number of comments on the possession. Further, the Bureau believes believes these concerns are misplaced. topic. The Bureau has consulted, or that any incentive to package large As stated above, the Bureau recognizes offered to consult with, the prudential that compliance with part 1040 may be quantities of cards before the regulators, the Federal Housing Finance more difficult or costly for some prepaid compliance date (a form of potential Agency, the Federal Trade Commission, evasion suggested by one commenter) providers because of the way some prepaid products are packaged and sold. the U.S. Department of Agriculture, the will be limited because the incremental U.S. Department of Housing and Urban benefit of doing so is limited, as For this reason, the Bureau is adopting Development, the U.S. Department of § 1040.4(a)(1) would continue to apply; § 1040.5(b). However, the Bureau does the Treasury, the U.S. Department of and because many providers will be not believe that compliance with part required to contact their customers and 1040 will impose a substantial burden Veterans Affairs, the U.S. Commodity provide the consumer an amended on prepaid providers in conjunction Futures Trading Commission, the U.S. agreement (pursuant to with the Bureau’s finalization of the Securities and Exchange Commission, § 1040.5(b)(2)(ii)). prepaid account rule. Both rules require and the Federal Communications The Bureau also declines to limit the revisions to account agreements. Commission. The consultations exception to GPR prepaid cards However, both rules also contain regarded consistency with any packaged no more than 60 days after lengthy compliance periods prudential, market, or systemic publication in the Federal Register. (approximately 18 months for the objectives administered by such This approach could be construed to prepaid account rule, including an agencies. The Bureau has chosen to impose a 60-day compliance period on additional six months the Bureau consider the benefits, costs, and impacts provided industry to give it sufficient of the final provisions as compared to GPR prepaid card providers after which 1115 they would have to pull-and-replace time to implement the rule, and the status quo in which some, but not non-compliant agreements at significant approximately eight months for part all, consumer financial products or expense, and the Bureau does not 1040). Further—for the reasons services providers in the affected believe a shorter compliance period for described in detail in the section-by- markets (see § 1040.2(c), defining the section analysis for § 1040.5(a), above— GPR prepaid card providers—compared entities covered by this rule as the Bureau believes that the contractual with the 241 days afforded other ‘‘providers’’) use arbitration change required by part 1040 is modest, providers—is legally permissible under agreements.1116 The baseline considers section 1028(d). In addition, the Bureau especially because the Bureau is providing the language for the required economic attributes of the relevant declines to require providers to markets and the existing legal and deactivate non-compliant, un-activated contract provision. The Bureau also notes that, contrary to the commenter’s regulatory structures applicable to card packages six months after the providers. The Bureau requested compliance date. Such a requirement assertion, part 1040 would not require providers to pull and replace products would be quite costly and the Bureau 1116 The Bureau has discretion in each does not believe such a requirement is from store shelves (indeed, as stated above, the purpose of § 1040.5(b) is to rulemaking to choose the relevant provisions to necessary, because limiting the discuss and to choose the most appropriate baseline exception to cards packaged before the prevent providers from having to do so). for that particular rulemaking. A potential alternative baseline for this rulemaking is the compliance date will have the same VIII. Dodd-Frank Act Section 1022(b)(2) baseline of a hypothetical future state of the world overall effect; once that stock of Analysis where ‘‘class actions against businesses would be agreements dissipates, only compliant all but eliminated.’’ See Brian Fitzpatrick, ‘‘The End A. Overview agreements will be available on store of Class Actions?,’’ 57 Ariz. L. Rev. 161 (2015). In developing this final rule, the Such a baseline could be justified because the use shelves. Further, such a rule would of class-eliminating arbitration agreements may effectively require providers to identify Bureau has considered the potential continue to grow over time. See also Myriam Gilles, non-compliant products at retail benefits, costs, and impacts as required ‘‘Opting Out of Liability: The Forthcoming, Near- locations and remove them—the very by section 1022(b)(2) of the Dodd-Frank Total Demise of the Modern Class Action,’’ 104 Act. Specifically, section 1022(b)(2) Mich. L. Rev. 373 (2005); Jean Sternlight, ‘‘As burden that the temporary exception Mandatory Binding Arbitration Meets the Class was designed to alleviate. calls for the Bureau to consider the Action, Will the Class Action Survive?,’’ 42 Wm. & The Bureau disagrees with the potential benefits and costs of a Mary L. Rev. 1 (2000–2001). Indeed, in Section 2 research center’s comment that it may regulation to consumers and covered of the Study, the Bureau documented a slight but persons, including the potential gradual increase in the adoption of arbitration be unclear whether a given prepaid card agreements by industry in particular markets. See agreement is subject to § 1040.4(a)(1) reduction of access by consumers to generally Study, supra note 3, section 2. See also because there may not be evidence of consumer financial products or services, Peter Rutledge & Christopher Drahozal, ‘‘Sticky when the consumer purchased the card the impact on depository institutions Arbitration Clauses—the Use of Arbitration Clauses and credit unions with $10 billion or after Concepcion and Amex,’’ 67 Vand. L. Rev. 955 (and, consequently, whether the (2014). The Bureau believes that this trend is likely consumer entered into it before or after less in total assets as described in to continue. Nonetheless, for simplicity and the compliance date). Based on its section 1026 of the Dodd-Frank Act, and transparency, the Bureau assumed that, in the knowledge of the prepaid card market, the impact on consumers in rural areas. absence of a final rule, the prevalence of arbitration In the proposal, the Bureau set forth agreements would remain constant. As a result, the the Bureau believes that, while the baseline that the Bureau used assumes that a provider may not know the identity of a preliminary analysis of these effects, significant amount of class litigation would remain the consumer unless the card is regardless of whether the proposal was finalized. If 1115 Prepaid Accounts Under the Electronic Fund the Bureau had instead used the hypothetical future registered, the provider does know, for Transfer Act (Regulation E) and the Truth in state of universal adoption of arbitration agreements a particular card, when the consumer Lending Act (Regulation Z). 82 FR 18975 (Apr. 25, as the baseline, the estimated impact, both of purchased it (and, accordingly, whether 2017). benefits and costs would be significantly larger.

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comment on this baseline, and did not The impact of submitting arbitral and contains an arbitration agreement today, receive any suggesting an alternative. court records to the Bureau is expected the ability of the debt collector to rely The Bureau invited comment on all to be minor, as identified in this upon it varies across arbitration aspects of the data that it has used to analysis and the Bureau’s PRA analysis agreements and depends on the analyze the potential benefits, costs, and further below. This impact is slightly applicable contract and background impacts of the proposed provisions.1117 higher than the PRA impact estimated law.1119 However, the Bureau notes that in some in the proposal, principally due to the The analysis below applies to both instances, the requisite data are not addition of § 1040.4(b)(1)(i)(B) and types of providers. For additional clarity available or are quite limited. In (b)(1)(iii), which requires providers to and to avoid unnecessary duplication, particular, with the exception of submit answers to arbitration claims the discussion is generally framed in estimating consumer recoveries from and arbitration motions filed in court to terms of the first type of provider Federal class settlements, data with the Bureau. (which faces virtually no exposure to which to quantify the benefits of the Given that the Bureau takes the status class claims today), unless otherwise final rule are especially limited. As a quo as the baseline, the analysis below noted. The Bureau estimates below the result, portions of this analysis rely in focuses on providers that currently have number of additional Federal class part on general economic principles and arbitration agreements. Providers that actions and putative class proceedings the Bureau’s experience and expertise in currently use arbitration agreements can that are not settled on a class basis for consumer financial markets to provide a be divided into two categories. The first both types of providers. category is comprised of providers that qualitative discussion of the benefits, Description of the Market Failure and currently include arbitration agreements costs, and impacts of the final rule. Economic Framework in contracts they enter into with The Bureau also discussed and consumers. For these providers, which Before considering the benefits, costs, requested comment on several potential constitute the vast majority of providers and impacts of the proposed provisions alternatives, including ones that would using arbitration agreements, the Bureau on consumers and covered persons, as be applicable to larger entities as well as believes that the final class rule will required by section 1022(b)(2), the smaller entities, which it listed in the result in the change from virtually no Bureau provided the economic proposal’s Initial Regulatory Flexibility exposure to class litigation to at least as framework through which it considered Analysis (IRFA) and also referenced in much exposure as is currently faced by those factors in order to more fully its Section 1022(b)(2) Analysis. A those providers with similar products or inform the rulemaking, and in particular further detailed discussion of potential services that do not use arbitration to describe the market failure that is the alternatives considered is provided in agreements. basis for the final rule.1120 This Section G of this Section 1022(b)(2) The second category includes framework is set forth below, followed Analysis and in the Final Regulatory providers that use arbitration by a discussion of related comments. Flexibility Analysis (FRFA) in Part IX agreements contained in consumers’ The Bureau’s economic framework below. contracts entered into by another assumes that when Congress and States In this analysis, the Bureau focuses on covered person, such as another have promulgated consumer protection the benefits, costs, and impacts of the provider. This category includes, for laws that are applicable to consumer two major elements of the final rule: (1) example, debt collectors and servicers financial products and services (‘‘the The requirement that providers with who, when sued by a consumer, invoke underlying laws’’) they have done so to arbitration agreements include a an arbitration agreement contained in address a range of market failures, for provision in the arbitration agreements the original contract formed between the example, asymmetric information. The they enter into 180 days after the original provider and the consumer. For underlying laws need enforcement effective date of the rule stating that the these providers, the additional class mechanisms to ensure providers arbitration agreement cannot be invoked litigation exposure caused by the final conform their behavior to these laws. In in class litigation, and the related rule will be somewhat less than the analyzing and finalizing both the class prohibition that would forbid providers increase in exposure for providers of the proposal and the requirement to submit from relying on such an agreement in a first type because the providers in this arbitral records, the Bureau is focusing case filed as a class action; and (2) the second category are not currently on a related market failure: Reduced requirement that providers using pre- uniformly able to rely on arbitration incentives for providers to comply with dispute arbitration agreements submit agreements in their current operations. the underlying laws, due to an certain records relating to arbitral For example, debt collectors typically insufficient level of enforcement. proceedings and certain court records to collect both from consumers whose While the Bureau assumes that the the Bureau. contracts contain arbitration agreements underlying laws address a range of and from consumers whose contracts do 1119 A research center commenter asserted that 1117 not contain arbitration agreements. The estimates in this analysis are based upon debt collectors are never able to rely on arbitration data obtained and statistical analyses performed by Thus, these debt collectors already face agreements between consumers and creditors. In the Bureau. This included much of the data class litigation risk, but this risk will fact, the Study contradicted this assertion, as 17 of underlying the Study and some of the Study’s increase, at most, in proportion to the 94 putative class cases with motions to compel results. The collection of the data underlying the fraction of the providers’ consumers arbitration involved FDCPA claims. See Study, Study was described in the relevant sections and supra note 3, section 6 at 56 n.94. See also SBREFA appendices of the Study. Some of the data was whose contracts contain arbitration Report, supra note 419, at 17 (summarizing collected from easily accessible sources, such as the agreements.1118 The actual magnitude comments from representatives of debt collectors data underlying the Bureau’s analysis of Federal by which debt collectors’ risk will who stated that, in some instances, debt collectors class settlements. Other data was confidential, such can rely on arbitration agreements). As is further as the data underlying the Bureau’s analysis of the increase is likely to be lower because noted below, at least one trade association pass-through of costs of arbitration onto interest even when a consumer’s contract representing debt collectors also said the ability of rates for large credit card issuers. The Bureau also debt collectors to rely on creditor arbitration collected additional information from trade groups 1118 For example, if half of consumers on whose agreements was more uncertain. on the prevalence of arbitration agreements used in debts a debt collector collects have arbitration 1120 Although Dodd-Frank section 1022(b)(2) does markets that were not analyzed in Section 2 of the agreements in their contracts, then the debt not require the Bureau to provide this background, Study. The collection of data from trade groups was collector’s class litigation risk would at most double the Bureau does so as a matter of discretion to more discussed further below in Parts VIII and IX. under the final rule. fully inform the rulemaking.

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market failures, it also recognizes that does not have a basis to believe that consequences for illegal behavior compliance with these underlying laws individual arbitration is inferior to separate from class action exposure. requires some costs. There are out-of- individual litigation. As discussed in The Bureau likewise acknowledges pocket costs required to, e.g., distribute Part VI, the data on this issue from the that it does not have data to quantify the required disclosures or notices, Study was inconclusive. Instead, the level of investment in compliance investigate alleged errors, or resolve Bureau in this rulemaking is focused on across the 50,000 firms affected by this disputes. There are opportunity costs in, a concern that the lack of an effective rule. As discussed further below, the for example, forgoing adjustments in class mechanism inherent in arbitration Bureau’s experience indicates that interest rates, limiting penalty fees, or agreements provides insufficient quantifying compliance costs is limiting calling hours for debt deterrence, which the Bureau believes challenging for any individual firm as collections. In addition, there are costs leads to sub-optimal levels of these costs tend to be diffused across associated with establishing a compliance.1122 multiple parts of financial institutions compliance management system which, A research center commenter argued and are also hard to distinguish from e.g., trains and monitors employees, that the Bureau does not have an costs that are incurred to enhance reviews communications with empirical basis to conclude that current customer service, mitigate reputational consumers, and evaluates new products levels of deterrence are sub-optimal. An risks, and related activities. The Bureau or features. association of State regulators also does not believe it is feasible to quantify The Bureau believes, based on its stated that it was troubled by the fact these costs across all of the affected experience and expertise in overseeing that the Bureau had not quantified firms. The Study showed that class consumer finance markets, that in current levels of providers’ investment litigation is currently the most effective general the current incentives to comply in compliance in order to determine private enforcement mechanism for are weaker than the economically whether those investments are most claims in markets for consumer efficient levels. That is, in general, the inadequate, and believed a study of that financial products or services in economic costs of increased compliance issue would provide a stronger providing monetary incentives are currently less than the economic foundation for rulemaking. A debt (including forgone profits due to in-kind benefits stemming from compliance. collection industry trade association or injunctive relief) for providers to Thus, increased compliance due to the asserted that its members already have comply with the law.1123 During the additional incentives provided by the substantial incentives to comply with years covered by the Study, providers final rule would, in general, be justified the law, in part because there is paid out hundreds of millions of dollars by the economic benefits of this uncertainty as to whether they can rely per year in class relief and related increased compliance. It may be, upon creditors’ arbitration agreements. litigation expenses in consumer finance however, that in some particular cases The Bureau acknowledged in the cases.1124 Class actions also resulted in or particular markets compliance is proposal and acknowledges again here substantial but difficult to quantify already at or above the optimal level, that the existing degree of compliance is prospective relief. This compares to the such that the increased compliance due difficult to quantify, and the Bureau purely retrospective relief and other to the final rule will lower economic does not have data available to quantify expenses related to about 1,000 welfare. The data and methodologies the level of compliance or the current individual lawsuits in Federal courts available to the Bureau do not allow for level of investments in compliance. The filed by consumers with respect to five an economic analysis of the optimal Bureau requested data on these subjects, of the largest consumer finance markets, level of compliance on a law-by-law or but commenters did not provide a similar number of individual 1121 market-by-market basis. However, additional data as to either of these. The arbitrations, and a similar number of for purposes of this discussion, the Bureau recognizes that existing small claims court cases filed by compliance incentives may be stronger Bureau assumes that the current level of consumers.1125 Individual consumer compliance in consumer finance in markets where providers do not markets is generally sub-optimal. contract directly with consumers and 1123 As discussed further below, if class litigation The Bureau also believes it may be thus there may be uncertainty as to is generally meritless then it does not provide an useful to clarify what this rulemaking is whether providers can rely on a given incentive for providers to comply with the law. not intended to address. In particular, creditor’s arbitration agreements. At the 1124 See generally Study, supra note 3, section 8. contrary to the view expressed by same time, to the extent certain markets As discussed further below, with regard to providing monetary incentives to increase several commenters, the Bureau is not already have greater incentives to investment in complying with the law, both relief attempting to address any lack of comply, the impact of the final rule on to consumers and litigation expenses serve to transparency surrounding arbitration those markets will be correspondingly increase the strength of deterrence incentives. See agreements per se. The Bureau is in less. In any event, as noted above in the Richard Posner, ‘‘Economic Analysis of Law’’ at 785–92 (Wolters Kluwer L. & Bus. 2011). In general concerned about consumer section 1028 findings, from its own particular, effectively evoking the logic of Pigouvian awareness of contract terms and the experience and expertise the Bureau taxes, he notes, ‘‘what is most important from an ability of consumers to make informed believes the level of compliance is economic standpoint is that the violator be choices about consumer financial generally less than optimal, despite the confronted with the costs of his violation—this preserves the deterrent effect of litigation—not that products and services. However, the fact that providers face existing he pays them to his victims.’’ Bureau does not at this time have a basis 1125 See Study, supra note 3, section 1 at 11, 15– to believe that any such lack of 1122 In addition to the comments discussed here, 16. The Bureau could not quantify providers’ transparency leads to harm for an industry trade association commenter argued spending on individual adjudications for a variety that the rule was unnecessary because consumers of reasons, most importantly that settlement terms consumers in this specific context, as it could switch providers if they did not want to be of these cases are most often private. An industry bound by an arbitration agreement, noting that not commenter cited a study that found more 1121 The Bureau sought comment and data that all providers have arbitration agreements in most individual litigation per year than the Bureau’s would allow further analysis of how to determine markets. Even if some consumers are aware of Study, which was focused on specific markets. For the point at which strengthening incentives might arbitration agreements and decided to switch more discussion of this study and how it relates to become inefficient. While some commenters providers, this still would not resolve the market the Bureau’s Study, see Part VI above. The Bureau asserted that current levels of compliance (and thus failure described here, as providers would still be notes that even if the volume of cases cited by the incentives) are efficient, they did not provide data insufficiently deterred with respect to the commenter is more reflective of the overall level of nor any means of analyzing that assertion. consumers who do not switch. individual litigation involving providers covered by

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finance lawsuits filed in State courts An automotive dealer industry mechanisms.1130 The second incentive (other than small claims courts) add commenter argued that the market is to avoid supervisory actions or public some additional modest volume, but the failure described here does not apply to enforcement actions by Federal and Bureau does not believe that they large-value transactions, such as motor State regulatory bodies, such as the change the magnitude of the differential vehicle sales, because the amount of Bureau. In response to this, many between class and individual relief. In alleged injury in such markets is large providers have developed compliance other words, the monetary incentives for enough that consumers’ claims will not programs, particularly where they are providers to comply with the law due to be negative-value. It is true that subject to ongoing active supervision by the threat of class actions are individual claims are less likely to have Federal or State regulators. substantially greater than those due to a negative expected value in arbitration However, economic theory suggests the threat of consumers bringing if the consumer harm is larger. that these other incentives (including individual disputes against providers. However, in the Bureau’s experience, reputation and public enforcement) are The relative efficacy of class small dollar claims can arise even for insufficient to achieve optimal 1131 litigation—as compared to individual larger-balance loans, and in other compliance. Given the Bureau’s dispute resolution, either in courts or markets, such as deposits, the balance in assumptions outlined above, economic before an arbitrator—in achieving these the account is not necessarily correlated theory suggests that any void left by incentives is not surprising. As with the amount of harm. For example, weakening any one of these incentives discussed in Part VI, the potential legal misconduct involving miscellaneous will not be filled completely by the harm per consumer arising from fees on a loan or deposit account may remaining incentives. violations of law by providers of create a large number of negative-value More specifically, reputational consumer financial products or services claims, regardless of the size of the concerns will create the incentive for a is frequently low in monetary terms. underlying account balance. firm to comply with the law only to the extent legally compliant or non- Moreover, consumers are often unaware Commenters did not provide support for compliant conduct would be visible to that they may have suffered legal harm. the claim that disputes concerning consumers and affect the consumer’s For any individual, the monetary automobile finance transactions are for desire to keep doing business with the compensation a consumer could receive significantly higher dollar amounts than firm, and even then, with a lag.1132 if successful will often not be justified other credit products. In any event, even Thus, there is an incentive for firms to by the costs (including time) of engaging a claim valued at several thousand underinvest in compliance if consumers in any formal dispute resolution process dollars may not be positive-value, will not notice the non-compliant even when a consumer strongly depending on the costs in time and legal conduct resulting from underinvestment suspects that a legal harm might have fees of bringing an action and the for some time or may not view the non- probability of success.1128 Moreover, occurred. This is confirmed by the compliant conduct as sufficient to affect even with a larger claim, consumers Study’s nationally representative survey the consumer’s willingness to do 1126 may still be unaware that they have a of credit card holders. In economic business with the firm.1133 The Bureau claim at all. terms, these legal claims have negative discusses the limitations of reputation expected value (i.e., the costs of The Bureau’s economic framework effects more fully in Part VI above. pursuing a remedy do not justify the also takes into account other incentives Economic theory also suggests that potential rewards). The Bureau refers to that may cause providers to conform regardless of whether relief is warranted such legal claims as ‘‘negative value their conduct to the law: There are at claims’’ below. When thousands or least two other important mechanisms, 1130 The Bureau notes that an incentive to act to millions of consumers may have which are both described here. The first preserve a good reputation with the consumers is individual negative-value claims, class incentive is the economic value for the not necessarily the same as an incentive to comply with the law, especially when consumers are not actions can provide a vehicle to provider to maintain a positive even aware of the legal harm. combine these negative-value claims reputation with its customers, which 1131 See, e.g., Carl Shapiro, ‘‘Consumer into a single lawsuit worth bringing.1127 will create an incentive to comply with Information, Product Quality, and Seller the law to the extent such compliance Reputation,’’ 13 Bell J. of Econ. 20 (1982) for reputation and Posner, supra note 1124, at section the final rule, it is still several orders of magnitude is correlated with the provider’s 13.1 for complementarity with public enforcement. less than the number of consumers who are reputation. As the Study showed, many Note that earlier economic literature suggested that members of a putative class each year. consumers might consider switching to reputation alone, coupled with competitive 1126 See generally Study, supra note 3, section 3. a competitor if the consumer is not markets, could lead to an efficient outcome. See, In particular, while being presented with a e.g., Benjamin Klein & Keith B. Leffler, ‘‘The Role hypothetical situation of a clearly erroneous charge satisfied with a particular provider’s of Market Forces in Assuring Contractual on their credit card bill that the provider is performance.1129 Partly, in response to Performance,’’ 89 J. of Pol. Econ. 4 (1981). However, unwilling to remedy, 1.4 percent of consumers this and to other reputational incentives formal modeling of this issue revealed that earlier surveyed stated that they would seek legal advice intuition was incomplete. See Carl Shapiro, or sue using an attorney, and 0.7 percent of (including publicly accessible ‘‘Premiums for High Quality Products as Returns to consumers stated that they would initiate legal complaint databases), many providers Reputations,’’ 98 Q. J. of Econ. 4 (1983). proceedings, without mentioning an attorney. Id. have developed and administer internal 1132 In addition, the non-compliance would have section 3 at 18. and informal dispute resolution to be sufficiently egregious to cause consumers to 1127 See, e.g., Posner, supra note 1124, at 785–92. want to switch given switching costs, and some See also Louis Kaplow & Steven Shavell, ‘‘Fairness consumers might not be able to switch ex-post at versus Welfare,’’ 114 Harv. L. Rev. 961, 1185 n.531 1128 In the specific context of automobile sales, all depending on the product in question. (2001) (‘‘[C]lass actions are valuable when they the Bureau notes the recent Volkswagen Clean 1133 See Shapiro, supra note 1131. This allow claims that would otherwise be brought Diesel case, where despite wide publicity and very underinvestment is a perpetual, rather than a individually to proceed jointly at lower cost due to large individual injury caused by Volkswagen’s temporary phenomenon: a firm underinvests today the realization of economies of scale. In addition, conduct, only a few hundred of the more than because consumers will not become aware of our analysis emphasizes that, when legal costs 500,000 affected consumers filed individual claims. today’s underinvestment until tomorrow, but then exceed the stakes, there may be no suits and thus See In re: Volkswagen ‘‘Clean Diesel’’, No. 15–2672. the firm also underinvests tomorrow because no deterrence; aggregating claims also solves this 1129 The survey in the Study focused specifically tomorrow’s consumers will not become aware of problem (although it is still possible that the on the credit card market. See Study, supra note 3, tomorrow’s underinvestment until the day after aggregated claim may not be socially desirable if the section 3 at 18. The survey findings might not be tomorrow, and so on. Moreover, competition is not benefit from improved behavior is sufficiently generalizable to any market where consumers face a panacea in this model: every firm rationally small).’’). a significantly higher cost of switching providers. underinvests in compliance.

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under the law, the provider has an parties’ underlying contracts).1134 In an argument. The Bureau has only been incentive to correct issues only for the addition, other factors may be at play; able to document several hundred consumers who complain directly about public prosecutors could be more consumers per year actually filing particular practices to the provider—as cautious or have other, non-consumer arbitration claims,1138 and the Bureau is those are the consumers for whom the finance priorities. For all these reasons, unaware that providers have routinely provider’s reputation is most at risk— public enforcement cannot and will not concluded that considerably more and less of an incentive to correct the entirely fill the void left by a lack of consumers were likely to file absent same issues for other consumers who do private enforcement. The Study’s taking action to resolve informal not raise them or who may be unaware analysis was consistent with this complaints. Neither did any commenter that the practices are occurring. prediction, indicating that there is provide empirical evidence supporting Accordingly, the providers’ incentive to limited overlap between the two types this claimed linkage. comply due to reputational concerns is, of enforcement.1135 Additionally, the Bureau believes that in part, driven by the fraction of An industry commenter argued that this argument is flawed conceptually as consumers who could become aware of individual arbitration itself can solve well. The Bureau disagrees that, even the issue. In addition, with such the market failure by strengthening for consumers who are aware of the informal dispute resolution, correcting incentives to resolve disputes legal harm, the presence of arbitration issues for a particular consumer could informally before providers have to pay agreements changes many negative- mean waiving a fee or reducing a arbitration filing fees. The commenter value individual legal claims into charge, in what a provider may call a noted that such agreements generally positive-value arbitrations and, in turn, ‘‘one time courtesy,’’ instead of contain fee-shifting provisions that creates additional incentives for changing the provider’s procedures require providers to pay consumers’ providers to resolve matters internally. prospectively even with regard to the upfront filing fees, and that this gives As discussed in more detail in Part VI, individual consumer. providers an incentive to provide an above, consumers weigh several other Furthermore, economic theory informal resolution to claims below the costs besides filing fees before engaging suggests that providers will decide how value of the filing fee. The Bureau notes in any individual dispute resolution to resolve informal complaints by that such incentives would only be process, including arbitration. It still weighing the expected profitability of relevant if consumers have an incentive takes time for a consumer to learn about the consumer who raises the complaint to file arbitration claims in the first the process, to prepare for the process, against the probability that the place. The commenter did not assert and to go through the process. There is consumer will indeed stop patronizing that consumers would have such also still a risk of losing and, if so, of the provider, rather than legal merit per incentives,1136 but theoretically it is possibly having initial filing fees shifted se. In the Bureau’s experience, some possible that the ease and low upfront back to the consumer. Accordingly, the companies implement this through cost of arbitration may change some Bureau is not convinced that the profitability models which are used to negative-value individual legal claims difference in upfront filing fees makes a cabin the discretion of customer service into positive-value arbitrations, which substantial difference to consumers’ representatives in resolving individual in turn create an additional incentive for overall evaluation. As discussed above, disputes. Indeed, providers may be providers to resolve matters consumers’ incentive to pursue an more willing to resolve disputes internally.1137 In principle, if arbitration individual claim depends upon the favorably for profitable consumers even agreements had the effect of expected value of the claim—the net in cases where the disputes do not have transforming enough negative-value payoff from success or failure adjusted a legal basis, than for consumers that are claims into positive ones, that would for the probability of success or failure not profitable but whose claims have a affect not just providers’ incentives to respectively—not just the payoff from a legal basis. A research center resolve individual cases but also their successful claim. commenter agreed that firms do this, but incentives to comply with the law ex Some industry trade association argued that this is rational for them to ante. commenters expressed doubt that class do so. As discussed above in Part VI, As noted above, however, there is actions would resolve any market this is precisely the market failure the little if any empirical support for such failure of the type described here, due rule is intended to address—that it is to the small average payments to not always in the providers’ private 1134 See Part VI. consumers. In the view of these 1135 interest to avoid harming consumers See generally Study, supra note 3, section 9. commenters, consumers will not have 1136 A research center commenter made a related without external enforcement of some sufficient incentive to file claims in argument that some providers have clauses in their class actions because of the small kind. By reducing the collective action arbitration agreements that provide a bonus problem inherent in small claims, class payment to consumers who receive a favorable average monetary recovery involved for actions provide a source of external arbitration judgment in excess of the provider’s last class members. As discussed in more settlement offer. The commenter argued that such enforcement that is currently missing detail in the section 1028(b) findings, a payments could increase consumer’s incentives to significant portion of cases resulting in for providers using arbitration file arbitration claims. However, the commenter agreements. acknowledged that these clauses are not commonly settlements lead to automatic 1139 Public enforcement could in use in consumer finance. In addition, as the distributions. Moreover, whether Bureau discusses further below in Section G of this theoretically bring some of the same automatic or claims-made, class 1022(b)(2) Analysis, such clauses are unlikely to settlements also lead to costs for cases that would not be brought by materially affect consumers decisions, as the ex private enforcement absent the rule. ante expected value of the bonus payments is companies, including defense costs and However, public enforcement resources significantly lower than the face value. plaintiff’s attorney fees, which magnify 1137 Note that a provider does not have to know, the deterrent effect. are limited relative to the thousands of for example, during a consumer’s call to the firms in consumer financial markets. One industry association also pointed provider’s service phone line whether this to low claims rates in claims-made Public enforcement resources also focus particular consumer will file for arbitration. The only on certain types of claims (for provider can wait until the consumer files for arbitration, and then resolve the matter with the 1138 See generally Study, supra note 3, section 5. instance, violations of State and Federal consumer without paying any fees related to 1139 See also Study, supra note 3, section 8 at 23– consumer protection statutes but not the arbitration. 29.

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settlements, and a low proportion of Overview of Effects of the Final Rule reputational effects, as is discussed in filed class actions that result in class The final rule requires providers to greater detail in Part VI, above. settlements, as a basis for concern that include language in their arbitration In this Section 1022(b)(2) Analysis, the rule will not address the market agreements stating that the agreement the Bureau has elected not to discuss failure. The Bureau has not stated, and cannot be used to block a class action further any benefits from certain does not believe, that cases filed as class with respect to those consumer financial abstract considerations which the actions but which are not resolved in products and services that would be Bureau considers above in Part VI, such class settlements would address the covered by the final rule and prohibits as promoting the rule of law. To the market failure. The Bureau believes that providers from invoking such an extent that individuals value any such the market failure is addressed by the agreement in a case filed as a class impacts to society from the final rule, availability of classwide relief through action with respect to those consumer this would be a part of the benefits of the class mechanism, which, as the financial products and services. The the rule to consumers; however, the Study showed, does produce outcomes final rule also prohibits third-party Bureau is not in a position to quantify providing substantial aggregate relief for providers facing class litigation from these impacts for purposes of this consumers. In addition, the Bureau relying on such arbitration agreements. Section 1022(b)(2) Analysis. The Bureau notes that the amount of monetary relief Finally, the final rule requires that did not receive any comments and other relief paid in these cases acts providers using pre-dispute arbitration disagreeing with this approach. as a deterrent, even if some of these agreements redact and submit certain Accordingly, while as discussed in Part class settlements are structured on a records relating to arbitral proceedings VI above, the Bureau believes that the claims-made basis with relatively lower to the Bureau. final rule is in the public interest due, percentage of potential class members The Bureau believes that the final in part, to reinforcing the rule of law, filing claims. Further, a provider also class rule will have three main effects the discussion in this section focuses in cannot generally know, ex ante, whether on providers with arbitration particular on more concrete impacts on the class exposure it may face would agreements: (1) They will have individual consumers and providers for result in an automatic or claims-made increased incentives to comply with the purposes of this Section 1022(b)(2) settlement (nor how many claims will law in order to avoid exposure to class be submitted). Thus, the prospect of the litigation; (2) to the extent they do not Analysis. latter may still serve as a deterrent in act on these incentives or acting on The Deterrent Effect many situations. these incentives does not prevent class In general, if the extant laws were litigation filed against them, the As discussed above, class litigation adopted to solve some underlying additional class litigation exposure will exposure provides a deterrence market failures, it means that, by ultimately result in additional litigation incentive to providers, above and definition, the market could not resolve expenses and potentially additional beyond other incentives they may have these failures on its own. Therefore, class settlements; and (3) they will incur to comply with the law. So long as the given the Bureau’s assumptions a one-time cost of changing language in level of class litigation exposure is outlined above, a practice that lowers consumer contracts entered into 180 related to the level of providers’ providers’ incentive to follow these days after the rule’s effective date, or an compliance with laws (that is, so long laws, in this case arbitration agreements, ongoing cost associated with providing as class litigation is not always brought that can be invoked in class litigation, contract amendments or notices in the randomly without regard to the merits would be a market failure since it would case of providers who acquire pre- of the individual case, such that higher allow the underlying market failures to existing contracts that lack the required levels of compliance will result in fewer persist or reappear. The providers, and language in their arbitration agreements. class action lawsuits), providers would the market in general, would be unable Below, the Bureau refers to these three want to ensure more compliance than if to resolve this market failure for the effects of the final class rule as, there were no threat of class same reasons that the providers would respectively, the deterrent effect, the litigation.1141 As discussed in more not be able to solve the underlying additional litigation effect, and the detail in Part VI above, even if some market failures in the first place.1140 administrative change effect. In class actions were random and without addition, the final monitoring rule may merit, as long as meritorious class 1140 This argument also illustrates why form have some effect on compliance through claims can be asserted, the threat of language regarding arbitration agreements is those class actions will deter conduct fundamentally different from standardized language parties chose to contract more efficiently from the that would give rise to such claims. regarding other contract terms, and is not parties’ perspectives, at least to the extent that both necessarily efficient. The debate about the parties had a choice. However, to the extent that the Leaving aside whether the filing of class efficiency of boilerplate language, from the law was adopted to fix a market failure, this friction actions is random, class action exposure perspective of law and economics, is whether is exactly what is preventing that market failure would still incentivize providers to boilerplate language allows for more efficient from occurring: The introduction of the contracting ensure appropriate levels of compliance contracting between the firm and the customer, thus friction is necessary for the underlying market enhancing both parties’ welfares, or whether failure to be alleviated, as opposed to being a if the probability of a suit’s dismissal, or boilerplate language allows the firm to take potential source of inefficiency that could be the finding of merit, is affected by the advantage of its customer in a welfare-reducing reduced by using boilerplate contracts. level of compliance. Given the Bureau’s manner, with this advantage potentially remaining That underlying market failure could be, for assumptions outlined above, economic even if the market is competitive. The same example, a negative externality exerted by the firm’s arguments apply to contracts of adhesion. See, e.g., and its customer’s contract on third parties. In a theory suggests that providers who are Symposium, ‘‘‘Boilerplate’: Foundations of Market theoretical model, this would imply that the laws immune from class litigation currently Contracts,’’ 104 Mich. L. Rev. No. 5 (2006). were endogenously chosen to correct pre-existing under-comply from an economic Any law restricting two parties’ freedom to market failures. And this fact means that an ability welfare perspective, and therefore this contract (for example, a mandatory disclosure or a to sign an efficient contract from the bilateral limit on some financing terms in a consumer perspective that lowers the incentives to comply finance statute) introduces the following friction: with the law is welfare-reducing since this law was 1141 See, e.g., Kaplow & Shavell, supra note 1127, To comply with the law, these two parties will supposedly passed exactly to ensure that the at 1166 (‘‘In many areas of law . . . a primary agree to a different contract or not contract at all. incentive to comply with the law is there and reason to permit individuals to sue is that the Each of these options was available to the parties because this incentive alleviates another market prospect of suit provides an incentive for desirable before the law was adopted, but at the time the failure. behavior in the first instance.’’).

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additional deterrence is beneficial.1142 The Additional Litigation Effect economic theory views class actions For this purpose, both the cost of class A class settlement could result in that result solely in cash relief as relief and the cost of related litigation three types of relief to consumers: (1) inefficient (i.e., absent any are counted as contributing to the size Cash relief (monetary payments to consideration of its deterrent impact). of the strengthened compliance consumers); (2) in-kind relief (free or More generally, under standard incentives.1143 discounted access to a service); and (3) economic theory, any delivery system At least two sources might inform a injunctive relief (a commitment by the for formal or informal compensation of provider’s determination of its profit- defendant to alter its behavior victims for violations of law is typically maximizing level of compliance in a prospectively, including the inefficient unless this system of regime in which there is potential class commitment to stop a particular remedies deters at least some of these action exposure for non-compliance. practice or follow the law). violations before they occur. The Bureau First, the potential exposure can cause When a class action is settled, the notes that, as in many cases of economic a provider to devote increased resources payment from the provider to policy, there may be a trade-off between to monitoring and evaluating consumers is intended to compensate efficiency and equity, that is, between compliance, which can in turn lead the class members for injuries suffered as a total output and the distribution of that provider to determine that its result of actions asserted to be in output. A policy of allowing wrongdoers to keep ill-gotten gains might be compliance is not sufficient given the violation of the law and is a benefit to efficient in that it avoids costly risk of litigation. Second, the potential those consumers. However, this benefit transfers, but might also lead to a exposure to class litigation can cause a to consumers is also a cost to 1144 distribution of resources that is provider to monitor and react to class providers. This payment from the inequitable. Although the Bureau’s litigation or enforcement actions (that provider to consumers in and of itself is, 1145 1022(b)(2) analysis here, in cataloguing could result in class litigation) against in economic terms, a transfer, the costs and benefits of the rule, its competitors, regardless of whether regardless of whether this payment is a abstracts from equity concerns, as a the provider previously believed that its remedy for a legal wrong or restitution general matter a policy of allowing compliance was sufficient. of providers’ previous ill-gotten gains from consumers that led to the class transfers to compensate injured parties An industry commenter asserted that action in the first place. To effectuate might be justified on equity grounds most class action claims are frivolous the transfer there are also other costs despite being inefficient absent a and that this reduces the potential involved, such as spending on attorneys deterrent effect or other benefits. deterrent effect of the rule because if (both the plaintiff’s and the defendant’s) Much of the discussion above also claims are frivolous, no amount of and providers’ management and staff applies to in-kind and injunctive relief. increased compliance could eliminate time, making any such transfer payment In-kind relief is intended to compensate the risk that a provider would be sued. in and of itself (i.e., absent any class members for injuries suffered as a Many consumer advocate and consumer consideration of its deterrent impact, result of actions asserted to be in law firm commenters took the opposite which the Bureau discuses in the below) violation of the law in ways other than position, arguing that class actions serve economically inefficient.1146 These by directly providing them with money. to redress real consumer injury from transaction costs are incurred both in Injunctive relief is typically intended to illegal conduct. The Bureau cases with an eventual class settlement stop or alter the defendant’s practices acknowledges that some class actions and in cases that ultimately are that were asserted to be in violation of filed may be frivolous in nature, but dismissed by motion, abandoned, or law. Both forms of relief benefit believes this would only be true in settled on an individual basis, although consumers. However, this benefit to general if providers were always in full the magnitude of the costs will vary consumers is also frequently a cost to compliance with the law. This is depending upon how and when in the providers (e.g., if the practice that the because the ability of class actions to process a case is resolved.1147 Thus, provider agrees to halt was profitable, recover for consumers, and reward class the loss of that profit is a cost to the action attorneys, bears a relationship to 1144 There might also be an associated increase in provider). To effectuate the relief there the merits of the cases. Defendants are prices due to firms passing on the cost of these are some similar transaction costs more likely to procure the dismissal of payments back to consumers. See the discussion on involved as with monetary relief, such frivolous claims, and less likely to settle pass-through below. as spending on attorneys (both the 1145 ‘‘Benefit and cost estimates should reflect real such claims, than meritorious claims. resource use. Transfer payments are monetary plaintiff’s and the defendant’s) and Further, even where frivolous claims are payments from one group to another that do not providers’ management time. settled, the settlements are likely to be affect total resources available to society.’’ Unlike with monetary relief, however, Memorandum to the Heads of Exec. Agencies & the benefits to consumers of injunctive smaller than for meritorious claims. For Establishments from Off. of Mgmt. & Budget, at 38 these reasons and those discussed in (Sept. 17, 2003), available at https:// relief may not be a mirror image of the Part VI above, a meritorious case is more www.whitehouse.gov/sites/default/files/omb/assets/ costs to providers, and the cost of likely to be pursued than a frivolous omb/circulars/a004/a-4.pdf. See Richard Posner, providing the relief might be lower than one. The fact that class actions can be ‘‘Cost-Benefit Analysis: Definition, Justification, consumer’s value of receiving the and Comment on Conference Papers,’’ 29 J. of Legal 1148 filed (and are more likely to be filed) for Studies 1153, at 1155 (‘‘In the discussion at the relief. The same can be true in meritorious claims therefore creates a conference John Broome offered as a disincentive to break the law. counterexample to the claim that efficiency in the of economic theory, the best outcome is the one Kaldor-Hicks sense is a social value the forced where the possibility of class litigation results in uncompensated transfer of a table from a poor optimal compliance, and this optimal compliance 1142 See Gary Becker, ‘‘Crime and Punishment: An person to a rich person. I agree that allowing the in turn results in no actual class litigation Economic Approach,’’ 76 J. Pol. Econ. 169 (1968). transfer would not improve social welfare in any occurring. See also Shapiro, supra note 1131; Posner, supra intelligible sense. But it would not be Kaldor-Hicks 1148 This is more likely to be the case where there note 1124. See the discussion above on why other efficient when one considers the incentive were also pre-existing negotiation frictions that incentives to comply, such as public enforcement effects.’’). prevented a Coasian outcome. The Coase Theorem, and reputation, are often insufficient or could be 1146 As noted above, these other costs still applied to this context, postulates that a firm made more effective and efficient by introducing contribute to the deterrence incentive. provides a service to its customer if and only if the private enforcement as well. 1147 Given the Bureau’s assumptions outlined customer values the service more than its costs. 1143 See Kaplow & Shavell, supra note 1127. above, because of these costs, from the perspective When the Coase Theorem holds, such a delivery

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principle for in-kind relief, although the will be limited in their ability to the costs of) avoiding class litigation Bureau believes that the benefits to continue doing so by the final rule, described below, and other types of consumers of such relief are more these providers are unlikely to investments for the same purpose, limited. Thus in some cases involving experience many notable benefits from would likely be enhanced by monitoring substantial injunctive relief, litigation the Bureau’s final rule.1150 Rather, the the market and noting class litigation could be viewed as efficient from the benefits of the final rule will flow settlements by competitors, as well as perspective of economic theory largely to consumers, as discussed in actions by regulators. Providers will also independent of any deterrent effect. detail in the next part of this section. likely seek to resolve any uncertainty regarding the necessary level of The Administrative Change Effect Providers’ costs correspond directly to the three aforementioned effects of the compliance by observing the outcomes The final class rule will mandate that final class rule and to the fourth effect, of such litigation. These investments providers with arbitration agreements which arises from the final monitoring might also reduce providers’ exposure include a provision in their future rule: (1) Providers will experience costs to public enforcement. contracts stating that the provider to the extent they act on additional The Bureau has previously attempted cannot use the arbitration agreement to incentives for ensuring more to research the costs of complying with block a class action. This administrative compliance with the law; (2) providers Federal consumer financial laws as a change will require providers to incur will spend more to the extent that the general matter, and found that providers expenses to change their contracts going exposure to additional class litigation themselves often lack data on forward, and amend contracts they actually materializes; (3) providers will compliance costs.1151 Even if basic data 1149 acquire or provide a notice. The incur a one-time administrative change were available on how much money Bureau acknowledges that, as some cost or ongoing amendment or notices providers invest in legal compliance industry commenters noted, some costs; and (4) providers will incur generally—as distinct from investments providers have a substantial number of ongoing administrative costs from the in customer service, general risk distinct agreements, all of which would requirement to submit arbitral and management, and related undertakings need to be modified to comply with the certain court records to the Bureau. The and functions—it would be difficult to rule. Bureau considers each of these effects in isolate the marginal compliance costs Effects of the Requirement To Submit turn. To the extent providers pass these related to particular deterrence and to Arbitral and Court Records costs through to consumers, providers’ quantify any additional investment that costs will be lower. Providers’ pass- would occur in the absence of The final rule will also require that arbitration agreements. Specifically, any providers using pre-dispute arbitration through incentives are discussed further below. differences in compliance-related agreements submit certain records expenditures between firms that have relating to arbitral and certain court Covered Persons’ Costs Due to and do not have arbitration agreements proceedings to the Bureau. This will Additional Compliance may be the result of other underlying require providers to incur additional factors such as a general difference in expenses when such an agreement is Persons exposed to class litigation have a significant monetary incentive to risk tolerance and management invoked, with some one-time expense of philosophy. Thus, given the data within establishing a procedure for avoid class litigation. The final rule prohibits providers from using its possession, or reasonably available to accomplishing such a task and some it, the Bureau is unable to quantify these recurring expense for each incidence. arbitration agreements to limit their exposure to class litigation. As a result, costs. The Bureau requested comment B. Potential Benefits and Costs to providers may attempt to lower their and data on this subject, but no Covered Persons class litigation exposure (both the commenters provided relevant data (as opposed to data on overall cost and Overview probability of being sued and the magnitude of the case if sued) in a impact of compliance generally, which Given that providers using arbitration multitude of ways. All of these ways of one credit union industry commenter agreements have chosen to do so and lowering class litigation exposure will estimated). likely require incurring expenses or An association of State regulators system of formal or informal relief will typically be expressed concern that the compliance inefficient, since the efficiency of the interaction forgoing profits. The investments in (or between the firm and its consumer would have costs of the proposal could be already been maximized before any relief occurred. 1150 The Bureau believes that it is possible that substantial, and that requiring As noted in Ronald Coase, ‘‘The Problem of Social some providers without arbitration agreements will institutions to incur those costs could Cost,’’ 3 J. of L. & Econ. 1 (1960), absent transaction benefit from the final rule. Their rivals’ costs will pose safety and soundness concerns for costs, the Coase Theorem holds. However, again as increase, and thus providers without arbitration Coase notes, presence of transaction costs might agreements will benefit to the extent that cost the depository institutions that the result in such a solution not materializing. increase is passed through to consumers (or to the association’s members supervise. The In general, economic theory behind optimal extent rivals change their aggressive practices). See commenter urged the Bureau to engage choices by firms in such contexts is ambiguous, at Salop and Scheffman, ‘‘Raising Rivals’ Costs,’’ 73 in a more rigorous analysis of current least as long as a solution consistent with the Coase Am. Econ. Rev. 267 (1983). However, the Bureau Theorem is not available because of a particular believes that the magnitude of this benefit is and future compliance costs before pre-existing market friction (transactions costs). relatively low. In addition, the Bureau See, e.g., A. Michael Spence, ‘‘Monopoly, Quality acknowledges that these providers without 1151 See Bureau of Consumer Fin. Prot.,’’ & Regulation,’’ 6 Bell J. of Econ. 417 (1975). For a arbitration agreements will lose the option going Understanding the Effects of Certain Deposit somewhat more accessible treatment (at a cost of forward to adopt an arbitration agreement that Regulations on Financial Institutions’ Operations,’’ assuming away several issues), see Richard could be invoked in class litigation. As discussed (2013), available at http:// Craswell, ‘‘Passing on the Cost of Legal Rules: above, economic theory treats a constraint on a files.consumerfinance.gov/f/201311_cfpb_report_ Efficiency and Distribution in Buyer-Seller party’s options as imposing costs on that party, findings-relative-costs.pdf (for challenges in general Relationships,’’ 43 Stan. L. Rev. 361 (1991). though given that these providers currently do not and for a description of the amount of resources 1149 As discussed further below, providers like have arbitration agreements, the Bureau believes spent collecting compliance information from seven debt buyers or indirect automobile lenders will that the magnitude of this cost is also relatively low. banks with respect to their compliance to parts of need to provide notices to consumers upon Thus, for the ease of presentation and due to the four regulations. A significant part of the challenge purchase of consumer debt with an arbitration low magnitude of these benefits and costs, the is that providers typically do not track their agreement that adheres to the proposal’s mandated Bureau focuses its analysis only on providers that compliance costs and it is not possible to calculate provision. currently have arbitration agreements. them from the standard accounting metrics.).

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finalizing the rule. The Bureau notes to those credit unions that do use absent. However, as discussed above, if that arbitration agreements are not arbitration agreements, the Bureau does success in a class action is related to the universal, such that for the markets not believe the impact of the rule will merit of the claim, there will be an covered by the final rule and that are be significantly different for them than incentive on the part of attorneys to subject to the authority of State any other provider whose products have bring claims with merit and therefore an regulators, there are depository a similar level of compliance with incentive on the part of providers to institutions that do not currently applicable laws. invest in compliance. Indeed, the employ such agreements. Indeed, as As noted, the Bureau believes that, as Bureau believes that many providers discussed below, the Bureau estimates a general matter, the final rule will know that class litigation is indeed that the majority of depository increase at least some providers’ related to their actual compliance with institutions do not use arbitration incentives to invest in additional the law and adherence to their contracts agreements. It is evident that depository compliance. The Bureau believes that with consumers.1153 Moreover, because institutions without arbitration the additional investment will be court cases, rulemakings, and other agreements are able to remain safe and significant, but cannot predict precisely regulatory activities address areas of sound despite their exposure to class what proportion of firms in particular legal uncertainty over time, the Bureau action liability. The Bureau has no markets will undertake which specific believes that providers at a minimum reason to believe that depository investments (or forgo which specific would have incentives to respond to institutions with arbitration agreements activities) described below. class litigation against them and their are less financially sound than those However, economic theory offers competitors and to respond to other new without or that requiring certain general predictions on the direction and legal developments as they occur. depository institutions to amend their determinants of this effect. Whether and Examples of Investments in Avoiding agreements will cause them to become how much a particular provider invests Class Litigation less financially sound. For the reasons in compliance will likely depend on the above the Bureau believes that perceived marginal benefits and Providers who decide to make increasing class action exposure for marginal costs of investment. For compliance investments may take a depository institutions currently using example, if the provider believes that it variety of specific actions with different arbitration agreements will not pose is highly unlikely to be subject to class cost implications. First, providers may safety and soundness risks. In addition, litigation and that even then the amount spend more on general compliance as discussed in Part III, no class action at stake is low (or the provider is willing management. For example, upon the in the Study went to trial. As further to file for bankruptcy if necessary to effective date of the rule, a provider may discussed in the findings in Part VI, ward off a case), then the incentive to decide to go through a one-time review courts are generally able to consider the invest is low. Conversely, if the provider of its policies and procedures and staff financial condition of the defendant believes that it is highly likely to be training materials to minimize the risks when evaluating the reasonableness of subject to class litigation and that the of future class litigation exposure. This class settlements and litigated amount at stake would be large if it is review might result in revisions to judgments. In addition, under CAFA, sued, then the incentive to invest is policies and additional staff training. prudential regulators are afforded notice high. There may also be an ongoing and the opportunity to comment on the Providers’ calculus on whether and component of costs arising from proposed class settlement before the how much to invest in compliance may periodic review of policies and court makes a final approval decision. also be affected by the degree of procedures and regularly updated These mechanisms allow for uncertainty over whether a given training for employees, as well as third- consideration of safety and soundness practice is against the law, as well as the party service providers, to mitigate concerns into the class settlement size of the stakes and the ability of the conduct that could create exposure to approval process. provider to mitigate the legal risk. class litigation.1154 Moreover, there may A credit union industry commenter Where uncertainty levels are very high be additional costs to the extent that disagreed with the Bureau’s analysis of and providers do not believe that they laws change, class litigation cases are the costs of additional compliance. In can be reduced by seeking guidance publicized, or new products are the view of this commenter, the costs to from legal counsel or regulators or by developed. Both the one-time and the credit unions of complying with forgoing a risky practice that creates the ongoing components could also include existing laws and regulations are uncertainty, providers may have less outside audits or legal reviews that the excessive, and the increase in class incentive to invest in lowering class provider might perform. action liability for those that now litigation exposure under the logic that In addition, providers may incur costs employ arbitration agreements would such actions will not make any due to changes in the consumer make these costs worse for credit difference in light of the residual unions. However, as the commenter uncertainty about the underlying law. In 1153 This is hard to measure empirically and the the extreme case, if a provider believes Bureau requested comments on or submissions of noted and as the Study showed, most any empirical studies that have measured the merit credit unions currently do not use pre- that class litigation is completely of class actions involving consumer financial dispute arbitration agreements. The unrelated to compliance, then the products or services. The Bureau did not receive class provision will not impose costs on provider will rationally not invest in any comments relevant to this question. The Bureau lowering class litigation exposure at all: is aware of some empirical literature on this entities that do not currently use question involving securities but does not believe 1152 arbitration agreements. With respect The deterrent effect is going to be that this literature directly applies in this context. See, e.g., Joel Seligman, ‘‘The Merits Do Matter: A 1152 Credit union industry commenters also rule would impose costs on their members because Comment on Professor Grundfest’s ‘‘Disimplying argued that their member-owned structure creates even though they do not currently use arbitration Private Rights of Action Under the Federal incentives to be more consumer-friendly than other agreements, they are currently considering doing so. Securities Laws: The Commission’s Authority,’’ 108 financial institutions. The commenters did not As noted above, any such cost is likely minimal— Harv. L. Rev. 438 (1994). generally dispute the Bureau’s view that credit if the option of adding an arbitration agreement had 1154 The providers that already have a compliance unions generally do not use arbitration agreements substantial value for credit unions, presumably management system with an audit function could, for most products and services. However, credit more credit unions would have already adopted for example, increase the frequency and the breadth union industry commenters also asserted that the them. of audits.

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financial products or services might even be unlikely that the additional data on arbitration agreement themselves. For example, a provider consumer would switch to another bank prevalence collected by the Bureau may conclude that a particular feature of because of that failure, especially given through outreach to trade associations a product makes the provider more the switching costs entailed in such a in several markets during the susceptible to class litigation, and move. However, a bank could invest in development of the proposal.1159 After therefore decide to remove that feature developing proper procedures to ensure considering the comments discussed from the product or to disclose the that such payments are stopped at most below, the Bureau is finalizing the feature more transparently, possibly three business days after a consumer’s estimates from the proposal, which it resulting in additional costs or request as required under prevailing discusses again here. decreased revenue. Similarly, a provider law. may update its product features based The third example is a creditor To estimate the impact of the rule the on external information, such as actions sending a consumer an adverse action Bureau used the Study data to estimate against the provider’s competitors by notice explaining the reasons for denial the percentage of providers in each either regulators or private actors. The of a credit application.1157 While market with an arbitration agreement. ongoing component could also include knowing when and why a denial has The Bureau had classified each case in changes to the general product design occurred may be important to an the Study by the North American process. Product design could consume individual consumer, it is unlikely that Industry Classification System (NAICS) more time and expense due to a consumer would bring an individual code that most closely corresponded to additional rounds of legal and suit based on the failure to provide such the consumer financial product or compliance review. The additional a notice (some consumers will not even service at issue in the case.1160 The exposure to class litigation could also know they are entitled to one) or on its Bureau assumed that the class result in some products not being content (consumers will not generally settlements that occurred involved developed and marketed primarily due be in a position to know whether the providers without an arbitration to the risk associated with class reason given is legally sufficient or agreement. The Bureau was then able to litigation. accurate). The consumer is more likely calculate the incidence and magnitude Some of the compliance changes that to seek credit from another source, or of class action settlements for those providers may make are relatively simply to proceed unaware of the providers in each market and use these inexpensive changes in business reasons why he or she is not able to calculations to estimate the impact of processes that nonetheless are less access credit. However, a creditor could the proposal going forward in each likely to occur in the absence of class invest in improving its notice market if the providers who currently litigation exposure. Three examples of procedures and content. such investments in compliance follow. Providers’ Costs Due to Additional Class 1159 See generally Study, supra note 3, sections 2 First, under the FDCPA, debt collectors Litigation: Methodology and Description and 8. During the SBREFA process, the Bureau are not allowed to contact a consumer sought and obtained permission from OMB to of Assumptions Behind Numerical conduct a survey of trade groups (and potentially at an unusual time or place which the Estimates providers) in order to assess the prevalence of collector knows or should know to be Additional investments in compliance arbitration agreements in the markets for which inconvenient to the consumer.1155 prevalence was not reported in the Study. Unless However, it is highly unlikely that even are unlikely to eliminate additional the trade groups had an exact estimate, the Bureau a consumer who is aware of this rule class litigation completely, at least for asked the trade group representatives to pick one some providers.1158 Thus, those of four options for the prevalence of arbitration will bring an individual lawsuit or an providers that are sued in a class action agreements in a given market, with the percentages individual arbitration over a single in the brackets also mentioned: (1) Barely any will also incur expenses associated with contact because, among other reasons providers use arbitration agreements [0 percent to additional class litigation. The major discussed more fully in Part VI, it will 20 percent]; (2) some providers but fewer than half expenses to providers in class litigation use arbitration agreements [20 percent to 50 require considerable time on the are payments to class members and percent]; (3) more than half but not the vast consumer’s part, which is likely to be an majority use arbitration agreements [50 percent to related expenses following a class even higher burden for consumers 80 percent]; and (4) the vast majority use arbitration settlement, plaintiff’s legal fees to the subject to debt collection than for other agreements [80 percent to 100 percent]. The Bureau extent that the provider is responsible then inquired whether this number would change types of consumers. To the extent that for paying them following a class if the question had been asked to just small a debt collector wants to minimize class providers. For the markets for which prevalence settlement, the provider’s legal fees and was analyzed in the Study, the Bureau converted litigation exposure, however, it could other litigation costs (in all cases develop a procedure to avoid such the estimate from the Study into one of these four regardless of how it is resolved), and the ranges. Finally, the Bureau utilized the midpoint of contacts. provider’s management and staff time each range for this quantification exercise (for As a second example, consider a bank example, assuming that 35 percent of providers use devoted to the litigation. arbitration agreements if the trade group reported stopping an Automated Clearing House To provide an estimate of costs (ACH) payment to a third party at a that some, but less than half [20 percent to 50 related to class settlements of percent] of providers use arbitration agreements). consumer’s request. While important to incremental class litigation that would See Part IX below for further description of the data a consumer, absent the possibility of be permitted to proceed under the received from the trade groups. class litigation, the bank’s primary proposal, the Bureau developed Any inaccuracy in the prevalence numbers affects incentive to ensure that the ACH the estimates below. For example, if prevalence is preliminary estimates using the data actually higher in a particular market than the payment is discontinued is to maintain underlying the Study’s analysis of number used by the Bureau, then the actual costs a positive reputation with this particular Federal class settlements over five years to providers (and benefits to consumers) will be 1156 consumer. It is highly unlikely that (2008 to 2012), the Study’s analysis of higher. In this example, the increases in across all a consumer would sue individually if markets costs to providers and benefits to arbitration agreement prevalence, and consumers (stemming from the relief to class the bank fails to take action, and it members) are not necessarily symmetric, since the 1157 A creditor would have to send such a notice. Bureau’s estimates are market-by-market. 1155 15 U.S.C. 1692(a). See 15 U.S.C. 1681m(a). 1160 See U.S. Census Bureau, ‘‘North American 1156 The law requires that a bank stop such 1158 For example, as noted above, some providers Industry Classification System,’’ http:// payments in at most three business days after a might choose to forgo sufficient additional www.census.gov/eos/www/naics/ (last visited June consumer’s request. See 15 U.S.C. 1693e(a). investment in compliance. 1, 2017).

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have arbitration agreements were no than the totals for the aforementioned invoked to try to block an ATM sticker longer insulated from class actions. 419 cases used in the Study. That is case.1167 The Bureau’s estimate of additional largely a function of the fact that the With regard to the Bureau’s Federal class litigation costs is based additions and subtractions were for the estimations overall, the accuracy of the upon the set of Federal class settlements most part relatively small class actions estimates is limited by the difficulty that analyzed in the Study, with adjustments that did not contribute materially to the often arises in data analysis of to align those data with the scope of the amount of aggregate gross or net disentangling causation and correlation, proposal, which was somewhat relief.1164 namely unobserved factors than can narrower.1161 Specifically the Study affect multiple outcomes. As noted sought to identify all class action Many of the cases not used to estimate above, the core assumptions underlying settlements involving any of the the impact of the rule in the Bureau’s the Bureau’s estimates are that the enumerated consumer financial statutes Section 1022(b)(2) Analysis were EFTA settlements identified in the Study were under title X of the Dodd-Frank Act. ATM ‘‘sticker’’ cases, in which all brought against providers without an Due to the narrower scope of both the noncustomers had sued ATM operators arbitration agreement and that providers proposal and the final rule, the Bureau’s for failing to comply with the historical with arbitration agreements affected by Section 1022(b)(2) Analysis focuses only requirement in EFTA to post a ‘‘sticker’’ the rule will be subject to class on the impact on covered entities when on the ATM disclosing certain settlements to the same extent as they offer products and services subject information concerning ATM fees. A providers without arbitration to the rule, rather than the broader research center commenter argued that agreements today. The first assumption scope of the research of Federal class a consistent approach would have been is a conservative one: It is likely that actions in the Study. Additionally, the to also exclude FDCPA claims against some of the settlements involved class rule will not have an impact on debt collectors, which the Bureau did providers with arbitration agreements cases in which arbitration agreements not exclude. In the commenter’s view, that they either chose not to invoke or cannot play a role today, either because both types of cases are not subject to failed to invoke successfully, in which the law does not allow them to be used arbitration, and the commenter believes event the Bureau’s incidence estimates for the type of dispute at issue or that that including FDCPA cases and are overstated. On the other hand, type of dispute does not involve a excluding EFTA ATM sticker cases similar to issues discussed above with written contract with the consumer on regard to estimating compliance-related biases the Bureau’s estimates in favor of which the defendant in the case could expenditures, it may be that some other the rule. The Bureau disagrees with this rely to invoke arbitration.1162 The set of underlying factor (such as a general Federal class settlements the Bureau comment. The Bureau believes that it is difference in risk tolerance and used to estimate the impacts of the rule not appropriate to include EFTA ATM management philosophy) might prompt therefore excludes 117 Federal class sticker cases in its analysis because providers that use arbitration settlements analyzed in Section 8 of the those cases concerned rights of persons agreements today to take a different Study.1163 In addition, to avoid using an ATM machine who were not approach to underlying business underestimating the effects, the holders of an account at the institution practices and product structures than estimates in this section also include 10 offering the ATM (and which in some providers who otherwise appear similar additional class settlements identified cases may have been a merchant). A but have never used arbitration through the Section 8 search financial institution providing ATM agreements. This might make providers methodology which are within the services to noncustomers is not a who use arbitration agreements today scope of the final rule by it but which product or service covered by the rule. more prone to class litigation than had not been counted in the data The commenter’s analogy between that providers who do not, and increase both analyzed in Section 8. service and debt collection is not the costs to providers and benefits to The resulting set of 312 cases used to apposite because debt collection is consumers discussed below. estimate impact of the proposal on specifically covered by the rule.1165 See The Bureau also generally assumed Federal class litigation, as well as the 1040.3(a)(10). Furthermore, regarding for purposes of the estimation that 117 excluded cases described above, FDCPA cases, as noted above in its litigation data from 2008 to 2012 were were listed in the proposal. The Bureau section 1028 findings, and as a number representative of an average five-year notes that the total amount of payments of SERs stated in the SBREFA Panel period. However, the Bureau recognizes and attorney’s fees—the two statistics process 1166 and debt collection industry that the Bureau’s own creation in 2010 that the Bureau uses for its estimates in comments confirmed, the Bureau may have increased incentives for some this Section 1022(b)(2) Analysis—for the believes that debt collectors who are providers to increase compliance 312 cases are not materially different subject to class action lawsuits often do investments, although it did not begin rely on arbitration provisions included enforcement actions until 2012. To the 1161 The Study’s Section 8 analyzed class extent that the existence and work of the in contracts between the original settlements of claims under enumerated consumer Bureau, including its supervisory laws, unless excluded as described in the creditor and consumers, which activity and enforcement actions, methodology for Section 8. See Study, supra note specifically provide for the debt increased compliance since 2010 in the 3, appendix S at 129. In addition, class settlements collector to be a beneficiary of the of claims concerning consumer financial products markets the final rule will affect, the or services more generally were included, even if arbitration agreement. In contrast, the estimates of costs to providers and the claims were not raised under enumerated consumer Bureau is not aware of any cases in benefits to consumers going forward laws. Id. The Bureau notes that although the scope which an arbitration clause has been of the final rule differs slightly from that of the will be overestimates. proposal, the changes in scope did not affect the estimates presented here. 1164 In some markets, such as the payday loan 1167 Specifically, the Bureau is not aware of any 1162 Persons offering or providing similar market, there were Federal class settlements related deposit agreement whose arbitration agreement products or services might be covered by the final to debt collection practices, which this part makes a foreign ATM operator a beneficiary. Nor rule in some circumstances; the Bureau’s estimates classifies as relating to the debt collection market. has the Bureau seen an example of a financial are not a legal determination of coverage. 1165 81 FR 32830, 32929–30 (May 24, 2016). institution seeking to rely on an arbitration 1163 See Appendices A and B hereto for additional 1166 SBREFA Report, supra note 419, at 21 and agreement to block an EFTA ATM ‘‘sticker’’ class details on adjustments in three other cases. appendix A (debt collection industry letters). action.

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To provide a more specific illustration payments.1170 The actual (as opposed to and then adjust that amount by a of the Bureau’s methodology, suppose documented by the end date of the lodestar multiplier designed to for example that out of 1,000 providers Study) payments to consumers from the compensate the plaintiff’s attorneys for in a particular market (NAICS code), 20 419 Federal class settlements in the the risk they took in bringing the case percent currently use arbitration Study was somewhere between these with no guarantee of payment.1174 To agreements, and the Bureau found 40 two numbers. The Bureau uses the the extent that lodestar multipliers class litigation settlements over five documented payments amount ($1.09 incorporate a risk inapplicable to years. That implies that 800 providers billion in total) as an input in defense costs, the Bureau believes that (1,000 ¥ 1,000 * 20 percent) did not use calculating payments to class members the proper comparison for the arbitration agreements and the overall in the derivations below. However, defendant’s cost is the unadjusted exposure for these 800 providers was 40 accounting for the different scope of the plaintiff’s attorney fees. cases total, for a rate of 5 percent (40/ proposed and final rule results in the By reviewing the cases used in 800) for five years. In turn, this implies aggregate payment amount changing Section 8 of the Study, the Bureau that the 200 providers (1,000 * 20 from $1.09 billion to $1.07 billion.1171 documented lodestar multipliers in percent) that currently use arbitration The Study documented relief about 10 percent of the settlements. The agreements would be expected to face, provided to consumers and attorney’s average multiplier across those cases collectively, 10 class settlements in five fees paid to attorneys for the was 1.71, and thus the Bureau uses this 1172 1175 years (200 * 5 percent), or two class consumers, but the Study did not number for calculations below. The settlements per year (10/5).1168 The contain data on the defense costs Bureau assumes that in all cases the Bureau performs similar calculations for incurred by the providers because these plaintiff’s attorney fees awarded were the monetary exposure in terms of data were not available to the Bureau. 171 percent of the base amount, payments to class members and The Bureau therefore estimated including in cases where the Bureau did plaintiff’s attorney fees. defendant’s attorney fees based on not find a lodestar multiplier, which plaintiff’s attorney fees with appropriate also include the cases where attorneys In the Study, the Bureau reported adjustments.1173 Specifically, the were compensated based on a both the amount defendants agreed to Bureau believed it was important to percentage of the settlement amount. provide as cash relief (gross cash relief) account for the fact that while plaintiff’s Based on that assumption, and the and the amount that public court filings attorneys are compensated in class further assumption that the defense established a defendant actually paid or actions largely on a contingent basis costs were equal to the lodestar (prior to was unconditionally obligated to pay to (and thus not only lose the time value multiplication), the Bureau estimated class members because of either of money but, moreover, face the risk of defense costs. submitted claims, an automatic losing the case and earning nothing), the The Bureau also notes that the distribution requirement, or a pro rata defendant’s attorneys and the estimates provided below are distribution with a fixed total amount defendant’s staff are often compensated exclusively for the cost of additional 1169 (payments). The Bureau on an hourly or salaried basis, and face Federal class litigation filings and documented about $2 billion in gross considerably lower risk. As discussed at settlements. The Bureau did not attempt cash relief and about $1.09 billion in greater length in Part VI, courts review to monetize the costs of additional State attorney’s fees in class action class litigation filings and settlements 1168 These calculations were done by NAICS settlements for reasonableness. One way because limitations on the systems to codes and adjusted for the composition of the debt search and retrieve State court cases portfolios at debt collectors. According to the courts do this is to first calculate a comments made by SERs and other anecdotal ‘‘lodestar’’ amount by multiplying the precluded the Bureau from developing evidence, debt collectors currently do not number of hours the attorneys devoted sufficient data on the size or costs of differentiate between debt incurred on contracts to the case by a reasonable hourly rate, State court class action settlements. with and without arbitration agreements when Based on the Study’s analysis of cases deciding whether to collect on such debt. Many debts in their portfolios do not involve arbitration 1170 The Bureau notes that the number of class filed, the Bureau believes that there is agreements and their ability to invoke agreements cases litigated, and the corresponding numbers for roughly the same number of class where they are present in the original credit both gross cash relief and payments vary year-to- settlements in State courts as there is in contracts varies depending on the circumstances. year. See Id. section 8 at 12, 16, 24, 27. 1171 Federal courts across affected See SBREFA Report, supra note 419, at appendix The data presented below with respect to a 1176 A. Thus, as discussed above, arguably all debt given market is after adding and dropping the markets; however, the Bureau collectors face the risk of class litigation already. aforementioned cases from the 419 used in the However, as discussed above, they are likely to Study. 1174 For this factor, the Bureau averaged lodestar experience an increase in risk proportional to the 1172 These fees included other litigation costs multipliers from a subset of cases from the Study share of debt that they are collecting on that such as expert report costs as well as amounts paid where the Bureau documented a lodestar currently enjoys arbitration agreement protection. for settlement administrator costs. See Study, supra multiplier. Plaintiff’s attorney compensation in a For purposes of this calculation, the Bureau note 3, appendix B at 137. class settlement is frequently computed using the assumed that 53 percent of debt collectors’ current 1173 A research center commenter asserted that time spent on the case, the per-hour rate of the portfolios are subject to arbitration agreements the Bureau’s calculation in the proposal did not attorneys, all adjusted by the ‘‘lodestar multiplier’’. based on the Study’s estimate that 53 percent of the account for the costs of discovery and staff time on The multiplier reflects various considerations, for credit card loans outstanding are subject to the part of the provider. The commenter did not example, the fact that when plaintiff’s attorneys do arbitration agreements. Study, supra note 3, section provide data on these costs and the Bureau believes not settle a case, they will frequently not be 2 at 7. Thus, the Bureau assumed that the that discovery in class actions prior to certification compensated. See, e.g., Theodore Eisenberg & proportion of debt collectors’ general portfolios that may be limited. In any event the Bureau disagrees Geoffrey P. Miller, ‘‘Attorney Fees in Class Action would be affected by the proposal has a prevalence that the proposal did not account for any such Settlements: An Empirical Study,’’ 1 J. of Empirical of arbitration agreements on par with credit card costs—discovery costs in particular will be borne by Legal Studies 27 (2004); Fitzpatrick, supra note 709. debt. The prevalence is likely to be different from plaintiffs’ attorneys as well and reflected in the 1175 Despite the small sample, this number is 53 percent as there are other sources of debt, for plaintiff’s attorney fees that the Bureau used to consistent with the finding by Professor Fitzpatrick example, payday and medical debt. As with other calculate defense costs. In addition, discovery costs of a 1.65 average. See Fitzpatrick, supra note 709, estimates of prevalence, if 53 percent is an are not necessarily greater for defendants than for at 834. underestimate, then debt collectors would incur plaintiffs, and the commenter provided no data on 1176 The Study found 470 putative Federal class more costs (and consumers would experience more this subject. With regard to staff costs, the Bureau actions filed between 2010 through 2012 versus 92 benefits). believes these costs are often fixed costs and is not putative State class actions. However, the State 1169 See Study, supra note 3, section 8 at 3–5 and aware of evidence indicating that companies add class actions were only for jurisdictions 23–29. staff to defend class actions. Continued

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generally believes that the amounts at cases that could be maintained in State argued that the Bureau’s approach for stake are not nearly as large in State court. The Bureau is not aware of any calculating the average ratio of courts.1177 The Bureau notes that while data that post-dates the adoption of attorney’s fees to consumer payments is the total number of putative class cases CAFA. Further, even if costs are more flawed because it overweights the filed might be similar in Federal and variable, this does not mean that on impact of certain large settlements State courts, the relative frequency of average they are higher.1180 involving litigation over depositories’ State and Federal class actions may vary A State regulator commenter argued overdraft programs. Second, the in different markets.1178 For example, that State court class actions are more commenter questioned the results of the there might be considerably more costly to litigate than Federal class Bureau’s aggregate calculation, pointing putative State class actions filed against actions of similar size. The commenter to a study by one of the comment’s automobile lenders or smaller payday asserted that differences in State laws authors that found much higher ratios. operators than putative Federal class regarding the procedure used for class Finally, the commenter argued the cases. On the other hand, there might be actions could increase the length and Bureau’s decision to include FDCPA considerably more putative Federal complexity of the process to certify a cases in its analysis but not EFTA ATM class actions filed against large national class action under a particular State’s sticker cases, discussed above, biases its banks than putative State class actions. laws. The commenter provided no calculations. An industry commenter argued that evidence to support this assertion. The Bureau disagrees with the some laws result in many more cases Moreover, this would only be relevant commenter’s specific critiques,1183 but being pursued at the State level than the in cases where the parties are litigating more broadly the Bureau believes that Federal level. The Bureau agrees that the issue of certification. The the commenter’s focus on the ratio of some claims involving some laws may commenter also provided no reason to attorney’s fees to consumer payments is be more commonly asserted in one believe that costs would be higher if the misplaced. The relative split of costs forum or another, but disagrees that this matter is resolved in any of a number of between consumers and their attorneys means that the total number of State other ways, including a class settlement, is not relevant to evaluating the overall court class actions is likely to be higher a non-class settlement, or litigating a burden of new class actions on than the total number of Federal class dispositive motion. In light of the providers, who must pay all costs.1184 actions. In the Study, the Bureau requirements of CAFA, which generally sampled three States and several limit the amount of relief available in 1183 Regarding the use of an aggregate average the additional counties to examine the level multi-state class action claims in State Bureau disagrees that the aggregate average is an of class action litigation in courts in courts to $5 million, the Bureau believes inappropriate metric. In the context of class action those jurisdictions, and, extrapolating that State court class actions may be litigation, where different cases may have wildly different numbers of consumers involved and from the sample, found the State class more expensive relative to the size of similarly variable total claimed injury, taking a actions were approximately as common the injury involved, but mainly because case-by-case average will produce misleading as Federal class actions.1179 Given that there are fixed costs involved in results because it weights all cases equally, the Bureau does not have nationwide litigating a class action, and State court regardless of the magnitude of the case, thus placing arbitrary significance on a case count instead of on data to estimate the number of class actions are likely less complex and counts of dollars and class members. The Bureau additional State class actions as a result involve fewer consumers.1181 It is likely discusses this further, including the effect of the of the class provision, the Bureau that Federal cases of similar size are overdraft settlements, above in Part VI. believes that its assumption that there similarly costly to litigate. This is Regarding the much higher ratios of attorney’s might be a similar number of Federal supported by data publicly reported in fees to consumer payments in the study conducted by one of the authors of the comment compared the and State cases remains appropriate in the Federal Judicial Center survey of Bureau’s estimates, the Bureau disagrees that this is the aggregate; commenters provided no defense counsel finding that cost was due to problems with its analysis. The main portion data to the contrary. not a common factor in the decision to of the discrepancy between the Bureau’s analysis The same industry commenter also remove a case from State court to and that of the commenter is in the set of cases used 1182 for analysis. As noted above in Part VI, if the study asserted that State class actions can Federal court. cited by the commenter had used the same have more variable litigation costs than A research center commenter made definition of relevant cases as the Bureau’s impacts Federal class actions. The commenter several criticisms of the methodology analysis, it would have obtained substantially argued that State courts lacked controls, described above, all relating to the ratio similar results to those of the Bureau. expertise, and oversight to create of attorney’s fees to consumer recovery Regarding the specific choice to include FDCPA cases in its analysis, the Bureau disagrees with the consistent outcomes, and this may lead in class actions. First, the commenter commenter that this creates a bias. Removing debt to unpredictable costs. The commenter collectors from the Bureau’s analysis would not did not cite data on this point. Congress 1180 In addition, the Study (Section 6 at 36 tbl. 3) make the Bureau’s estimates—the ratio of class adopted CAFA to address many of the showed that those cases that were brought in and action attorney’s fees to consumer recovery—more remained in State courts (which are the basis for the favorable to class actions. Debt collection cases concerns raised by the commenter. To Bureau’s estimate of State court defense costs, since make up a majority of the new class action lawsuits assess whether CAFA was sufficient to the removed cases are treated as Federal cases), the Bureau estimates will occur as a result of the address these concerns, the Bureau were more likely to include State law claims and rule, as illustrated in Table 1. Removing them would need data post-dating the no significant Federal claims. The State court would reduce the count of cases by about half. Debt adoption of CAFA, as CAFA limited the judiciary may have even greater expertise on State collection cases on average involve lower fees but law than the Federal judiciary. In any event, as the also lower payments to consumers; however, the Study (Section 6 at 45 fig. 14) indicated, State class ratio of attorney’s fees to consumer payments is representing 18.1 percent of the U.S. population actions took slightly longer to resolve than non- higher for debt collection cases than class actions (92/.181 = 508). See Study, supra note 3, section 6 MDL class actions in Federal court, but in other industries, and so the overall ratio of at 16–17. Note that the Federal and State data in considerably less time than MDL class actions in attorney’s fees to consumer recovery would be Section 6 of the Study includes size markets, and Federal court. somewhat lower if debt collectors were excluded. not all the markets that would be affected. 1181 The Bureau discusses the issue of fixed costs 1184 In Part VI above, the Bureau considers 1177 Especially due to the CAFA, which in many in class action litigation more fully in Part VI, whether class action plaintiff’s attorney fees are cases allows defendants to remove class actions to above. excessive and thus against the public interest. The Federal court when $5 million or more are at stake 1182 Thomas E. Willging & Shannon R. Wheatman, Bureau finds above that plaintiff’s attorney fees are and other jurisdictional requirements are met. ‘‘An Empirical Examination of Attorneys’ Choice of not generally excessive. However, the Bureau notes 1178 See Study, supra note 3, section 6 at 19 tbl. Forum in Class Action Litigation,’’ Federal Judicial again that the primary effect of the rule, and the 4. Center, at 21 tbl. 3 (2005), available at http:// source of the important costs and benefits, is from 1179 See id. section 6 at 15. www.uscourts.gov/file/clact05pdf. deterrence, and thus the question of whether

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Even considering the effectiveness of These numbers should be compared In addition to the costs of Federal the class action procedure for providing to the number of accounts across the class actions as discussed above, the monetary redress to consumers, which affected markets. While the total Bureau assumes that providers who as discussed above is a transfer in number of all accounts across all become subject to class actions as a economic terms with no direct effect on markets is unavailable, there are, for result of the rule will enter into a welfare, the ratio of attorney’s fees to example, hundreds of millions of similar number of class settlements in consumer payments may be accounts in the credit card market State court, however, with markedly misleading.1185 Under some Federal alone. Thus, averaged across all lower amounts paid out to consumers consumer protection laws, the markets, the monetized estimates and attorneys on both sides. maximum recovery for the class is provided above amount to less than one The Bureau performed a similar capped. In other cases, plaintiff’s dollar per account per year. However, analysis to estimate the number of cases attorney fees are not negotiated or this exposure could be higher for that will be filed as putative class awarded by a court until after a particular markets. actions but not result in a class consumer settlement amount has been Many cases also feature in-kind settlement. Based on the data used in reached. And in cases with injunctive relief.1188 However, as in the Study, the the Study, the Bureau believes that relief, the court takes into account that Bureau is unable to quantify this cost in roughly 17 percent of cases that are filed relief when considering the a way that would be comparable with as class litigations end up settling on a reasonableness of attorney’s fees, even if payments to class members. Similarly, classwide basis.1191 For purposes of this the value of that relief cannot be injunctive relief could in some cases estimate the Bureau again assumed that quantified. result in substantial forgone profit (and these putative class actions were all a corresponding substantial benefit to brought against providers without an Covered Persons’ Costs Due to the consumers), but cannot be easily arbitration agreement. This is a Additional Class Litigation quantified.1189 Commenters generally conservative assumption; it may be that The Bureau estimates that the final did not dispute the numbers discussed the very reason that some of these class rule will create class action above, although some industry putative class actions were resolved on exposure for about 53,000 providers commenters disputed whether it was an individual basis was precisely (those who fall within the coverage of appropriate to compare overall litigation because of an arbitration agreement. the final rule and currently have an costs to the number of consumer Nonetheless, on this assumption and arbitration agreement).1186 Based on the accounts involved. These industry extrapolating from the estimated 103 calculation described above, the commenters expressed the view that the additional Federal cases that will be Bureau’s model estimates that this class overall costs were substantial. However, settled on a classwide basis each year, action exposure will result—on an they did not provide an alternative the Bureau estimates that there will be annual basis—in about 103 additional point of comparison beyond the number 501 additional Federal court cases filed class settlements in Federal court. In of consumer accounts covered by the as class actions that will end up not those cases, the Bureau estimates that an proposal. The Bureau still believes that settling on a classwide basis, assuming additional $342 million will be paid out it is relevant to compare the overall no change in filing behavior by to consumers, an additional $66 million costs of additional class action litigation plaintiff’s attorneys.1192 Some of the will be paid out to plaintiff’s attorneys, to the size of the markets covered by the Federal cases analyzed in the Study and an additional $39 million will be rule.1190 filed as class actions were filed against spent by providers on their own providers that had an arbitration attorney’s fees and internal staff and out to consumers, an additional $114 million paid agreement that applied to the case. management time.1187 out to plaintiff’s attorney fees, and an additional Thus, the Bureau believes that such $67 million for defendant’s attorney fees and providers already face some exposure, attorney’s fees are excessive is not in and of itself internal staff and management time per year. which implies that both the 103 settled 1188 See Study, supra note 3, section 8 at 4. As relevant to the Bureau’s Section 1022(b)(2) class cases and the 501 cases filed as Analysis. Moreover, the ratio of attorney’s fees to in the Study, the Bureau uses the term ‘‘in-kind consumer redress is not even necessarily relief’’ to refer to class settlements in which class actions are likely overestimates of informative as to whether fees are excessive. consumers were provided with free or discounted Federal court settlements. Consumers could benefit greatly from injunctive access to a service. Id. section 8 at 4 n.6. While the In order to estimate the costs relief while receiving little monetary compensation Study quantified $644 million of in-kind relief, that associated with these incremental (perhaps due to capped statutory damages), leading number is included in relief, but not in payments to a very high ratio of fees to redress regardless of in the Study, and the Bureau continues to follow Federal putative class actions, the the reasonableness of the attorney’s compensation. this approach here, both for the calculation of costs Bureau notes that the Study showed that 1185 The Bureau discusses the relative size of to providers and benefits to consumers. an average case filed as a putative class attorney’s fees above in Part VI, the section 1028 1189 The Study quantified behavioral relief action in Federal court takes roughly 2.5 findings, addressing comments asserting that (defined as a part of injunctive relief) in the Study. times longer to resolve if it is settled as plaintiff’s attorneys are unjustly enriched by class The Bureau uses ‘‘behavioral relief’’ to refer to class action litigation. As discussed above, the Bureau settlements that contained a commitment by the a class case than if it is resolved in any finds plaintiff’s attorneys are not in general unjustly defendant to alter its behavior prospectively, for enriched. example, by promising to change business practices these costs, and the number of accounts at only 1186 See the FRFA below for the data used to in the future or implementing new compliance those firms. However, the Bureau does not believe arrive at this estimate. programs. The Bureau did not include a simple it would be appropriate to ignore the probability 1187 These numbers do not include any estimates agreement to comply with the law, without more, that any one firm would be sued when evaluating from costs or benefits from increased investment in as behavioral relief. Id. appendix B at 135. If the the scale of the additional litigation costs. compliance with the law. As discussed above, the Bureau were to count such cases, there would likely 1191 The Bureau reported a lower number (12.3 Bureau is not estimating those numbers. The be significantly more cases with behavioral relief. percent) in the Study based on final settlements Bureau has also performed a sensitivity analysis by As the Bureau noted in the Study, behavioral relief approved before March 1, 2014, though as noted in using market shares of providers with arbitration is seldom quantified in case records, and thus the the Study, nearly 30 additional cases had a final agreements in the checking account and credit card Bureau does not quantify it. Id. section 8 at 5 n.10. settlement or proposed class settlement entered as markets instead of prevalence that is unadjusted by 1190 One industry commenter disputed the of August 31, 2014. Id. section 6 at 7, 36. market share. The Bureau used the numbers validity of this comparison of estimated additional 1192 The Bureau estimated 102.7 (rounded to 103) reported in Section 2 of the Study for this costs incurred by sued firms to the overall universe additional Federal class settlements. Thus, the sensitivity analysis. This other specification of firms affected by the rule, arguing instead that calculation for additional Federal cases that would changes the results to about 109 additional Federal the Bureau ought to compare the class action be settled on a classwide basis is (102.7/.17) * class settlements, an additional $475 million paid defense costs to only those firms that would incur (1¥.17).

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other way.1193 The Bureau discusses these cases will likely be significantly cases. Using $15,000 per individual case two potential estimates below and cheaper for providers.1195 as a defense cost estimate, the cost of presents the more conservative one in The Bureau believes that the these 501 cases would be approximately the table below. The cost to providers calculation above might be an $8 million per year.1196 Thus, the from a putative class case that is not overestimate of time spent on such cases Bureau believes that the correct estimate resolved as a class case is almost because both defendant’s and plaintiff’s is somewhere between $8 and $76 entirely from defense costs—the Bureau attorneys frequently come to the million per year. For the purposes of believes the compensation to a single conclusion, relatively early in the case clearer presentation, the Bureau consumer is likely to be trivial by that the case will not result in a class conservatively presents the $76 million comparison, and any plaintiff’s attorney settlement. Once such a conclusion is number in the table below. reached, the billable hours incurred by fees—if paid by the provider at all—will The Bureau notes that for several 1194 either side (in particular the defense) are be of a similar magnitude. markets the estimates of additional For the purposes of the first defense likely significantly lower than for a case Federal class action settlements are cost estimate, the Bureau assumed that that is headed towards a class low.1197 These low estimates could putative class action cases that are not settlement, even if the final outcome of reflect some combination of the settled on a class basis (for whatever the two cases might be achieved in following three possibilities. First, as reason) cost 40 percent (1 divided by comparable calendar time. Similarly, 2.5) as much to litigate. Therefore, the many cases are resolved before noted above, in some markets class Bureau estimated that these additional discovery or motions on the pleadings; actions may be more commonly filed in 501 Federal class cases that do not settle such cases are cheaper to litigate. In State courts. Second, in some markets, on a class basis will result in $76 other words, at some point early in by their nature, there will be few claims million per year in defense costs to many putative class actions, the case that can proceed as class actions, providers. The Bureau did not include becomes effectively an individual case regardless of arbitration agreements, in this estimate recovery amounts in (in terms of how the parties and their because there are not common issues these putative class cases that did not counsel treat the stakes of it), and from that are predominant or because the result in a class settlement, as the that point on, its cost should be market is highly dispersed. Finally, in Bureau believes those are negligible comparable to the cost of an individual some markets the current prevalence of amounts (for example, a few thousand case (as opposed to a case settled on a arbitration agreements is so high (over dollars per case that had an individual classwide basis). The calculation above 80 percent) that any estimates regarding settlement). Based on similar numbers assumes that this point of transition to future class action activity in the of Federal and State cases, it is likely an individual case is the last day of the absence of such agreements are that there will also be an additional 501 case. especially imprecise because currently State cases filed that do not settle on In contrast, the Bureau also calculated so few firms are subject to class action class basis, whose cost the Bureau does the impact of making the opposite exposure. not estimate due to the lack of assumption that from the first day of the BILLING CODE 4810–AM–P nationally representative data; however, case the parties (in particular, the defense) know that the case is not going 1196 While the $15,000 figure is hard to estimate, 1193 See Study, supra note 3, section 6 at 46 tbl. to be settled on a classwide basis. Using this estimate is consistent with data received from 7. this assumption, the 501 class cases cost one of the SERs during the SBREFA process. See 1194 One industry commenter expressed concern SBREFA Report, supra note 419, at 18. that the Bureau had significantly undercounted the as much to defend as 501 individual 1197 As further discussed in Part IX below, a costs of putative class actions that resulted in number of other markets are covered, but not individual settlements. The commenter mistakenly 1195 For the sensitivity analysis using market sufficiently affected to the point that the Bureau interpreted the additional fees listed in the last share prevalence data for checking account and would estimate the number of affected persons. The column of Table 1 in the Section 1022(b)(2) credit card markets, the results are additional 530 Bureau likewise does not generally include rows in Analysis in the proposal as excluding defense costs. Federal class cases that do not settle on class basis the Federal class settlement estimate table for those In fact, the figures are almost entirely defense costs. result in $130 million in costs to providers. markets.

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BILLING CODE 4810–AM–C The Bureau notes that providers increased class litigation exposure by might attempt to manage the risks of opting for more comprehensive

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insurance coverage or a higher relief than Federal court class actions, circumstances described in sections reimbursement limit. However, the sometimes considerably so, due to the 1027 and, in the case of automobile Bureau is not able to model the impacts fact that class actions seeking more than dealers, section 1029 of the Dodd-Frank of insurance in providers’ response to $5 million in relief generally can be Act. See Part VI for further discussion. the final rule. During the Small Business removed to Federal court under As a result, their conduct is expressly Review Panel, these SERs reported that CAFA.1200 As already noted, the Bureau not regulated by this rule. See generally it often is not clear to them which type expects that payments to consumers section 1040.3(b)(6) (incorporating of class litigation exposure a policy from State court class actions will be Dodd-Frank exemptions into the scope covers, nor was it clear that providers markedly lower than in cases settled in of the rule). This Section 1022(b)(2) typically ask about this sort of coverage. Federal court, due to the limits imposed Analysis has already accounted for costs These SERs explained that their by CAFA. No commenters disputed this of additional class actions that would coverage is often determined on a more assertion. Given that the vast majority of result from the class rule, and the specialized case-by-case basis that limits the Bureau’s estimate of the costs of Bureau acknowledges here that these at least small providers’ ability to plan additional litigation comes from costs may be passed through to ahead. Larger firms may have more payments to consumers, which vary by automobile dealers and merchants by sophisticated policies and more the size and nature of the case and are the providers who are subject to the systematic understanding of their likely to be higher in Federal litigation, rule.1201 Based on the data available and coverage, however, or they may self- the Bureau does not believe that a cost information supplied by commenters, insure. Finally, the insurance providers equal to that of the additional Federal the Bureau is not able to estimate the might require at least some of the class actions is a reasonable upper amount of pass-through that would changes to compliance and products bound for the cost of additional State occur from these third parties covered discussed above as a prerequisite for class actions. by the rule to automobile dealers and coverage or for a discounted Several industry commenters merchants that are not covered by the premium.1198 expressed the view that the Bureau rule. In any event, this impact would be Regarding the total costs to providers should have generally considered costs indirect, as the industry trade over a five year period, three industry to additional firms beyond those association commenter noted, and thus trade associations asserted that considered in the Section 1022(b)(2) is not relevant to the discussion of accounting for State class actions could Analysis in the proposal. Specifically, impacts on small entities under the as much as double the total costs to automobile dealer industry commenters Regulatory Flexibility Act as discussed providers from additional class action expressed the view that the rule would below in Part IX. litigation, to $5.2 billion. The have a significant impact on them commenters apparently were because increased suits against indirect Covered Persons’ Costs Due to the extrapolating from the Bureau’s automobile lenders would increase the Administrative Change Expense observation in the proposal that the costs on dealers, who would be Providers that currently have incidence of additional State class obligated to reimburse the indirect arbitration agreements (or who purchase litigation might be similar to the automobile lenders pursuant to contracts with arbitration agreements incidence of additional Federal class indemnification clauses that are that do not include the Bureau’s litigation.1199 The commenters included in many contracts between language) will also incur administrative essentially characterized that aspect of dealers and indirect automobile lenders. expenses to make the one-time change the Bureau’s analysis from the proposal An industry trade association to the arbitration agreement itself (or a as bounding the cost of State class commenter expressed a related view notice to consumers concerning the actions between zero and the full cost of that merchants would be affected by the purchased contract). Providers are likely additional Federal class actions. rule despite the exemption for to incur a range of costs related to these The Bureau acknowledges again that merchants providing interest-free credit administrative requirements. the total additional litigation costs to for their own nonfinancial goods or The Bureau believes that providers providers will exceed costs from Federal services because the rule would apply to that currently have arbitration class actions presented in Table 1, as servicers, collectors, and debt buyers agreements will manage and incur these they do not account for the costs of State (both initial and downstream). The costs in one of three ways. First, the class actions. The Bureau also increased costs incurred by those Bureau believes that some providers acknowledges again that it does not providers, in the view of the industry rely exclusively on third-party contract have reliable data to estimate the cost of trade association, would be passed forms providers with which they additional State class actions. However, along to the merchants. As a result, the already have a relationship, and for as discussed above, the Bureau rule would impose costs on merchants these providers the cost of making the disagrees that the cost of State class ‘‘indirectly,’’ in the view of this required changes to their contracts is actions are likely to be anywhere near commenter. negligible (e.g., downloading a the full cost of Federal class action In its Section 1022(b)(2) Analysis, the compliant contract from the third- litigation. Most State court class actions Bureau analyzes costs and benefits to party’s Web site, with the form likely will seek smaller amounts of monetary covered persons whose conduct is being either inexpensive or free to regulated by the rule. Although download). 1198 Related to this discussion, an insurance automobile dealers and merchants who Second, there may be providers that industry trade association commenter asserted that originate consumer credit transactions perform an annual review of the litigation insurance rates would be higher for are covered persons under Dodd-Frank providers who do not have or cannot rely on an section 1002(6), they are not subject to 1201 Related to this point, two credit union arbitration agreement. The Bureau acknowledges industry commenters noted that credit unions may that this is likely true simply as a matter of basic the Bureau’s rulemaking authority in bear some burden of class actions due to conduct economic theory, but the Bureau cannot quantify on the part of dealers who contract with such credit the size of this effect, nor did the commenter 1200 While claims under many Federal consumer unions for indirect automobile lending. As noted, provide any information or data indicating the protection statutes have damages caps, those claims the Bureau believes that it has already accounted magnitude of any potential change in insurance also generally can be moved to Federal court if State for any such burden through its estimates of new premiums. court claims do not predominate in the case. See class action lawsuits in the indirect automobile 1199 81 FR 32830, 32907 (May 24, 2016). 28 U.S.C. 1331. lending market.

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contracts they use with consumers. As its members’ consumer agreements. The A prepaid card industry commenter a part of that review (provided it comes Bureau acknowledges that some argued that the Bureau should have before the final rule becomes effective), providers may have particular further considered the administrative they will either revise their arbitration circumstances that will lead to above burden of the proposal in concert with agreements or delete them, whether or average costs, even if they do not fall the burden imposed by the Bureau’s not most of these contracts are supplied into the third category of providers recent Prepaid Accounts Rule. The by third-party providers. For these above, with highly customized commenter asserted without providers, it is also unlikely that the contracts. The Bureau noted in the explanation that prepaid card providers final rule will cause considerable proposal that some providers have would be compelled to revise their card incremental expense of changing or multiple contracts: For example, some packaging and disclosures twice in a taking out the arbitration agreement credit card issuers have filed dozens of short space of time. The Bureau insofar as they already engage in a contracts with the Bureau.1203 However, disagrees that it should account for the regular review, as long as this review given that many providers will have no costs of the Prepaid Accounts Rule, occurs before the rule becomes effective. or negligible costs, the Bureau continues which itself accounts for its own Third, there are likely to be some to believe that its average estimate is costs.1205 As the Bureau explained in providers that use contracts that they appropriate. the proposal and again in this final rule, have highly customized to their own the rule does not require prepaid card In addition to the one-time change needs (relative to the first two categories providers to revise packaging and described directly above, some above) and that might not engage in disclosures. Specifically, § 1040.5(b) of providers could be affected on an annual reviews. These will require a the rule allows providers of general ongoing or sporadic basis in the future more comprehensive review in order to purpose reloadable prepaid cards to as they acquire existing contracts as the either change or remove the arbitration continue to sell their pre-existing stock result of regular or occasional activity, agreement. as long as they give the consumer notice such as a merger. Section The Bureau believes that smaller of the update to the arbitration 1040.4(a)(2)(iii) will require providers providers are likely to fall into the first agreement at the time they communicate who become a party to an existing category. The Bureau believes that the with the consumer concerning largest providers fall into either the contract with a pre-dispute arbitration registration of the card. second or the third category. On average agreement that does not already contain Comments from automobile dealers across all categories, the Bureau believes the language mandated by § 1040.4(a)(2) asserted that the proposed class rule that the average provider’s expense for to amend the agreement to include that would lead to inclusion of the mandated the administrative change to be about provision, or send the consumer a language in form retail installment sale $400. This consists of approximately notice indicating that the acquirer will contracts and lease forms by exempt not invoke that pre-dispute arbitration motor vehicle dealers. These dealers one hour of time from a staff attorney or 1204 a compliance person and an hour of agreement in a class action. Various expressed concern that the Bureau’s supporting staff time. Given the markets may incur different costs due to proposal did not allow for the use of the Bureau’s estimate of approximately this requirement. language that would preserve the 48,000 providers that use arbitration For example, buyers of medical debt arbitration agreement of the dealers agreements,1202 the final rule’s required could incur additional costs as a result because given that they typically sell contractual change will result in a one- of additional due diligence they their loans to entities that would be time cost of $19 million, or about $4 undertake to determine which acquired providers under the proposal, those million per year total for all providers debts arise from consumer credit providers will in effect mandate dealers’ if amortized over five years. transactions (that will be subject to final use of compliant arbitration agreements Alternatively, providers may choose to rule), or alternatively by the additional even if the Bureau does not apply its drop arbitration agreements altogether, exposure created from sending rule to dealers. As noted in the section- potentially resulting in lower consumer notices on debts that did not by-section analysis of the rule, the administrative costs. arise from credit transactions (i.e., Bureau has updated the contract Some industry commenters asserted potential over-compliance). The Bureau provision that can be used in this that their costs from the required does not believe that the cost of sending situation to further clarify that it does administrative changes would be higher such a notice will be burdensome to the not result in the coverage of, or impact than the Bureau’s estimates, as buyers of medical debt. In particular, on, excluded persons.1206 While some described above and in the proposal. A the Bureau believes that medical debt automobile dealers might incur some small dollar credit industry commenter buyers typically send out a notice to the costs in updating their contracts if the asserted that it had more than 100 consumer upon acquisition of debt due indirect automobile lenders they deal separate consumer agreements that to FDCPA requirements in 15 U.S.C. with do not do so automatically, the would need to be updated across 1692(g), when applicable. The Bureau Bureau believes that these costs will be multiple systems, in addition to believes that these debt buyers could minimal, and will not be incurred by hardcopies at retail storefronts. A trade attach the additional notice that will be most dealers. association for installment lenders required by the final rule to this Costs to Covered Persons From the argued that the addition of the Bureau- required FDCPA notice with a minimal Requirements Regarding Submission of required contract language would increase in costs. Arbitral and Certain Court Records require conforming changes throughout 1203 See Bureau of Consumer Fin. Prot., ‘‘Credit There will also be a minor cost related 1202 See the Regulatory Flexibility Act analysis Card Agreement Database,’’ http:// to the final rule’s requirements below at Part IX. The Bureau estimates that 4,500 www.consumerfinance.gov/credit-cards/ regarding sending records to the Bureau debt collectors are subject to the rule but would not agreements/ (last visited June 1, 2017). Presumably, related to providers’ arbitrations and incur this cost because they do not act as the the marginal cost of changing each additional certain court cases. In the Study, the original provider of consumer financial products contract is minimal, as long as each of the contracts and services, and thus are unlikely to have used the same dispute resolution clause. contracts directly with the consumers with whom 1204 The Bureau believes that medical debt buyers 1205 81 FR 83934 (Nov. 22, 2016). they interact. would be the most affected by this provision. 1206 See § 1040.4(a)(2)(iv)(B).

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Bureau documented significantly fewer arguments regarding benefits to through to the consumers.1211 than 1,000 individual arbitrations per consumers are discussed separately Conversely, a pass-through rate of 0 year in the markets analyzed.1207 The below.) The Bureau acknowledges that percent would mean that consumers Bureau believes it is unlikely that the publication of arbitral awards with would not see a price increase or a transmittal requirement will impose a rulings adverse to firms may have some diminution in the quality of products or cost of more than $100 per arbitration— impact on the reputation of those firms, services due to the final rule. As noted a conservative estimate for the time although the Bureau notes that the above, the monetized estimates of required to copy or scan the documents, number of arbitration cases that results additional Federal class actions above locate the address where to send the in such awards is so small—36 per year amount to less than one dollar per documents, and any postage costs. To in the markets analyzed in the account per year when averaged across the extent covered persons will be Study 1209—that the impact on any markets, although it is possible that the required to redact specific identifiers given firm or in the aggregate is likely number is higher for some markets; the (such as name, physical and email to be slight and may be offset by monetized estimates of additional State address, phone number, account reputational benefits from the class actions is even less. Also, as noted number, and social security number), publication of awards that favor below in the Paperwork Reduction Act this cost might increase, conservatively, companies. In particular, firms should analysis, the direct cost of submission of by a few hundred dollars on average due only face a negative cost from this effect arbitral and certain court records is to the time to train the staff on the when they have arbitral claims found in estimated at approximately $500,000 specific identifiers and the time to customers’ favor. Providers who comply per year. Given the extremely high redact the documents, for each with the law and face a claim without volume of accounts covered under the arbitration.1208 Thus, the total cost of merit will experience this cost to a final rule, the monetized cost of this the arbitration submission requirements much lesser extent, if at all. provision is miniscule when averaged is unlikely to reach $1 million per year Some commenters asserted that across markets. Thus, even 100 percent given the current frequency of publication of arbitral records will pass through of the monetized costs of individual arbitrations. Moreover, these provide an opportunity for plaintiffs to additional Federal class settlements in costs could be lower to the extent that find companies susceptible to litigation, every market would result in an providers decide not to use arbitration and thus indirectly impose a heavy cost increase in prices of under one dollar agreements in response to the rule. burden on those firms. The Bureau per account per year when averaged With regard to the cost of submitting again notes that the number of arbitral across all markets, although particular arbitral and certain court records awards favoring individual consumers markets or providers might see larger generated by the final rule, some is miniscule relative to the size of the changes. commenters disputed as low the amount various markets covered by the rule. Determining the extent of pass- estimated by the Bureau, suggesting that Moreover, as one commenter asserted, through involves evaluating a trade-off there would be additional unaccounted publication of arbitral records could between volume of business and margin for burden of redacting records and actually create a more efficient private (the difference between price and ensuring privacy. As discussed in more enforcement market, as consumers may marginal cost) on each customer served. detail in Part VI, however, the Bureau be more likely to realize they have a Any amount of pass-through increases expects that the rule will not lead to valid claim if they see that an arbitral price, and thus lowers volume. A pass- additional burden because the Bureau decision was made in favor of through rate below 100 percent means provides a specific list of information consumers with similar claims. that a firm’s margin per customer is lower than it was before the provider types that must be redacted. Providers Potential Pass-Through of Costs to had to incur the new cost. Economic will not have to make additional Consumers redactions to ensure privacy in general. theory suggests that, without accounting The Bureau, rather than providers, will As also discussed in Part VI, the for strategic effects of competition, the bear any further cost of redacting Bureau acknowledges that most pass-through rate ends up somewhere in information beyond those types listed in providers will pass through at least between the two extremes of: (1) No the rule to ensure privacy. portions of some of the costs described In addition to the costs of submission above to consumers. This pass-through 1211 Even where providers pass on 100 percent of of records listed above, one commenter can take multiple forms, such as higher their costs, they may lose volume and thus prices to consumers or reduced quality experience lower profits. With regard to the asserted that the private nature of proposal, however, in markets where arbitration arbitration benefits all parties involved, of the products or services they provide agreements are extremely widespread, this would and as such publication of arbitral to consumers. The rate at which firms depend on the extent to which the market’s records will act as a cost toward both pass through changes in their marginal aggregate demand curve is elastic. In other words, costs onto prices or interest rates the entities’ profits would decrease in proportion to parties. For firms, this takes the form of the fraction of consumers who would stop buying a reputational cost from the details of charged to consumers is called the pass- the consumer financial products or services if most 1210 their disputes with consumers being through rate. or all firms were to increase their prices at the same made public. (The commenter’s A pass-through rate of 100 percent time. The Bureau is unaware of reliable estimates means that an increase in marginal costs of this elasticity for the covered markets, with the would not be absorbed by the providers, exception of the credit card market, where such a 1207 See generally Study, supra note 3, section 5. loss would unlikely be significant given the likely Relatedly, JAMS (the second largest provider of but rather would be fully passed modest per-consumer magnitude of the marginal consumer arbitrations) reported about 114 cost increase. See David Gross & Nicholas Souleles, consumer financial products or services arbitrations 1209 See Study, supra note 3, section 5 at 13 ‘‘Do Liquidity Constraints and Interest Rates Matter in 2015. (reporting 32 disputes resolved with monetary relief for Consumer Behavior? Evidence from Credit Card 1208 One of the SERs on the SBREFA Panel and 41 non-overlapping disputes with debt Data,’’ 149 Q. J. of Econ. 117 (2002). To the extent projected two to six hours of staff time. See forbearance awarded, over a two-year period). that credit cards and mortgages are indicative of SBREFA Report, supra note 419, at 25. Meanwhile, 1210 In some markets the provider does not have other markets for consumer financial products and one commenter suggested the burden of redacting a direct relationship with the consumer, and thus services, this effect is unlikely to be significant. See, records to a level that sufficiently protected the pass-through if any will be indirect. In other e.g., Andreas Fuster & Basit Zafar, ‘‘The Sensitivity consumers’ privacy would be highly burdensome, markets, providers are already charging a price at of Housing Demand to Financing Conditions: but did not provide any quantitative estimates of the usury limit, and thus would not be able to pass Evidence from a Survey,’’ (Fed. Reserve Board of the amount of time and staff required. through any cost onto price. N.Y.C., Staff Rept. No. 702, 2015).

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pass-through (and thus completely on a class basis. The extent to which reasons other than a low general preserving the volume at the expense of these marginal costs are likely to be industry pass-through rate. For example, lowering margin) and (2) full pass- passed through to consumers cannot be issuers may have priced as if the through (completely preserving the reliably predicted, especially given the expected litigation exposure was a fixed margin at the expense of lowering multiple markets affected. Empirical cost or as if most of the cost was volume).1212 For a case of a monopolist studies are mostly unavailable for the expected to be due to investment in with a linear demand function (a price markets covered. Empirical studies for more compliance (and would be treated increase of a dollar results in the same other products, mainly consumer as a fixed cost).1219 The result also change in quantity demanded regardless package goods and commodities, do not might not be representative for other of the original price level) and constant produce a single estimate.1215 issuers. marginal cost (each additional unit of The available pass-through estimates Several commenters stated that the output costs the same to produce as the for the consumer financial products or class rule would increase costs beyond previous unit), the theory predicts a services are largely for credit cards, the Bureau’s estimates in the proposal’s pass-through rate of 50 percent. The rate where older literature found pass- Section 1022(b)(2) Analysis. In general, would be higher or lower depending on through rates of close to 0 percent.1216 these commenters asserted that various how demand elasticity and economies More recently, researchers have costs, including litigation discovery, of scale change with higher prices and analyzed the effects of regulation that costs of State court actions, and the lower outputs.1213 To the extent that a effectively imposed price ceilings on costs of non-class settlements would all provider’s fixed costs change, economic late payment and over-limit fees on be passed on to consumers. As the theory indicates that the profit- credit cards and interchange fees on commenters did not directly take issue maximizing response is not to pass that debit cards. These researchers, by and with any of the Bureau’s estimates of change onto prices.1214 large, found evidence consistent with these costs, the Bureau interprets these Economic theory does not provide low to nonexistent pass-through rates in comments as asserting that all such useful guidance about what the these markets.1217 However, these costs will be passed through. As neither magnitude of the pass-through of findings do not necessarily imply low the Bureau nor other researchers or marginal cost is likely to be with regard pass-through in other markets that will commenters have been able to develop to the final rule. The Bureau believes be affected by the final rule, as a quantitative model to estimate a that providers might treat the providers in different markets are likely specific pass-through rate in markets for administrative costs of the class rule as to face cost and demand curves of consumer financial products and fixed, while the administrative costs for different curvatures. services, the commenters’ view, if true, submission of arbitral and certain court More directly related to the proposal, would not be inconsistent with the records will primarily have a marginal the Study analyzed the effect on prices Bureau’s assumption that pass-through component for each actual submission. of several large credit card issuers will be between 0 and 100 percent. Whether the costs due to additional agreeing to drop their arbitration An industry commenter asserted that compliance are marginal depends on the agreements for a period of time as a part the potential for pass-through of costs to exact form of this spending, but most of a class settlement.1218 The Bureau did consumers must be analyzed by examples discussed above would likely not find a statistically significant effect focusing on individual companies qualify as largely fixed. The Bureau on the prices that these issuers charged facing class actions, not averaging across believes that providers might treat a subsequent to the contract changes, an entire market of consumer accounts. large fraction of the costs of additional relative to other large issuers that did The commenter asserted that individual class litigation as marginal: Payments to not have to drop their arbitration companies facing class actions may be class members, attorney’s fees (both agreements. To the extent that this forced out of business by the additional defendant’s and plaintiff’s), and the cost finding implies low or nonexistent price class action litigation exposure if they of putative class cases that do not settle increases, it could be due to several cannot pass the costs through to consumers and stay in business. The 1212 It is theoretically possible to have a pass- 1215 See, e.g., RBB Economics, ‘‘Cost Pass- Bureau disagrees, as this would ignore through rate of over 100 percent, even without Through: Theory, Measurement, and Potential the issue of pass-through of compliance accounting for strategic effects of competition. Policy Implications,’’ (2014), available at https:// costs incurred by providers that are not These strategic effects tend to drive up the pass- www.gov.uk/government/uploads/system/uploads/ subject to such a suit. As discussed through rate even higher. See, e.g., Jeremy Bulow attachment_data/file/320912/Cost_Pass-Through_ & Paul Pfleiderer, ‘‘A Note on the Effect of Cost Report.pdf. above, the Bureau also believes that it is Changes on Prices,’’ 91 J. of Pol. Econ. 182 (1983); 1216 See Lawrence Ausubel, ‘‘The Failure of important, given the size of the markets Rajeev Tyagi, ‘‘A Characterization of Retailer Competition in the Credit Card Market,’’ 81 Am. at issue, to evaluate cost estimates Response to Manufacturer Trade Deals,’’ 36 J. of Econ. Rev. 50 (1991); but see Todd Zywicki, ‘‘The relative to the number of accounts and Mktg. Res. 510 (1999); E. Glen Weyl & Michal Economics of Credit Cards,’’ (Geo. Mason Sch. of L., Fabinger, ‘‘Pass-Through as an Economic Tool: Working Paper No. 00–22, 2000); Daniel Grodzicki, consumers. More specifically, the Principles of Incidence under Imperfect ‘‘Competition and Customer Acquisition in the U.S. Bureau recognizes that the rule will Competition,’’ 121 J. of Pol. Econ. 528 (2013); Credit Card Market,’’ (Working Paper, 2015), have the greatest impact on those Alexei Alexandrov & Sergei Koulayev, ‘‘Using the available at https://editorialexpress.com/cgi-bin/ providers whose compliance is least Economics of the Pass-Through in Proving Antitrust conference/download.cgi?db_ Injury in Robinson-Patman Cases,’’ 60 Antitrust name=IIOC2015&paper_id=308. robust, as those providers will either Bull. 345 (2015). 1217 See Sumit Agarwal et al., ‘‘Regulating spend more to bring their compliance 1213 In other words, these rates depend on Consumer Financial Products: Evidence from Credit up to an appropriate level to avoid class curvatures (concavity/convexity) of cost and Cards,’’ 130 Q. J. of Econ. 1 (2015); Benjamin Kay liability or are more likely to be subject demand functions. et al., ‘‘Bank Profitability and Debit Card to class liability. The Bureau does not 1214 Some industry commenters asserted that all Interchange Regulation: Bank Responses to the costs of the class provision would be passed Durbin Amendment,’’ (Fed. Reserve Board, Working agree that, to the extent that the pass- through to consumers, but none provided evidence Paper No. 2014–77, 2014), available at http:// or specific figures. Thus, the Bureau’s conclusion www.federalreserve.gov/econresdata/feds/2014/ 1219 See id. (for other caveats to this analysis). See remains that pass through will likely occur, but that files/201477pap.pdf. But see Todd Zywicki et al., also Alexei Alexandrov, ‘‘Making Firms Liable for it cannot estimate whether the level of pass through ‘‘Price Controls on Payment Card Interchange Fees: Consumers’ Mistaken Beliefs: Theoretical Model will be closer to zero or 100 percent. Economic The U.S. Experience,’’ (Geo. Mason L. & Econ., Res. and Empirical Applications to the U.S. Mortgage theory predicts that pass through will be lower in Paper No. 14–18, 2014). and Credit Card Markets,’’ Soc. Sci. Res. Network industries that are less competitive. 1218 See generally Study, supra note 3, section 10. (Sept. 22, 2015).

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through of these costs occurs or that price response observed in the Study accuracy of the information furnished to some individual providers exit the may not reflect the industry-wide level a credit reporting agency or to market, it will substantially restrict of pass-through. investigate disputes of such access to financial products or services C. Potential Benefits and Costs to information. as a whole. Consumers Just as the Bureau is unable to Credit union industry commenters quantify and monetize the investment asserted that the risk or magnitude of Potential Benefits to Consumers that providers would undertake to lower pass-through costs to consumers is Consumers will benefit from the class their exposure to class litigation, the effectively greater for credit unions, rule to the extent that providers will Bureau is unable to quantify and because unlike traditional banks, credit have a larger incentive to comply with monetize the extent of the consumer unions are owned by their members. the law; from the class payments in any benefit that would result from this The Bureau agrees that, at least for any class settlement that occurs due to a investment or particular subcategories credit unions that use arbitration provider not being able to invoke an agreements, this may be true, if of investment, such as improving arbitration agreement in a class disclosures, improving compliance somewhat tautological. In general, a cost proceeding; and, from any new to a firm must either be passed on to management systems, expanding staff compliance with the law consumers training, or other specific activities. The consumers through higher prices or to experience as a result of injunctive relief the owners of the firm through reduced Bureau requested comment on any in a settlement or as a result of changes representative data sources that could profits. To the extent that credit union in practices that a provider adopts in the customers are also owners, such costs assist the Bureau in both of these wake of the settlement to avoid future quantifications, but did not receive any will ultimately fall to consumers one 1221 litigation. In addition, consumers responses. way or another. Nonetheless, given that will benefit from the monitoring rule to the Bureau’s preliminary conclusion the extent that the rule provides The Bureau also believes consumers was only that pass-through was likely transparency into the arbitration will benefit from the reporting greater than zero, and given that most process. requirement via improved monitoring credit unions currently do not use As noted above and in Part VI, the for potential biases in administration of arbitration agreements and so will not primary effect of the rule on consumers arbitration (as was alleged in the case of be affected by the rule, the Bureau’s will be to provide a deterrent against NAF, discussed in Part II above), as well analysis is not meaningfully altered by harmful conduct on the part of as other potential harms in the use of this comment. providers, resulting in additional arbitration agreements. Some Some industry commenters argued investments in compliance. Consumer commenters disputed this, arguing that that pass-through would be especially benefits due to providers’ larger the Bureau’s existing database of high in their specific industry. For incentive to comply with the law are complaints serves as a direct substitute. example, a small dollar lending industry directly related to the aforementioned That is, in their view, the public already commenter argued that profit margins in investments by providers to reduce class has access to consumers’ complaints that industry are so thin that costs litigation exposure. Specifically, about providers, and more information would have to be passed on, or else consumers would benefit from the through the submission of arbitral firms would go out of business. Again, forgone harm resulting from fewer awards is unnecessary. However, the the Bureau acknowledges that full pass- violations of law. A full catalog of how Bureau believes that the monitoring through is possible, but the Bureau all laws applicable to affected products proposal would produce different and believes that even full pass-through will benefit consumers when they are supplemental information that is not impose substantial burden on followed is far beyond the scope of this important. Perhaps most importantly, individual consumers. analysis. However, a few examples of A research center commenter asserted the monitoring provision will provide types of benefits are offered. These the Bureau and the public insight into that large financial services firms adjust benefits could take a form that is easier price more slowly than smaller firms how the arbitration process is serving to monetize—for example, a credit card consumers who enter into it. In and firms in other sectors, and that this issuer voluntarily discontinuing (or not explains the lack of price response from addition, while the Bureau’s complaint initiating) a charge to consumers for a process serves as an effective avenue the issuers studied by the Bureau. The service that generates $1 of benefit to Bureau has no evidence to suggest that through which a consumer can consumers for every $10 paid by complain to a provider, the Bureau does price responses by credit card issuers consumers; a depository institution are so slow that they would not have not adjudicate claims. The Bureau does ceasing to charge overdraft fees with not decide on the merits of a complaint, been captured by the analysis in the respect to transactions for which the Study, and the commenter did not and firms are not required to provide consumer has sufficient funds on any response to consumer complaints provide any evidence to support this deposit at the time the transaction assertion; nor did any credit card issuer submitted through the portal. Absent settles to cover the transaction; or, a settlement by the affected entities, or other provider come forward with lender ceasing to charge higher rates to such evidence, even anecdotally.1220 arbitration features legally binding minority than non-minority borrowers. decisions on the merits of a case by a However, the Bureau acknowledges that Or this could take a form that is harder this is another reason that the lack of a third party that can serve as a means by to monetize—for example, a debt which the public can better understand collector investing more in insuring that 1220 potential areas of non-compliance. The only empirical data any commenters the correct consumers are called and in provided on the issue of arbitration agreements and Consumers will also benefit from pricing was an anecdote from the 1990s where a complying with various provisions credit card issuer offered its existing customers an limiting certain types of contacts and class payments that they receive from APR discount of 2 percent if they accepted a new calls under the FDCPA and TCPA; or, a settlements of additional class actions. arbitration agreement. While little conclusion can creditor taking more time to assure the According to the calculation above, this be drawn from one such dated example, the Bureau benefit would be on the order of $342 notes that in that case, the price difference was not delayed. 1221 See Part VI for a related discussion. million per year for Federal class

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settlements, and an unquantified purportedly attractive features of large for some, or even all, providers amount in State court settlements.1222 arbitration, rather than empirical data that eliminated their arbitration Moreover, as noted above as well, the on actual consumer preferences. In any agreements to make a noticeable Bureau believes that there will also be event, the research center survey difference to consumers in the significant benefits to consumers when concerning class actions focused on a aggregate. settlements include injunctive relief.1223 particular example in a particular In short, if a consumer initiates a This relief can affect consumers beyond market, and its results may not extend formal dispute relating to a consumer those receiving monetary remediation, to other situations in other markets. financial product or service, it is including for example future customers possible that the consumer would fare of the provider or customers who fall Potential Costs to Consumers somewhat better in individual outside of the class action but will stand The cost to consumers is mostly due arbitration than in individual to benefit from the injunctive relief. The to the aforementioned pass-through by litigation.1227 However, in practice, this Bureau is not aware of a consistent providers, to the extent it occurs, as comparison is not material for the method of quantifying the total amounts discussed above and in Part VI. The analysis of consumer benefits and costs of additional injunctive relief from the Bureau does not repeat this general since consumers do not initiate formal approximately 103 additional Federal discussion here. individual disputes involving consumer class settlements per year and a similar A second possible impact could occur financial products or services in notable number of additional State class if some providers decide to remove numbers in any forum: The Bureau settlements.1224 The Bureau requested arbitration agreements entirely from documented hundreds of individual comment on whether the extent of this their contracts, although there is no arbitrations versus millions of benefit, and the associated cost to empirical basis to determine the consumers receiving relief through class providers, could be monetized, and if so proportion of providers that would do actions.1228 how, but did not receive any responses. so, and the Bureau believes it is unlikely The Bureau requested comment on Consumers may also benefit to the that many, if any, providers will do both providers’ incentives to drop extent that they prefer to engage in so.1225 Assuming that some providers arbitration agreements altogether and on disputes through the court system, will remove these agreements, some quantification of consumer benefit or rather than through arbitration. A consumers who can currently resort to cost of individual arbitration over and research center’s comment provided the arbitration for filing claims against above individual litigation. A number of results of its survey which they stated providers will no longer be able to do industry commenters asserted that indicated that 89 percent of 1,008 so if the provider is unwilling to engage providers would drop individual consumers surveyed would like to be in post-dispute arbitration. Conversely, arbitration agreements. able to participate in class actions some consumers who currently cannot Commenters made two points. First, against a bank who had charged them resort to individual litigation will be they asserted that companies subsidized for a fee or services they did not request. able to do so if an arbitration agreement individual arbitration, requiring An industry association comment is removed in toto. significant upfront expenses on filing criticized the research center survey for, As discussed in detail in Part VI, the fees and other costs, for the purpose of among other things, not asking about Bureau continues to believe that the avoiding class action exposure. Thus, in arbitration as an alternative, and several results of the Study were inconclusive their view, it would be unprofitable to industry association comments asserted as to the benefits to consumers of subsidize individual arbitration if the Bureau should survey consumer individual arbitration versus individual companies cannot in turn prevent class preferences for arbitration. The latter, litigation.1226 However, given that the actions. Second, the commenters the Bureau believes, is less relevant Study found only several hundred asserted that the decision to drop given the infrequent use of arbitration individual arbitrations per year arbitration agreements would occur and its potential to continue under the involving consumer financial products because it is not cost-effective to rule. Other industry commenters or services, the Bureau believes that the support a dual-track system of litigation asserted that consumers prefer magnitude of consumer benefit, if any, (on a class or putative class basis) and arbitration, although they only cited the of individual arbitration over individual individual arbitrations. However, this litigation would need to be implausibly reasoning conflicts with available facts. 1222 As noted above, the calculation depends on As discussed above in Part VI many assumptions, and thus there are many reasons 1225 See Part VI for more discussion of this issue. findings, the upfront costs of individual for why this number might be considerably higher 1226 See Study, supra note 3, section 6 at 2. arbitration are likely more than offset by or considerably lower. Existing empirical evidence compiled by scholars the reduced cost compared to litigating 1223 In a market with transaction costs (not subject prior to the Study mainly concerns employment, in court.1229 Thus, even without the to the Coase Theorem), the value of behavioral relief franchisee, and security arbitrations (note that to consumers could be either roughly equal, higher FINRA rules require an option of class action in any ability to block class actions, companies or lower than the value to firms. arbitration agreement). The Bureau does not believe would still have an incentive to retain 1224 One easier quantification to make is in the that these data are necessarily applicable to their arbitration agreements. Further, class settlement analysis in Section 8 of the Study, consumer financial products and services. Even that the Study showed that providers often where 13 percent of the settlements featured evidence is also largely inconclusive. See, e.g., behavioral relief and 6 percent featured in-kind Theodore Eisenberg & Elizabeth Hill, ‘‘Arbitration relief. Accordingly, out of the additional 103 cases, and Litigation of Employment Claims: An Empirical 1227 Similarly, it is possible that the consumer a reasonable quantification is that 13 percent will Comparison,’’ 58 Disp. Resol. J. 44 (2004) (finding would fare somewhat worse in individual feature behavioral relief and 6 percent will feature no statistical differences in a variety of outcomes arbitration than in individual litigation. in-kind relief. As noted above, while the Study between individual arbitration and individual 1228 If anything, the Study showed considerably quantified $644 million of in-kind relief, that litigation). See also Peter Rutledge, ‘‘Whither more individual litigation (in Federal and in small number is included in relief, but not in payments Arbitration?,’’ 6 Geo. J. of L. & Pub. Pol’y 549, at claims courts) than individual arbitration. See in the Study, and the Bureau continues to follow 557–9, (2008) (discussing several studies that generally, Study, supra note 3, sections 5 and 6. this approach here, both for the calculation of costs compared outcomes in individual arbitration and 1229 Some commenters asserted that the cost to providers and benefits to consumers. Similarly, individual litigation, typically showing comparable savings were less significant compared to small as noted above, the Study did not include promises outcomes in the two fora). The Bureau notes that claims court. However, a large portion of the to obey the law going forward as specific enough these and other similar comparative studies should arbitration claims in the Study were for amounts to count toward behavioral relief, suggesting that be interpreted carefully for reasons stated in the exceeding the small claims court limits in many injunctive relief overall is likely higher. Study. See Study, supra note 3, section 6 at 2–5. States, so this comparison is not entirely apt.

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do not invoke arbitration agreements in providers must submit records redacted monetized. Specifically, the calculation individual lawsuits,1230 and thus of certain personal identifiers, the predicts approximately one additional providers are already operating in such Bureau will take the primary Federal class settlement and about three a dual-track system. In addition, since responsibility, prior to publication, for putative Federal class cases over five most individual firms do not face even redacting any additional information years involving depositories below the one arbitration claim in any given year, needed to minimize the risk of re- $10 billion threshold after the class rule it seems unlikely that firms are paying identification.1232 The Bureau has takes effect. substantial fixed costs to maintain an extensive experience in redacting such However, there might be other ways individual arbitration program nor did information from its consumer in which impacts on smaller depository commenters submit evidence to the complaints database. With regard to the institutions, and smaller providers in contrary. Thus, the Bureau lacks first argument, the Bureau is not aware general, would differ from impacts on sufficient information to determine that of any evidence that consumers who are larger providers. The Bureau describes most providers would drop arbitration particularly privacy sensitive currently some of these in this Section 1022(b)(2) agreements altogether rather than seek out arbitration to handle formal Analysis. adopting the Bureau’s language if the disputes. One possibility might be that the rule is finalized as proposed. D. Impact on Depository Institutions managers of smaller providers A third possible cost to consumers With No More Than $10 Billion in (depository institutions or otherwise) could arise if, as discussed above, some Assets are sufficiently risk averse, or generally providers decide that a particular sensitive to payouts, such that putative feature of a product makes the provider The prevalence of arbitration class actions have an in terrorem effect. more susceptible to class litigation, and agreements for large depository To the extent this occurs, small therefore decide to remove that feature institutions is significantly higher than providers may settle any such that for smaller depository from the product. A provider might 1233 additional lawsuits for more than the make this decision even if that feature institutions. Moreover, while more expected value of an award if the case is actually beneficial to consumers and than 90 percent of depository were likely to be certified as a class case does not result in legal harm to institutions have no more than $10 and go to trial. However, the Study consumers. In this case, consumers billion in assets, about one in five of the found that it is most common for class would incur a cost due to the provider’s class settlements with depository action settlements to be reached before over-compliance with respect to this institutions in the Study involved a court has certified a case as a class depository institutions under this particular decision. The Bureau is not case. Moreover, as noted above, the threshold (approximately one class aware of any data showing this amount of any such settlement should settlement per year). The magnitude of theoretical phenomenon (over- be lower for smaller providers given the these settlements, measured by compliance) to be prevalent among smaller magnitude of the case and the payments to class members, was also providers who currently do not have an lower number of consumers affected. In considerably smaller than settlements arbitration agreement or any reason to addition, as noted above, the Bureau with institutions above the threshold: believe this would be likely among estimates the number of additional class The aggregated documented payments providers who will be required to forgo lawsuits in general against small to class members from all cases that using their arbitration agreement to depository institutions to be extremely involve depository institutions with less block class actions. The Bureau than $10 billion in assets was under $2 low. In particular, the Bureau believes requested comment on the extent of this million over the five years analyzed in that out of the 312 cases (over five years) phenomenon in the context of the the Study. Similarly, while the that are used for the estimates of the proposal but did not receive any impact on the number of Federal class 1231 requirement that providers using pre- responses. dispute arbitration agreements submit settlements, about one Federal class A nonprofit commenter and some certain records relating to arbitral settlement per year involved smaller industry commenters posited a fourth proceedings to the Bureau will, in institutions (either depository or non- possible cost to consumers, arguing that relative terms, cost more for a small firm depositories) paying over $1,000,000 to consumers value the private nature of than a large firm, given the small class members. individual arbitration, and that the number of overall arbitral proceedings, There is a significant amount of monitoring provision of the rule could and the smaller relative likelihood of a academic finance literature suggesting compromise this. These commenters small depository entity invoking an that management should not be risk also asserted that consumers’ private arbitration agreement, this cost will not averse, unless the case involves a financial information could be released possibility of a firm going bankrupt in be disproportionately borne by smaller 1234 as a result of this provision if the entities. Additionally, even if a small case of a loss. However, arbitral records are made public and depository entity would need to submit management of smaller providers, consumers are re-identified using public records of arbitral and certain court regardless of whether they are information. Taking the second proceedings to the Bureau, the overall depository institutions, might be more argument first, the Bureau notes that administration cost burden, as stated risk averse because their shareholders or several measures will sufficiently above, is relatively small. owners might be less diversified. reduce re-identification risk. While Thus, using the same method The bargaining theory literature discussed above to estimate additional generally suggests that the party with 1230 Study, supra note 3, section 1 at 15. class settlements (and putative class deeper pockets and relatively less at 1231 Some commenters made a general assertion cases) among depository institutions stake will be the party that gets the most that the rule would stifle innovation. Although 1235 somewhat related, innovation of new products and with no more than $10 billion in assets out of the settlement. It follows that services is not the same thing as the over- suggests that the final rule will have 1234 ´ compliance phenomenon described here. In any practically no effect that could be See, e.g., Clifford Smith & Rene Stulz, ‘‘The event, as described above in Part VI (the findings), Determinants of Firms’ Hedging Policies,’’ 20 J. Fin. the Bureau believes the rule is as likely to suppress & Quantitative Analysis 391 (1985). harmful innovations as those beneficial to 1232 See § 1040.4(b)(5). 1235 More generally, economic theory suggests consumers. 1233 See generally Study, supra note 3, section 2. that the side that is more patient is going to get a

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smaller defendants might fare worse in businesses. It is possible that consumers the Section 1022(b)(2) Analysis that it terms of the settlements relative to their might experience temporary access also considered them in that context. larger peers, all else being equal. concerns if their particular provider The Bureau discusses potential However, from anecdotal evidence, the were sued in a class action. These alternatives further here, both in general Bureau believes that, if the smaller concerns might become permanent if and in light of comments received defendants are sued at all, they are such litigation significantly depleted the regarding potential alternatives.1237 likely to be sued by smaller law firms. provider’s financial resources, Commenters suggested and the Bureau This could equalize bargaining power potentially resulting in the provider considered four general classes of (as a smaller law firm might not be able exiting the market. potential alternatives to the proposed to afford to be too aggressive even in a Of course, the incentive for a class class rule: (1) Measures to increase single proceeding) or tilt bargaining counsel to pursue a case to the point consumer choice with respect to power more to a smaller defendant’s where it would cause a defendant’s entering into arbitration agreements; (2) side relative to their larger peers bankruptcy is low because this would measures to improve consumers’ access defending against larger law firms. leave little or no resources from which to and the conduct of individual Finally, given the considerably lower to fund a remedy for consumers in a arbitrations; (3) an exemption from the frequency of class litigation for smaller class settlement or any fees for the class proposed class rule for potentially providers, it is possible that it is not counsel and could make the process actionable conduct that providers report worth the cost for smaller providers to longer. In addition, the potential to regulators; and (4) an exemption from invest in lowering class litigation consumers of this provider presumably the rule for small businesses.1238 The exposure. This might also explain the have the option of seeking this fourth alternative, because it relates to relatively lower frequency of arbitration consumer financial product or service small entities, is discussed in more agreement use by smaller depositories. from a different company that is not detail in the FRFA in Part IX below. facing a class action, and thus a Beyond these general classes of E. Impact on Rural Areas bankruptcy scenario is substantially potential alternatives, commenters Rural areas might be differently more of an issue for the particular suggested other limitations to the class impacted to the extent that rural areas provider affected than for the provider’s rule, which the Bureau has discussed in tend to be served by smaller providers, customers. Moreover, especially given Part VII. Some commenters suggested as discussed above with regard to the low prevalence of cases against exempting claims under specific depository institutions with less than smaller providers outlined above and statutes, discussed in Part VI and Part $10 billion in assets and below with the amounts of documented payments VII,1239 while others raised the regard to providers of all types that are to class members, the Bureau does not possibility of excluding arbitration below certain thresholds for small believe that out of the Federal class agreements from the class rule if they businesses. In addition, markets in rural settlements analyzed in the Study, many allow for class arbitration.1240 Some areas might also be less competitive. settlements threatened the continued Economic theory suggests that less existence of the defendant and the 1237 The proposal also discussed the potential for competitive markets would have lower resulting access to credit or other a total ban on the use of arbitration agreements. pass-through with all else being equal; Consumer advocate commenters generally urged consumer financial products or services. that option as an alternative to the individual therefore, if there were any price A Congressional commenter also monitoring proposal, as discussed in Part VII above. increase due to the proposal, it would stated his view that the class rule would In any event, as compared to the class rule, such be lower in rural areas.1236 likely cause financial institutions to an approach would not reduce burden as explained increase their cash reserves held to in the proposal. 81 FR 32830, 32921 (May 24, 2016), F. Impact on Access to Consumer and the Bureau does not discuss it further here. mitigate litigation risk. The commenter Financial Products and Services 1238 Some commenters that suggested a small stated that this increase in cash reserves, entity exemption requested that this exemption Given hundreds of millions of in turn, could reduce the amount of cover the monitoring proposal as well as the class accounts across affected providers and cash that institutions have available to rule. The Bureau discusses this potential alternative the numerical estimates of costs above, lend to consumers and small businesses, in the FRFA, below. 1239 For discussion of claims under statutes the Bureau expects the additional or to invest in technology upgrades and providing for statutory damages or attorney’s fees marginal costs due to additional Federal employee retention. The commenter generally, see Part VI (Bureau findings that the class class settlements to providers to be referred to this effect as creating ‘‘dead rule is warranted for these claims). For further negligible in most markets. Each of the discussion of claims under the Credit Repair capital.’’ To the extent that financial Organization Act (CROA) in particular, see the product markets affected has hundreds institutions self-insure in this fashion, section-by-section analysis of § 1040.3(a)(4) above of competitors or more. Thus, the the Bureau does not believe it will (Bureau decision not to exclude providers Bureau does not believe that this final substantially impact consumers’ access potentially subject to these claims from coverage). rule will result in a noticeable impact A nonprofit commenter criticized EFTA ATM to credit, as the overall costs of the rule ‘‘sticker’’ class actions and stated these cases on access to consumer financial are small relative to the size to the demonstrate that the rule should exclude claims products or services. relevant markets. under statutes that do not explicitly authorize class The Bureau does not believe that remedies. Yet the Bureau notes that EFTA does access to consumer financial products G. Potential Alternatives Considered by provide for class remedies in 15 U.S.C. or services will be diminished due to the Bureau in Lieu of the Class Action 1693m(a)(2)(B), and in any event, the EFTA ATM Rule ‘‘sticker’’ requirements have been repealed, as noted effects on providers’ continued viability in Part VI above. To the extent the commenter was or, as discussed below in Part IX, due In developing the proposal and the asserting that statutes authorizing statutory damages to effects on providers’ access to credit final rule, the Bureau considered several in individual actions provide sufficient deterrence without allowing for class actions under Federal to facilitate the operation of their potential alternative approaches in light Rule 23 of the Federal Rules of Civil Procedure, this of whether these potential alternatives comment is addressed in Part VI above, which finds better deal, all else being equal. For the canonical would achieve the goals of the that application of the rule to class actions, economic model of bargaining, see Ariel rulemaking with less burden on including those seeking statutory damages, is in the Rubinstein, ‘‘Perfect Equilibrium in a Bargaining public interest and for the protection of consumers. Model,’’ 50 Econometrica 97 (1982). industry. The Bureau discussed some of 1240 One industry commenter and an individual 1236 See Weyl and Fabinger, supra note 1212; these potential alternatives in the IRFA commenter suggested the Bureau examine class Alexandrov and Koulayev, supra note 1212. included in the proposal, and noted in Continued

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other potential alternatives suggested by this is because this information is entering into an arbitration agreement if commenters would be infeasible or in generally not reliably available at the they wish to, remedying this problem conflict with the goals of the outset of a case. The size of the class would not be sufficient to correct the rulemaking, such as excluding often is not determined until the market failure which is the focus of this consumers from participating in a class settlement approval and administration rulemaking. Increased information and action unless they have exhausted process. Finally, in most consumer choice about arbitration agreements informal dispute resolution 1241 or protection statutes that allow for cannot increase consumers’ knowledge excluding class claims where the recovery of attorney’s fees, the rules for of their claims, change the small value attorney did not state the fees sought attorney’s fees do not specify a cap. The of the claims, or reduce the effort would be below a certain amount, Bureau believes there would be little consumers must exert to pursue these discussed in more detail immediately basis for identifying a generic cap that claims in a way that would render them below. would apply across all cases that are positive value, and thus address the For these reasons, and for the reasons impacted by this rule. For these reasons, market failure.1243 Class actions, in discussed below for the other potential this policy option seems infeasible. contrast, take these net negative costs, centralize them with one entity already alternatives, the Bureau concludes that Potential Alternatives Involving familiar with the legal process who none of these potential alternatives Disclosure, Consumer Education, Opt- pursues the claim, and distributes net would accomplish the goals of the class In, or Opt-Out Requirements rule of promoting more effective proceeds if the valid claim provides a compliance and remediation for non- Several industry commenters net positive return. Consumers who are compliance with laws providing for a suggested that instead of prohibiting class members need to expend virtually private right of action applicable to firms from using pre-dispute arbitration no time in this process. The class covered consumer financial products agreements to bar class actions, the attorneys may pass their fees on to and services, while minimizing any Bureau should instead require firms to consumers, but even when doing so, significant burden on providers. give consumers more choice regarding that does not render the claims net One Member of Congress suggested whether and how they enter into negative; consumers still receive the Bureau consider limiting the arbitration agreements. These proposals positive payout amounts after percentage of attorney’s fees that an took a variety of forms, including accounting for legal fees, with little or attorney can demand ‘‘in a lawsuit.’’ requiring firms to allow consumers to no expenditure of their own time or However, the Bureau does not believe either to opt in to or opt out of pre- money. that lawsuit complaints typically state dispute arbitration agreements, a None of the commenters that the amount of attorney’s fees sought. mandated disclosure of the existence suggested these potential alternatives Thus, such an alternative would amount and details of an arbitration agreement, articulated how the proposed to introducing a new pleading and consumer education initiatives. alternatives would accomplish the requirement on consumer class actions The Bureau discusses its concerns Bureau’s goals.1244 As such, the Bureau or a cap on the fees that could be with each of these variations in turn believes that none of the suggested awarded at the settlement stage— below. However, the fundamental alternatives aimed at improving something that is the province of problem with this class of potential consumer choice will achieve the goals alternatives is that it does not address 1245 Congress and the courts and would not of the rulemaking. the market failure that the rulemaking is be appropriate for the Bureau to With respect to the specific intended to address—the fact that regulate. Moreover, the Bureau does not alternatives suggested, the Bureau consumers often lack awareness that believe information needed to estimate received some comments that suggested they have a legal claim and, moreover, the attorney’s fees sought is reliably that when they are aware of such 1243 available at the outset of a case. As the Indeed, the value of the time necessary for claims, many are negative-value claims consumers to learn about the arbitral process, learn Study showed, the dollar value of that cannot practicably be pursued in enough about consumer law to understand when consumer harm and the size of the class they have a valid claim, and finally initiate and any formal dispute resolution forum are rarely pleaded in consumer class pursue the arbitral process to completion will likely (whether litigation or arbitration) on an complaints.1242 The Bureau believes often exceed the value of the claims discussed in individual basis. Both of these factors the market failure section. A common way to reduce firms’ incentives to comply with measure the value of consumers’ time is using their arbitration as a potential alternative to the class wages. At the 2015 U.S. median wage of $17.40, a rule. The industry commenter stated that the laws (and thereby correct the market process requiring several hours of time will be more consumers might be able to receive higher failures the laws were enacted to costly than forgoing a claim with expected value of recoveries in class arbitration, but recognized the address). $100 or less. ‘‘little or no data available,’’ and did not explain Moreover, because the market failure 1244 One industry commenter stated that its why consumers might be able to receive higher identified in this rule relates to what proposed alternative would allow consumers to recoveries. This is discussed in detail in the choose for themselves whether they prefer section-by-section analysis of § 1040.4. happens when a claim does arise (and arbitration or litigation. As noted above, consumers’ 1241 Two industry associations suggested that the the consequences for compliance and preferences over the forum for individual dispute Bureau allow arbitration agreements to block remedies), it cannot be ameliorated by resolution are not the focus of the rulemaking—the consumers from participating in class actions increasing consumers’ knowledge and market failure in question is a problem of collective unless they had exhausted an internal dispute action. Other commenters simply said that the resolution process. This approach, however, would understanding ex ante of entering into Bureau should have considered the suggested not only make it more difficult for consumers who arbitration agreements before these alternative without further explanation. recognize that they have been harmed to obtain claims arise. The weak individual 1245 The Bureau is in general concerned about legal relief to which they are entitled, but would incentives for consumers to pursue consumer awareness of contract terms and the foreclose relief on behalf of consumers who do not ability of consumers to make informed choices recognize that harm has occurred. Even if such a these claims lead to weakened about consumer financial products and services. system would result in equal amounts of redress for incentives for firms to comply with the Several industry commenters have noted certain consumers who recognize their injuries, the Bureau law. While the Study revealed that public statements about transparency and consumer believes it would result in far less deterrent effect many consumers lack awareness of choice in the context of arbitration agreements. and therefore produce far less benefit than the final Nonetheless, as the rulemaking record reflects, the rule. arbitration agreements, and it is likely lack of transparency and choice regarding pre- 1242 See Study, supra note 3, section 6 at 15 n.36 true that consumers are rarely able to dispute arbitration agreements is not the rationale and 23 n.42. make an informed choice to avoid for the class action provision of the final rule.

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the rule could mandate opt-out compliance decisions, nor did possible future consequences of entering agreements that could allow consumers commenters suggest that they would. into an arbitration agreement. In to remove themselves from the Further, a number of providers in support, these commenters cited to the obligation to pursue individual markets for consumer financial services Bureau’s lack of consumer education on arbitration in lieu of participating in a used opt-out agreements in the course of arbitration and the Bureau’s support of class action.1246 One credit union adopting their current arbitration improved disclosure in other contexts. industry commenter argued that agreements, but the Study showed that The Bureau’s primary focus in this consumers should have this opportunity very few consumers are aware whether rulemaking, however, is not the problem as a right, while a credit union trade they have arbitration agreements in their that improved disclosure purports to fix. group also promoted it under the rubric contracts. This suggests that such Thus, the market failure this rule seeks of providing consumers with more regimes are subject to many of the same to address would remain even if the choices. Another industry commenter awareness and effectiveness issues Bureau mandated the best possible form offered that opt-outs make sure discussed below with regard to of disclosure proposed by some consumers are not ‘‘forced’’ into disclosures. commenters, including, among other arbitration. An industry trade Furthermore, even if the Bureau’s features, plain language and large, clear association commenter, under similar goals in this rulemaking was to enhance fonts on pages separate from the rest of logic, maintained that the Bureau did informed consumer decision-making the financial contract, coupled with not adequately consider the potential of with respect to the potential risks and increased consumer education efforts a combination of consumer education benefits of entering into adhesion (whether by the providers, regulators, or and opt-outs. Another industry trade contracts that contain arbitration both). Moreover, as discussed in Part VI, association commenter argued that agreements, there is reason to doubt that above, the disparity in numbers between knowledgeable consumers might choose mandated opt-out provisions would be the few hundred consumers who not to opt out because they decide that effective in promoting informed currently pursue individual claims in arbitration is superior to individual or consumer decision-making, even if arbitration and the tens of millions class action litigation. Finally, an coupled with consumer education or annually who are part of a putative class industry commenter and a research improved or additional disclosures. makes it difficult to imagine that any center cited an example from the 1990s Although there is limited evidence kind of information intervention could where a provider offered a price specific to the context of arbitration, bridge the difference. discount to existing customers who there is extensive academic literature In any event, there is reason to doubt chose not to opt out of a new arbitration showing that consumers frequently do that disclosures would be very effective agreement. These commenters suggested not opt to leave a default option, even in raising consumer awareness, even that this could allow consumers to if it would be advantageous for them to coupled with consumer education or choose what is more important to them: do so.1248 In this respect an opt-out mandated opt-out provisions. The Study Price or non-arbitration dispute options. regime would only marginally increase indicated that current consumer For many of the same reasons already firms’ class action exposure relative to understanding of arbitration agreements discussed, the Bureau believes that the status quo.1249 The commenters that is low.1251 The Bureau believes that requiring opt-out arrangements would suggested that mandatory opt-out even with the most effective disclosures not meet the objectives of the proposal provisions did not provide any evidence and education it is unlikely that many because they would not alleviate the that consumers would be any more consumers could, at the outset of a market failure that the class rule seeks likely to opt-out of arbitration customer relationship, anticipate that to address. Opt-out agreements will not agreements, compared to opt-outs in the provider will act unlawfully not make consumers aware they have a legal other contexts, offering only that only to the consumer but to a putative claim in the future, nor will such consumers sometimes take advantage of class, and accurately assess the value of agreements make negative-value claims existing opt-out provisions.1250 these dispute-resolution rights in a worth pursuing. The timing of decisions In a related series of comments, hypothetical future scenario.1252 becomes a factor as well—consumers industry commenters, trade associations generally choose whether to be part of and a nonprofit commenter also 1251 Despite contract language and placement that an arbitration agreement at the outset of suggested that the Bureau mandate new is not dramatically different from that of other their customer relationship, while firms disclosures to accompany arbitration contract provisions. 1252 See Study, supra note 3, section 3 at 16–23. make compliance decisions continually agreements that block class actions as an Two individual commenters suggested the rule over time.1247 As such, there is no alternative to the class rule. These could mandate opt-in arbitration agreements that reason to believe that opt-out provisions commenters focused on the problem of could be used to block class actions only for would materially influence firms’ lack of consumer awareness about the consumers who actively consented to be a part of that agreement. Neither commenter seemed to envision that many consumers would actually opt 1246 In an opt-out agreement, the default for 1248 See Stefano DellaVigna, ‘‘Psychology and in. An industry commenter suggested that the rule consumers is that they would be subject to the Economics: Evidence from the Field,’’ 47 J. Econ. should allow companies to offer either opt out or arbitration agreement if they become a party to the Lit. 2 (2009) (for a review of this literature). opt in. A State attorney general commenter noted contract. However, the provider would allow 1249 For instance, auction site eBay engineered its that consumers generally lack awareness of opt-out consumers to ‘‘opt out’’ of the arbitration agreement opt-out provision specifically as a means of regimes, and also observed opt-in regimes are fair so that that part of the contract would not apply to shielding the company from class action liability, and reasonable but did not actually suggest that the them. If the arbitration agreement could be used to and achieved a very low opt-out rate. Ted Frank, Bureau adopt such a rule. Because the Bureau block a class action, only those consumers who ‘‘Class Actions, Arbitrations and Consumer Rights: believes that it is unlikely that many consumers opted out would be able to file or participate in a Why Concepcion is a Pro-Consumer Decision,’’ MI would actively opt in to a pre-dispute arbitration class action. Any class settlement would not apply Report (Feb. 19, 2013). One commenter cited this agreement absent inducement, in principle such an to those consumers who did not take the affirmative report as an example of consumers being happy alternative could achieve much of the benefits of step to opt out of the arbitration agreement. with arbitration clauses, an argument that is at odds the final rule. However, the Bureau believes that 1247 An exception would be if firms add an with the source material. consumers will face the same difficulties in making arbitration clause to their existing contracts and 1250 The Bureau acknowledges that mandatory an informed decision to opt in as they would to opt notify consumers of the opportunity to opt out at opt-in or opt-out policies have been set by out. The Bureau is also concerned that providers that time. Even then, the provider’s compliance regulation in consumer financial regulation, most would raise prices and offer equivalent small decisions are made over time after the opportunity notably Regulation E’s opt-in regime for overdraft incentives to induce consumers to opt in. Because to opt out. services. 12 CFR 1005.17(b). Continued

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In sum, the Bureau believes it is claims, this would be several orders of However, although the commenters unlikely that firms would be able to magnitude more than firms currently pointed to examples of these types of implement an opt-out program that is face. A thousand-fold increase in policies in existing agreements, they did effective at enabling informed choices. individual arbitration claims could be not identify evidence that consumers But more importantly, as noted above, a more expensive to defend against than actually pursue individual arbitration lack of consumer awareness and choice class actions. Moreover, even under more often in response to the presence regarding pre-dispute arbitration clauses ideal circumstances individual of such clauses, nor is the Bureau aware is not the market failure that the rule is arbitration is not suited to providing of any. trying to address, and even without the prospective conduct relief.1253 As with the cost-reducing options problems detailed above, disclosures or That being said, the Bureau believes discussed above, the Bureau notes that opt-in/opt-out provisions will not that reducing the costs of individual conditionally increasing the payout to address the market failure of insufficient arbitration, while a laudable goal, would consumers from individual arbitration deterrence. not increase demand for individual will not make consumers aware that Potential Alternatives Involving arbitration enough to provide a they have a claim if they were not Features of the Arbitration Process deterrent that would substitute for class otherwise aware. Moreover, and for action exposure. First, improved access similar reasons as in the discussion Some commenters suggested to individual arbitration does nothing regarding statutory damages in Part VI alternatives aimed at making individual for consumers who are not aware that (whether providing for minimum arbitration easier, cheaper, or more they have a legal claim. Second, the desirable to consumers. These included recovery or punitive damages), the Bureau notes that many of the features Bureau disagrees that the additional proposals intended to lower the costs of suggested by commenters are already arbitration, reduce barriers to entry, or incentives would be large enough to relatively common in arbitration persuade large numbers of consumers to increase the potential value of agreements,1254 yet the Bureau’s Study consumers’ claims. The premise of these pursue claims that they are aware of and showed that there were few individual that today they decline to pursue. In alternatives is that small dollar claims claims filed in arbitration. This suggests would be easier for consumers to order for these incentives in arbitration that there is a systemic limit to what agreements to make an impact, prosecute as a result of these changes, consumers acting on their own will be the demand for individual arbitration consumers must both be aware that they willing or able to do to address their have a claim and believe an otherwise would increase, and class action concerns, even when they are aware of litigation would not be necessary. small claim also presents a meaningful a problem and have access to a low-cost Specifically, the commenters opportunity for additional recovery. As means of pursuing redress. suggested that the Bureau mandate that to the latter, the Bureau does not believe providers incorporate certain features The Bureau also considered, in these contract awards meaningfully into their arbitration agreements such as combination with the cost-reducing increase the expected value of claims at advancement of filing fees and legal potential alternatives discussed above, the time consumers decide whether to costs to consumers when they bring a an intervention suggested by an pursue them. First, consumers must claim; improving consumers’ knowledge industry commenter and a nonprofit evaluate the potential likelihood of an and understanding of the arbitration commenter that, in their view, would arbitrator finding in their favor. Second, process for purposes of enabling them to increase the perceived value of claims they must condition their expected file a claim in the event of a dispute; brought in individual arbitration. additional payout on the likelihood that requiring easily accessible venues for Specifically, commenters suggested that the firm will provide a settlement offer arbitrations such as online forums and the Bureau mandate that arbitration before judgment. Third, they must online filing of documents; and agreements include clauses that provide evaluate the likelihood that the firm will providing for rapid adjudication. These for some additional payment to provide a settlement offer lower than features all would, in the view of the consumers in cases in which four the payout that might in the future be commenters, lower the costs of entry to conditions are satisfied: A company awarded by the arbitrator. Thus, any arbitration, so that fewer claims are makes a settlement offer to the supplemental payout is contingent on negative-value claims. For purposes of consumer, the consumer rejects the decisions made by the consumer, the this analysis, the Bureau considers all of offer, an arbitrator makes an award in firm, and the arbitrator, and the actual these cost-reducing alternatives jointly favor of the consumer, and the award expected supplemental payout is the as one alternative. provides for relief that exceeds the value of that supplemental payout times As an initial matter, even if demand amount of the settlement offer. The these three separate probabilities, since for individual arbitration increased premise of this intervention is that it a specific contingent outcome must enough to be as strong a deterrent to would shift the balance of costs and occur in each of the conditions. That illegal behavior as class action litigation, benefits for consumers with a claim, expected award, as it is a factor of it is far from clear that this would increasing the demand for arbitration. several values less than or equal to one, reduce the burden to industry as is likely to be very small and difficult compared to the class rule. The Study 1253 In principle, a firm might change its general to accurately estimate. Because the practices in the face of a large number of successful found only a few hundred claims arbitration claims. In practice, a firm is likely to resulting expected payout will still be related to consumer financial products have a substantial number of informal complaints small, it is unlikely that a low filed each year by consumers, compared about a practice, either made to the firm’s customer probability of a supplemental payment to millions who were part of a putative service or through other venues such as the will make an otherwise negative-value class. Even if only a small fraction of Bureau’s complaint database, well before any large number of individual arbitration claims accrue. The claim positive even for a risk-neutral affected consumers filed arbitration Bureau believes it is unlikely that there are a consumer. This expected payout is also substantial number of firms that would voluntarily only considered by the subset of of the difficulty in making an informed decision to change their practices in response to a large volume consumers who understand they have a opt in or opt out of pre-dispute arbitration of arbitrations but would not already do so in agreements, such incentives might have sufficient response to the previous volume of informal pursuable claim. Thus, the Bureau does take-up to effectively shield providers from class complaints. not believe that conditional contract action exposure, undermining the goals of the rule. 1254 Study, supra note 3, section 2 at 31. awards would increase the demand for

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arbitration beyond the other options well as follow-on class actions that in exemption for self-reporting envisioned already described above, which also are the commenters’ view are unnecessary by the commenters is problematic as insufficient to replace class actions for when public enforcement has already well. The commenters seem to intend the reasons discussed above. resolved the problem. that a self-report of any conduct The Bureau acknowledges that public involving any potential legal claims to Safe Harbor for Conduct Reviewed by, enforcement can be more efficient than any regulator would suffice to trigger or Self-Reported to, Government private actions at achieving redress for the safe-harbor. However, the Bureau Regulators consumers, compared to private actions. believes this level of flexibility would in The Bureau generally considered However, as discussed in Part VI above, practice undermine the goals of the potential alternatives related to public due to resource constraints and limits rulemaking, effectively giving the enforcement in the proposal, but on legal authority there are a number of provider an option for drastically received comments only on one reasons that a regulator may not pursue reducing the deterrent effect of class particular potential alternative.1255 an action, or may achieve less than full actions by terminating private claims Three industry commenters and their redress, in spite of the merits of the that could not legally or practicably be trade associations urged the Bureau to underlying claims. This may brought by the agency that receives the adopt a safe harbor or exemption from particularly occur for violations with self-report. Providers could choose to the class rule for conduct that has been relatively low aggregate harm, as a report a violation to a regulator that reviewed by, or been self-reported to, regulator should reasonably prioritize a does not enforce the relevant law, does government regulators as promoted by case with harm to thousands of not have jurisdiction, or does not the Bureau’s Bulletin on Responsible consumers over one with harm to prioritize enforcement of that law. For Business Conduct.1256 Under this hundreds, even if consumers in both instance, the final rule will apply to all potential alternative, the class rule groups suffer equal individual harm. In financial institutions, but pursuant to would not apply to a class action addition, regulators are only authorized Dodd-Frank section 1026 the Bureau concerning such conduct. As a result, an to bring certain types of legal claims. As does not have enforcement authority arbitration agreement could be used to such, providing a broad safe harbor for over depository institutions with assets block such a class action. conduct self-reported to or investigated of $10 billion or less and its supervisory These comments stated that this by public regulators would undermine authority with respect to such potential alternative would reduce the goals of the rule by removing the institutions is limited to information firms’ exposure to unmeritorious cases deterrent effect of class actions for such gathering, and would be unable to act because unlike class action attorneys, claims that public regulators cannot on a self-report from such an entity. public regulators bring more meritorious bring or reasonably prioritize. Similarly, it is possible that a provider cases. These commenters also stated Even if this were not true, the Bureau facing a class action in State court consumers would benefit more because believes that the safe harbor articulated regarding treatment of a class of public regulators achieve more by the commenters would be infeasible consumers in that jurisdiction could meaningful relief for consumers than in practice. Below the Bureau describes report to that State’s regulator only upon class action attorneys, and do not charge the problems with implementing the receiving the lawsuit, effectively their attorney’s fees to providers. potential alternative suggested by the removing its national liability in the Accordingly, in the commenters’ view, commenters. The Bureau also process. It is also possible that a as long as a public regulator is aware of considered a more limited version of a provider could report a violation to a an issue, there is no need for class safe-harbor for self-reporting, described regulator with a mission that is actions. below, but concludes that this would primarily focused on its safety and The commenters further argued that not provide a substantial reduction in soundness and not on the protection of this alternative would address the burden, and would also be inconsistent consumers. market failure this rule seeks to address with the goals of the rule. Given the difficulties with a broad (reduced incentive to comply with the Considering the version of the exemption for conduct self-reported to law) because it would not allow potential alternative proposed by regulators, the Bureau also considered a arbitration agreements to eliminate commenters, the essential problem is more limited potential alternative. exposure. Rather, it would only allow that the mechanism to trigger the safe Specifically, the Bureau considered a companies to eliminate class exposure if harbor is unworkable. To begin with, safe-harbor for conduct violating a they were willing to create public allowing a safe harbor to be raised in Federal consumer financial law (FCFL) enforcement exposure (by self-reporting) private litigation for conduct that is the enforced by the Bureau against the or already are subject to public subject of a regulatory investigation is reporting person, which is reported to enforcement exposure (by virtue of a incompatible with the procedures of the Bureau. This potential alternative 1257 regulatory review of their conduct). The such investigations. The broad would avoid the issues discussed above commenters also asserted that the that make the version proposed by 1257 alternative would accomplish the In order for a provider to invoke the commenters infeasible. Confidential Bureau’s goals with a reduced burden suggested safe harbor, the regulatory action and its scope would have to be disclosed to the court in investigations would not be implicated, because providers would be able to the motion to compel arbitration. However, it is and the Bureau would have legal block class actions which assert non- difficult to understand how a provider could authority to pursue an enforcement meritorious claims that public accurately describe the scope of a regulator’s action if warranted. However, the enforcement was not willing to assert, as investigation to a court, as regulators do not typically explain the full scope of their Bureau’s practical ability to pursue investigations to the targets of those investigations. enforcement actions would still be 1255 81 FR 32830, 32922 (May 24, 2016). Nor would it be appropriate to put the regulator in subject to resource and prioritization 1256 Bureau of Consumer Fin. Prot., ‘‘Responsible the position of providing information about its Business Conduct: Self-Policing, Self-Reporting, confidential investigations in the context of a constraints. Moreover, in light of the Remediation, and Cooperation,’’ CFPB Bulletin, No. private lawsuit. This would further place a strain 2013–06 (June 25, 2013) (calling upon companies to on their limited resources and thus may interfere the investigation. In many cases this confidentiality take responsible conduct including ‘‘promptly self- with their enforcement priorities. Further, the is required by statute. Thus, the Bureau does not report[ing] to the Bureau when [they] identif[y] investigations of many regulators besides the believe that it would be feasible for a safe-harbor potential violations’’). Bureau are confidential to preserve the integrity of to be based upon ongoing investigation activity.

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more limited scope of the safe harbor, harm, even if an action would be promote the goals of this rulemaking. the Bureau believes that this narrower justified in a world with unlimited And while the Bureau has considered a safe-harbor would not provide a resources. The proposed safe-harbor narrower alternative that might be more substantial reduction in burden to would thus block class actions with workable as a practical matter, that providers, while at the same time limited countervailing risk of public alternative does not appear likely to harming the goals of the rule by enforcement, lowering deterrence. In reduce burden without compromising reducing deterrence for some violations contrast, for violations with large the ability of the rule to provide of FCFLs. aggregate harm, a self-report would also deterrence for certain violations, and Specifically, the Bureau believes that increase the likelihood of public thus also seems unlikely to accomplish a safe harbor for conduct reported to it enforcement by the Bureau, perhaps the Bureau’s goals. might decrease but would not minimize substantially. As a result, the Bureau the burden of the rule on providers. believes that firms would only make an IX. Regulatory Flexibility Analysis While under the potential alternative additional self-report if the avoided risk The Regulatory Flexibility Act (RFA) making a self-report would shield a firm of class action liability outweighed the generally requires an agency to conduct from class-action liability for FCFLs, it increased risk of Bureau action. Given an Initial Regulatory Flexibility would not shield the firm from class- these competing risks, the Bureau does Analysis (IRFA) and a Final Regulatory action liability under other claims. As not believe most providers would see Flexibility Analysis (FRFA) of any rule the Study noted, more than 63 percent sufficient benefit from the alternative to subject to notice-and-comment of Federal court class actions in selected outweigh the costs of exercising it for rulemaking requirements.1262 These markets asserted State law claims.1258 serious violations of the law, save for analyses must ‘‘describe the impact of The fact that such residual exposure cases where the provider would self- the proposal on small entities.’’ 1263 An would exist suggests that in a report anyway.1260 On balance, the IRFA or FRFA is not required if the substantial majority of cases, companies Bureau believes that the potential agency certifies that the proposal will could not block a class action as a result alternative at best would have no effect not have a significant economic impact of the exclusion, but instead could only on overall deterrence and compliance on a substantial number of small block certain claims in a class action with the law, and at worst will have a entities.1264 The Bureau also is subject (i.e., claims of FCFL violations). As a deleterious effect on compliance.1261 to certain additional procedures under result, at best the exclusion would only To summarize, after further the RFA involving the convening of a allow providers to gain leverage over consideration and for the reasons panel to consult with small entity certain potential class claims, rather outlined above, the Bureau does not representatives prior to proposing a rule than avoid class litigation entirely.1259 believe that a self-reporting exemption, for which an IRFA is required.1265 Indeed, the benefits would probably be including the one suggested by In the proposal, the Bureau did not the smallest from frivolous class action commenters, would be workable or certify that the proposal would not have lawsuits, as, all else equal, these are a significant economic impact on a more likely to be brought with a variety 1260 The Bureau also notes that potentially even substantial number of small entities of claims. this narrow exemption could be abused by firms within the meaning of the RFA. As a result, rather than reducing the who ‘‘self-report’’ information they accurately believe is already known to the Bureau. Such Accordingly, the Bureau convened and burden to providers from frivolous superfluous self-reports would not have any effect chaired a Small Business Review Panel lawsuits, the potential safe-harbor on firms’ compliance decisions, nor on public under SBREFA to consider the impact of would instead compromise the deterrent enforcement—in such cases the Bureau’s decision the proposal on small entities that effect of the rule. The Bureau believes of whether or not to bring a case would not be altered by the nominal self-report. While in would be subject to the rule and to this would primarily occur for law principle the potential alternative could carve out obtain feedback from representatives of violations with relatively low aggregate information that is already known to the Bureau or such small entities. The Small Business harm. The Bureau’s enforcement publicly available, this would require the Bureau to Review Panel for the proposal is resources are limited, and the Bureau become involved in the court’s decision whether to allow the arbitration agreement to block the class discussed in the SBREFA Report. The may not be able to bring enforcement action, by verifying that the self-report contained proposal also contained an IRFA actions in cases with low aggregate new information or was otherwise made in good pursuant to section 603 of the RFA, faith. For example, under the Bureau’s Responsible which among other things estimated the 1258 Conduct Bulletin, it assesses whether the company Study, supra note 3, section 6 at 19. number of small entities that would be 1259 The Bureau also notes that to the extent that ‘‘voluntarily disclosed material information not the proposed alternative reduces firms’ class action directly requested by the Bureau or that otherwise subject to the proposal. In this IRFA, the liability, the need to litigate over the applicability might not have been uncovered.’’ The Bureau does Bureau described the impact of the of the exemption counteracts some of the reduction not believe it should be required to make this assessment in the context of private litigation. in burden. Parties would likely incur new costs and 1262 5 U.S.C. 601, et seq. time delays in litigating arbitration motions, trying 1261 One industry commenter suggested that the 1263 5 U.S.C. 603(a). For purposes of assessing the to figure out whether the subject of a class action Bureau could make the safe harbor temporary, i.e., impacts of the proposal on small entities, ‘‘small (and the related size and scope of the class) until the Bureau completed its investigation. entities’’ is defined in the RFA to include small matched the subject, size, and scope of the However, the Bureau does not believe that approach businesses, small not-for-profit organizations, and defendant’s self-report. Currently, it already takes would be feasible. Arbitration agreements are used companies a significant amount of time to persuade to obtain stays or dismissal of class actions in favor small government jurisdictions. 5 U.S.C. 601(6). A a court to grant a motion to compel arbitration of arbitration. Thus, there is currently no procedure ‘‘small business’’ is determined by application of terminating a class action. According to the Study for using an arbitration agreement as a basis for Small Business Administration regulations and (Section 6 at table 7), this took on average almost obtaining a general stay on the class litigation, reference to the North American Industry 500 days. Under the potential alternative, courts without also proceeding to arbitration. Yet if Classification System (NAICS) classifications and would need to determine several additional arbitration of the named plaintiff’s claim on an size standards. 5 U.S.C. 601(3). A ‘‘small complex issues, extending the time and cost of individual basis proceeded, this would not preserve organization’’ is any ‘‘not-for-profit enterprise litigating a motion to compel arbitration. Moreover, the status quo of the class action during the which is independently owned and operated and is uncertainty over how courts would make these pendency of the Bureau’s investigation. not dominant in its field.’’ 5 U.S.C. 601(4). A ‘‘small determinations would only reduce the potential for Alternatively, if the arbitration agreement were governmental jurisdiction’’ is the government of a increased self-reporting in the first place. Finally, used to dismiss the class claims during the city, county, town, township, village, school resolution of any claims that were not compelled temporary period, this would raise complex district, or special district with a population of less to arbitration would have been delayed, potentially questions under statute of limitations laws, which than 50,000. 5 U.S.C. 601(5). substantially, which would not serve the consumer could preclude refiling of the case after the Bureau’s 1264 5 U.S.C. 605(b). protection goals of the rule. investigation. 1265 5 U.S.C. 609.

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proposal on those entities, drawing on products and services, because this FRFA. The Bureau discusses the proposal’s Section 1022(b)(2) arbitration agreements effectively block comments relating to other potential Analysis. The Bureau also solicited consumers from participating in class alternatives in Part VIII, above. As noted comment on any costs, recordkeeping proceedings. Finally, the Bureau was in those sections, the Bureau has requirements, compliance requirements, concerned about the potential for decided not to adopt any of the or changes in operating procedures systemic harm if arbitration agreements potential alternatives suggested by arising from the application of the were to be administered in biased or commenters, as the Bureau believes that proposal to small businesses; comment unfair ways. Accordingly, the Bureau these potential alternatives will not regarding any Federal rules that would considered proposals that would: (1) substantially reduce burden to providers duplicate, overlap, or conflict with the Prohibit the application of certain without compromising the objectives of proposal; and comment on alternative arbitration agreements regarding the rule. means of compliance for small entities. consumer financial products or services Several insurance industry Comments that addressed the impact on as to class litigation; and (2) require commenters and their trade associations small entities are discussed below. submission of arbitral claims, awards, and an association of State insurance Many of these comments implicated and two other categories of documents regulators expressed concern regarding individual provisions of the final rule or to the Bureau. The rulemaking is whether, in the IRFA, the Bureau had the Bureau’s Dodd-Frank Act Section pursuant to the Bureau’s authority even considered potential effects of the 1022(b)(2) Analysis discussion and are under sections 1022(b) and (c) and 1028 proposal on life insurers that may offer also addressed in those parts. of the Dodd-Frank Act. The latter other consumer financial products or Similar to its approach in the section directs the Bureau to study pre- services. As is explained above in the proposal, the Bureau is not certifying dispute arbitration agreements in section-by-section analysis of that the final rule will not have a connection with the offering or § 1040.3(a)(1), although an insurance significant economic impact on a providing of consumer financial company could be covered by the rule substantial number of small entities. products or services and authorizes the to the extent that it offers consumer Instead, the Bureau has completed a Bureau to regulate their use if the financial products that are not part of FRFA as detailed below. However, the Bureau finds that certain conditions are the business of insurance, the Bureau Bureau continues to believe that the 1266 met. believes it is unlikely that there are arguments and calculations outlined many, or even any, such firms. both in the Section 1022(b)(2) Analysis 2. Statement of the Significant Issues Raised by the Public Comments in and the FRFA below, as well as the 3. Response to the Small Business Response to the IRFA, a Statement of comments received on the IRFA, Administration Chief Counsel for the Assessment of the Agency of Such strongly suggest that the final rule will Advocacy not have a significant economic impact Issues, and a Statement of Any Changes on a substantial number of small entities Made as a Result of Such Comments In the FRFA, the Bureau has taken in any of the covered markets. In accordance with section 603(a) of into account feedback received in the RFA, the Bureau prepared an IRFA. interagency communications with the 1. Statement of the Need for, and In the IRFA, the Bureau estimated the SBA. Objectives of, the Final Rule possible compliance costs for small 4. Description of and Estimate of the As the Bureau outlined in the entities with respect to each major Number of Small Entities to Which the SBREFA Report and discussed above, component of the rule against a pre- Final Rule Will Apply the Bureau considered a rulemaking statute baseline. The Bureau requested because it was concerned that by comment on the IRFA. As noted in the SBREFA Report, the blocking class actions, arbitration Very few commenters specifically Panel identified 22 categories of small agreements reduce deterrent effects and addressed the IRFA. A number of entities that may be subject to the compliance incentives in connection commenters suggested potential proposal. These were later narrowed with the underlying laws. The Bureau alternatives, some but not all of which (see discussion and table below with was also concerned that consumers do were intended to reduce the burden of estimates of the number of entities in not have sufficient opportunity to obtain the rule on small entities. The Bureau each market). The NAICS industry and remedies when they are legally harmed discusses comments relating to a small SBA small entity thresholds for these 22 by providers of consumer financial entity exemption below, in section 6 of categories are the following:

TABLE 2—SBA SMALL ENTITY THRESHOLDS

NAICS description NAICS code SBA small business threshold

All Other Nondepository Credit Intermediation ...... 522298 $38.5m in revenue. All Other Professional, Scientific, and Technical Services ...... 541990 $15m in revenue. Collection Agencies ...... 561440 $15m in revenue. Commercial Banking ...... 522110 $550m in assets. Commodity Contracts Dealing ...... 523130 $38.5m in revenue. Consumer Lending ...... 522291 $38.5m in revenue. Credit Bureaus ...... 561450 $15m in revenue. Credit Card Issuing ...... 522210 $550m in assets. Direct Life Insurance Carriers ...... 524113 $38.5m in revenue. Direct Property and Casualty Insurance Carriers ...... 524126 1,500 employees. Financial Transactions Processing, Reserve, and Clearinghouse Activities ...... 522320 $38.5m in revenue. Mortgage and Nonmortgage Loan Brokers ...... 522310 $7.5m in revenue. Other Activities Related to Credit Intermediation ...... 522390 $20.5m in revenue.

1266 12 U.S.C. 5518(b).

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TABLE 2—SBA SMALL ENTITY THRESHOLDS—Continued

NAICS description NAICS code SBA small business threshold

Other Depository Credit Intermediation ...... 522190 $550m in assets. Passenger Car Leasing ...... 532112 $38.5m in revenue. Real Estate Credit ...... 522292 $38.5m in revenue. Sales Financing ...... 522220 $38.5m in revenue. Truck, Utility Trailer, and RV (Recreational Vehicle) Rental and Leasing ...... 532120 $38.5m in revenue. Used Car Dealers ...... 441120 $25m in revenue. Utilities (including Electric Power Generation, Transmission, and Distribution of 221 between $15–$27.5m in revenue or 250– Electric Power, Natural Gas, Water/Sewage, and other systems). 1,000 employees. Wired Telecommunications Carriers ...... 517110 1,500 employees. Wireless Telecommunications Carriers (except Satellite) ...... 517210 1,500 employees.

For purposes of assessing the impacts codes (when such data was firms that were counted twice using the of the proposals under consideration on available).1267 When the data was NAICS numbers, some double counting small entities, ‘‘small entities’’ are insufficient to precisely estimate the may remain due to overlap in non- defined in the RFA to include small number of businesses under the SBA NAICS estimates. For the NAICS codes businesses, small nonprofit threshold, the Bureau based its estimate that encompass several markets, the organizations, and small government for the number of small businesses on Bureau summed the numbers for each of jurisdictions that would be subject to the estimate that approximately 95 the market-NAICS combinations to the proposals under consideration. A percent of firms in finance and produce the table of affected firms. ‘‘small business’’ is defined by the SBA insurance are small.1268 In addition to estimating the number Office of Size Standards for all NAICS numbers were taken from the of providers in the affected markets, the industries through the NAICS. 2012 Economic Census, the most recent Bureau also estimated the prevalence of To arrive at the number of entities version available from the Census arbitration agreements in these markets. affected, the Bureau began by creating a Bureau. The data provided employment, The Bureau first attempted to estimate list of markets that will be covered. The average size, and an estimate of the the prevalence of arbitration agreements Bureau assigned at least one, but often number of firms for each industry, in each market using public sources. several, NAICS codes to each market. which are disaggregated by a six-digit However, this attempt was For example, while payday and other ID. Other industry counts were taken unsuccessful.1269 For the markets installment loans are provided by from a variety of sources, including covered in Section 2 of the Study that storefront payday stores (NAICS other Bureau rulemakings, internal provided data on prevalence of 522390), they are also provided by other Bureau data, public data and statistics, arbitration agreements, the Bureau uses small businesses, such as credit unions including published reports and trade the numbers from the Study. The (NAICS 522120). The Bureau estimated association materials, and in some cases Bureau contacted trade associations to the number of small firms in each from aggregation Web sites. For a select obtain supplemental data for the market-NAICS combination (for number of industries, usually NAICS markets that were not covered in 1270 example, storefront payday lenders in codes that encompass both covered and Section 2 of the Study. NAICS 522390 would be such a market- not covered markets, the Bureau estimated the covered market in this 1269 The Bureau attempted to develop a NAICS combination), and then the methodology for sampling contracts on the internet. Bureau added together all the markets NAICS code using data from Web sites The methodology involved attempting to sample within a NAICS code if there is more that aggregate information from multiple the contracts of 20 businesses from randomly- than one market within a NAICS code, online sources. The reason the Bureau selected States and different levels of web search relied on this estimate instead of the relevance (to alleviate selection biases). However, accounting for the potential overlaps providers generally do not provide their contracts between the markets (for example, NAICS estimate is that NAICS estimates or terms and conditions online. Even when some probably all banks that provide payday- are sometimes too broad. For example, contracts are available online in a specific market, like loans also provide checking the NAICS code associated with virtual providers that provided such information are wallets includes dozens of other small usually large, national corporations that operated in accounts, and the Bureau does not multiple States. The lack of provider-specific double-count them, to the extent industries, and would overestimate the revenue and employment information also makes it possible given the data). actual number of firms affected by an hard to determine which of the sampled businesses The Bureau first attempted to estimate order of magnitude or more. are small according to the SBA threshold. After Although the Bureau attempted to attempting this methodology for several markets, the number of firms in each market- the Bureau decided to proceed by contacting trade NAICS combination by using account for overlaps wherever possible, associations instead. The Bureau attempted the administrative data (for example, Call a firm could be counted several times if sampling method for the following markets: Reports that credit unions have to file it participates in different industries and Currency Exchange, Other Money Transmitters/ was counted separately in each data Remittances, Telephone (Landline) Services, and with the NCUA). When administrative Cable Television. The Bureau also started work on data was not available, the Bureau source. While this analysis removes a few other markets before determining that the attempted to estimate the numbers using results were unlikely to be sufficiently public sources, including the Bureau’s 1267 The Bureau also used data from the Census representative for the purposes of this analysis. Bureau, including the Census Bureau’s Statistics of 1270 The Bureau obtained the necessary PRA previous rulemakings and impact U.S. Businesses. approval from OMB for the survey. The Bureau analyses. When neither administrative 1268 See Small Bus. Admin. Off., ‘‘SBA’s Size contacted national trade associations with a history nor other public data was available, the Standards Analysis: An Overview on Methodology of representation of providers in the relevant Bureau used the Census’s NAICS and Comprehensive Size Standards Review,’’ markets. The questions the Bureau posed related to Presentation of Sharma R. Khem at 4 (2011), the prevalence of arbitration agreements among numbers. The Bureau estimated the available at http://www.gtscoalition.com/wp- providers in this market generally, as opposed to number of small businesses according to content/uploads/2011/07/Size-Stds-Presentation_ among the members of the trade association. The the SBA’s size standards for NAICS Dr.-Sharma-SBA.pdf. Bureau uses the prevalence numbers from the Study

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The table below sets forth affected arbitration agreements are not prevalent to the final rule. In some cases, utility markets (and the associated NAICS in the consumer mortgage market.1272 providers may engage in billing the codes) in which it appears reasonably With respect to brokering of credit more consumer for charges imposed by a likely that more than a few small broadly, the Bureau also believes that third-party supplier hired by the entities use arbitration agreements. some credit lead generators may be consumer. However, government Some affected markets (and associated primarily engaged in the business of utilities that are immune from suit as an NAICS codes) are not listed because the brokering and would be affected by the arm of the State will be exempt and, number of small entities in the market rule. The Bureau lacks data on the with respect to private utility providers using arbitration agreements is likely to number of such businesses and the providing these services, the Bureau be insignificant. For example, the extent to which they are primarily believes that these private utility Bureau did not list convenience stores engaged in brokering. The Bureau providers’ agreements with consumers, (NAICS 445120). While consumers can requested these data and data on the use including their dispute resolution cash a check at some grocery or of contracts and on the prevalence of mechanisms, are generally regulated at convenience stores, the Bureau does not arbitration agreements by these a State or local level. The Bureau is not believe that consumers generally sign providers, but did not receive any aware that those dispute resolution contracts that contain arbitration responses. mechanisms provide for mandatory agreements with grocery or convenience Merchants are not listed in the table arbitration.1274 stores when cashing checks; indeed, this because merchants generally will not be Further, the final rule will apply to is even less likely for check guarantee covered by the final rule, except in extensions of credit by providers of (NAICS 522390) and collection (NAICS limited circumstances. For example, the whole life insurance policies (NAICS 561440). For the same reason, currency Bureau believes that most types of 524113) to the extent that these exchange providers (NAICS 523130) are financing consumers use to buy companies are ECOA creditors and that not listed on the table. The Bureau also nonfinancial goods or services from activity is not the ‘‘business of did not list department stores (NAICS merchants is provided by third parties insurance’’ under the Dodd-Frank 4521) because the Bureau does not other than the merchant or, if the section 1002(15)(C)(i) and 1002(3) and believe small department stores are merchant grants a right of deferred arbitration agreements are used for such typically involved in issuing their own payment, this is typically done without policy loans. However, it is unlikely credit cards, rather than partnering with charge and for a relatively short period that a significant number of such an issuing bank that issues cards in the of time. For example, a provider of providers will be affected because a name of the department store. monthly services may bill in arrears, number of State laws restrict the use of Other notable exceptions were Other allowing the consumer to pay 30 days arbitration agreements in insurance Depository Credit Intermediation after services are rendered each month. products and, in any event, it is possible (NAICS 522190) and Attorneys who Thus the Bureau believes that that the loan feature of the whole life Collect Debt (NAICS 541110). The merchants rarely offer their own policy could be part of the ‘‘business of Bureau believes that for these codes financing with a finance charge, or in an insurance’’ depending on the facts and virtually all providers that are engaged amount that significantly exceeds the applicable law.1275 in these activities are already reporting market value of the goods or services The Bureau also does not believe that under other NAICS codes (for example, sold.1273 In those rare circumstances (for a significant number of new car dealers Commercial Banking, NAICS 52211, or example, acting as a TILA creditor due offer or provide consumer financial collection agencies, NAICS 561440). to lending with a finance charge), then products or services that render these In addition, the final rule will apply dealers subject to the Bureau’s to mortgage referral providers for whom the merchants will be covered by the referrals are their primary business. For final rule in those transactions (unless, regulatory jurisdiction. As a result, New example, the Bureau estimates that there in the case of offering credit with a Car Dealers (NAICS 44111) and are 7,007 entities classified as mortgage finance charge, the merchant is a small Passenger Car Leasing Companies and nonmortgage brokers (NAICS entity and meets the other requirements (NAICS 532112) are not included in the 522310), 6,657 of which are small.1271 of Dodd-Frank section 1027(a)(2)(D)). table below; rather, the table covers However, the Bureau believes that The Bureau lacks data on how dealer portfolio leasing and lending frequently merchants engage in such with the Used Car Dealer Category for checking/deposit accounts, credit cards, payday transactions, whether in the education, (NAICS 441120) and indirect loans, GPR prepaid cards, private student loans, health, or home improvement sectors, automobile lenders with the Sales and wired and wireless telecommunication among others, and on how often pre- Financing category (NAICS 522220). providers. All other prevalence estimates used in dispute arbitration agreements may This analysis does not account for this section and in the Section 1022(b)(2) Analysis are based on this survey of trade associations. In apply to such transactions. The Bureau various types of entities that are each such market (represented by a separate row in requested comment and data on the indirectly affected (and thus would the table below), except credit monitoring and frequency of these transactions, by likely not need to change their providers of credit reports, we relied on numbers from one trade association for that market. For industry, but did not receive any 1274 credit monitoring and providers of credit reports, response. The Bureau notes, for example, that in some we received supplemental information from a trade Similarly, the Bureau does not list situations, such as some consumer disputes heard by State utility regulators, consumers may be association that we did not survey that lead us to Utility Providers (NAICS 221) because adjust the estimate by averaging the two estimates. required to submit disputes to governmental For the markets covered by the Study’s prevalence when these providers allow consumers administrative bodies prior to going to court. If analysis, the Bureau adjusted the numbers to fit into to defer payment for these providers’ courts review the determinations of those the four choices provided in the survey: 0 to 20 services without imposing a finance administrative bodies as agency administrative percent, 20 to 50 percent, 50 to 80 percent, and 80 action, rather than an arbitral award, then the to 100 percent. The prevalence column in the tables charge, this type of credit is not subject Bureau does not believe that processes such as in this section and in the Section 1022(b)(2) these would be considered ‘‘arbitration’’ under Analysis provide the midpoint estimate (for 1272 Since 2013, Bureau regulations have proposed § 1040.2(d). example, 10 percent if the answer was 0 to 20 prohibited using PDAAs in most types of consumer 1275 See, e.g., Kan. Stat. Ann. § 5–401 (2015). percent). mortgages. See 12 CFR 1026.36(h). These State laws involve interplay between the 1271 NAICS 522292 is similarly excluded from 1273 However, the Bureau includes buy-here-pay- FAA and the McCarran-Ferguson Act, 15 U.S.C. estimates. here automobile dealers in the table below. 6701 et seq.

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contracts) and for which the Bureau did (NAICS codes 511210 and 541511) that estimate how many third-party not find any Federal class settlements in provide covered consumer financial merchant servicers may be included in the Study (and thus would not be products or services with arbitration this coverage and as such does not significantly affected by additional class agreements directly to consumers (such include them in the table below. litigation exposure). These entities as payment processing products) that do Finally, the final rule expanded the include, for example, billing service not report in the NAICS codes listed scope from the proposal to include providers for providers of merchant either above or in the table below. The credit (third-party servicers NAICS Bureau believes that the number of such providers of credit repair services even 522390). software developers is low. The Bureau when these services were unrelated to Small government entities at the State requested comment on this issue, and debt settlement (which was covered by and local level, in theory, also could be no commenters disputed this assertion. the proposal). However, the Bureau affected to the extent they use Some merchants extending consumer believes that these credit repair arbitration agreements and are not an credit with no finance charge may use providers were already counted in the arm of the State. The Bureau does not third parties to service these table below under NAICS code 541990, have data indicating such use of transactions, as an industry trade and no update to the table is needed in arbitration agreements by such small association noted in its comment. that respect.1277 government entities is widespread, Whether affiliated with the merchant or BILLING CODE 4810–AM–P however, and the Bureau did not receive not, those persons may be covered by any comments from these governmental § 1040.3(a)(1)(v). When the merchant 1277 According to a GAO report, in 2015 there providers, even though the proposal did uses a pre-dispute arbitration were about 50 to 60 companies providing identity not call for their complete agreement, there is a possibility that theft services, including credit monitoring. (GAO exemption.1276 agreement could apply to third parties Report. No. 17–254 (Mar. 2017) at 6–7. As the GAO Similarly, the Bureau is unaware of such as a servicer, depending on the noted, no agency or trade association collects the number of software developers facts and applicable law. The comprehensive data on the industry and census data classifies identity theft protection services in commenter did not provide data on how a catch-call category (NAICS 812990) for ‘‘other 1276 The Bureau received a number of comments often such credit is extended, how often personal services’’ that includes about 50 different from Tribal government entities involved in the small-dollar credit industry. The impact on those the merchants extending such credit use types of services ranging from astrology services to entities is captured in the table below. Note, third parties to service it, how often the wedding planning. Accordingly, both because of the however, that the figures in the table may somewhat merchants use pre-dispute arbitration number of providers estimated by GAO and because overstate the number of such entities, as the final agreements, or how often the servicers of the inability to estimate the number using Census rule exempts entities that are an arm of a Tribal data, credit monitoring is not separately listed on government, which may include some small-dollar may be covered by such agreements. the table below, except for the counting of credit providers. The Bureau is not in a position to consumer reporting agencies, which are significant participants in this market.

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BILLING CODE 4810–AM–C block class litigation. The Bureau contracts from form providers, that task 5. Projected Reporting, Recordkeeping, believes that, given that the Bureau is might be done by the providers and Other Compliance Requirements of specifying the language that must be themselves, requiring a simple check by the Proposal, Including an Estimate of used, this can be accomplished in the small entity’s compliance staff to the Classes of Small Entities Which Will minimal time by compliance personnel, ensure that this has indeed been done. Be Subject to the Requirement and the who do not have to possess any See the last column in the table above Type of Professional Skills Necessary for specialized skills, and in particular who for the Bureau’s estimate of the number the Preparation of the Report Reporting do not require a law degree.1278 of small entities that use arbitration Requirements Moreover, the Bureau believes that to agreements. Additionally, as discussed above, debt the extent small covered entities use As discussed above in the Section buyers and other consumer financial 1022(b)(2) Analysis, the providers that services providers who become parties 1278 The Bureau is aware that many small use arbitration agreements will have to providers do not employ dedicated compliance to existing contracts with pre-dispute change their contracts to state that the staff, and uses the term broadly to denote any arbitration agreements that do not arbitration agreements cannot be used to personnel who engage in compliance activities. contain the required language would be

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subject to the ongoing requirements of The costs and types of additional In addition, the additional Federal cases § 1040.4(a)(2), which will require them investment to reduce additional filed as class litigation that will end up to issue contract amendments or notices exposure to class litigation and the not settling on class basis (121 per year when they become party to a pre- components of the cost of additional according to the estimates above) are existing contract that does not include class litigation itself are described above also likely to result in a considerably the proposed mandated language. As in the Section 1022(b)(2) Analysis. As higher expense than $200. However, the discussed above, the Bureau believes noted above, it is difficult to quantify vast majority of the 51,000 providers that this cost and the skills required to how much all covered providers, will not experience any of these effects. satisfy this requirement will also be including small entities, would invest in As discussed above, these entities will minimal since many of these providers additional compliance. also face increased exposure to State typically send out notices for FDCPA With respect to additional class class litigation. While the Study’s purposes to consumers whose contracts litigation exposure, using the same Section 6 reported similar numbers for these providers just acquired. calculation as in the Section 1022(b)(2) State and Federal cases, it is likely that The final rule also includes a Analysis, limited to providers below the the State to Federal class litigation ratio reporting requirement when covered SBA threshold for their markets,1280 the is higher for small covered entities to entities exercise their arbitration Bureau estimates that the final rule will the extent that they are more likely to agreements in individual lawsuits and result in about 25 additional Federal serve consumers only in one State. in several other circumstances. Given class settlements, and in those cases, an However, as discussed above, the the small number of individual additional $3 million paid out to Bureau believes that State class arbitrations identified in the markets consumers, an additional $2 million litigation is also likely to generate lower covered by the Study, the Bureau paid out in plaintiff’s attorney fees, and costs than Federal litigation. The Bureau believes that there would be at most a an additional $1 million for defendant’s believes that these calculations strongly few hundred small covered entities attorney fees and internal staff and suggest that the final rule will not have affected by this requirement each year, management time per year. The Bureau a significant economic impact on a and most likely considerably fewer also estimates 121 additional Federal substantial number of small entities since most defendants that participated cases filed as class litigation that would within the meaning of the RFA. in arbitrations analyzed by the Study end up not settling on class basis, The Bureau notes that the estimates were frequent repeat players.1279 Each resulting in an additional $2 million in are higher for small debt collectors than instance of reporting consists of sending fees per year. This aggregate $8 million for other categories: Small debt the Bureau already existing documents, per year for Federal class litigation collectors account for 22 of the 25 potentially redacting specified should be juxtaposed with an estimated Federal settlements estimated above for categories of personally identifiable 51,000 providers below the SBA small providers overall, and $5 million information pursuant to the final rule. thresholds that use arbitration (out of $8 million for small providers) As discussed above, the Bureau believes agreements, resulting in well under a 1 in costs combined. With about 4,400 that fulfilling the requirement would percent chance per year of those entities debt collectors below the SBA not require any specialized skills and being subject to a putative Federal class thresholds, the estimates suggest a would require minimal time. litigation, a much lower chance of any roughly 2 percent chance per year of The Bureau requested comment on of those cases resulting in a class being subject to an additional putative whether there are any additional costs settlement, and an expected cost of Federal class litigation, a lower than 1 or skills required to comply with about $200 per year from Federal class percent chance of that resulting in a reporting, recordkeeping, and other cases per entity. Federal class settlement, and an compliance requirements of the While the expected cost per provider expected cost of about $1,100 per year proposal that the Bureau had not that the Bureau can monetize is about from these additional settlements. The mentioned in the IRFA. Although a $200 per year from Federal class cases, same State class litigation assumptions number of commenters discussed the these costs would not be evenly outlined above apply to smaller debt reporting, recordkeeping, and other distributed across small providers. In collectors. compliance requirements of the particular, the estimates above suggest As evident from the data and from proposal, as discussed in the Bureau’s that about 25 providers per year would feedback received during the SBREFA Section 1022(b)(2) Analysis above and be involved in an additional Federal process, providers that are debt the Bureau’s PRA analysis below, none class settlement at a considerably higher collectors might be the most affected stated that there were additional costs or expense than $200 per year, as noted in relative to providers in other markets, skills required beyond those described the Section 1022(b)(2) Analysis above. despite the fact that debt collectors do above. As noted in its Section 1022(b)(2) not enter into arbitration agreements Analysis above, the Bureau believes that 1280 The Bureau attempted to classify defendants directly and already frequently collect the vast majority of the final rule’s of the class settlements from the Study on whether on debt without an arbitration they meet the SBA threshold for a small business impact is due to additional exposure to in the defendant’s market. Some of the markets agreement in the original contract. class litigation and to any voluntary were relatively easy to classify; for example, the However, for the reasons described investment (spending) in reducing that Bureau has the data on depository institutions’ above, the Bureau believes it is unlikely exposure that providers might assets and that is the only data necessary to that class settlement amounts will in determine whether depository institutions are SBA undertake, including foregone profit small. Other markets were considerably more fact drive companies out of business. from products or services that might difficult, in particular debt collectors. The Bureau Indeed, as discussed above, debt lead to class action exposure. The used trade publications and internal expertise to the collectors already face class litigation Bureau believes that neither of these extent possible to classify debt collectors into large exposure in connection with a and small; however, it is likely that the Bureau categories is a reporting, recordkeeping, made mistakes in this classification in at least significant proportion of debt they or other compliance requirement; several cases. The mistakes were likely made in collect. Much of that debt comes from however, the Bureau discusses them both directions: Some debt collectors that were SBA creditors that do not have arbitration small at the time of the settlement were likely agreements, and even where the credit below. classified as large, and other debt collectors that were not SBA small at the time of the settlement contract includes an arbitration 1279 See Study, supra note 3, section 5 at 59. were likely classified as small. agreement, collectors are not always

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able to invoke the agreements Bureau supervision or enforcement The Bureau believes that the burden successfully. under Dodd-Frank. They further stated to small entities from the rule will be that institutions of this size have little smaller relative to their size than the 6. Description of the Steps the Agency choice but to settle class actions filed burden to larger providers. First, the Has Taken To Minimize the Significant against them, because they cannot afford Bureau estimated in the proposal that Economic Impact on Small Entities high attorney’s fees and fear the the vast majority of new class actions The Bureau described several imposition of crippling statutory against small entities filed per year due potential alternatives above in the damages on a classwide basis. Credit to the class rule would be filed against Section 1022(b)(2) Analysis. For the union industry commenters also small debt collectors.1284 The Bureau reasons discussed above, the Bureau emphasized that because credit unions notes that an exemption for small believes that none of these are are member owned, such costs also are entities would not necessarily provide a significant alternatives insofar as they passed on them not only as customers, reduction in burden for small debt would not accomplish the goal of the but also in their capacity as owners. One collectors. Debt collectors and other proposed rulemaking with substantially credit union industry commenter also service providers such as payment less regulatory burden. The Bureau stated that exposure to class actions can processors typically do not enter into discussed these alternatives both for lead smaller depository institutions to arbitration agreements with consumers, SBA small providers and for larger curtail product and service offerings. but instead rely upon agreements made providers as well. In addition to the Finally, one community banking by the original creditor. Thus, unless general alternatives discussed above, the industry commenter stated that an small debt collectors work only for Bureau further considered an exemption exemption for smaller depository small creditors, a small entity for small entities, which the Bureau institutions should be adopted, since exemption would not necessarily discusses here. In the proposal, the these are the institutions that are benefit such debt collectors absent a Bureau requested comment on whether supervised and have ongoing customer special rule allowing small debt to exempt smaller entities from the rule, relationships with incentives to treat collectors to invoke a large creditor’s including comment on how to structure customers fairly and, unlike certain arbitration clause to block a class action any such exemption, and received a nonbank markets such as payday even though the creditor itself, or its number of comments both for and lending, these institutions are not larger service providers, could not. The against such an exemption. saturated already with arbitration Bureau believes that large firms’ A small business advocacy agreements. arbitration agreements should not have organization stated that the Bureau A consumer advocate urged against a a loophole that allows small service should exclude all small businesses small entity exemption because, in its providers to avoid the rule. To do from the class rule because, in its view, view, an exemption would encourage otherwise would distort incentives in data concerning defense costs outlined businesses to structure their operations the marketplace, as large firms could 1281 in the SBREFA Report demonstrates to avoid coverage under the class rule. outsource potential sources of liability that it is particularly costly for a small Considering the comments received to small subcontractors. Therefore, the business to defend a class action and its own analysis and experience, the Bureau believes that there is no way to lawsuit, even when the small business Bureau concludes that an exemption to exempt small debt collectors without has not violated the law, and the Bureau the class rule for small entities would creating a market distortion that has not adduced data to demonstrate not reduce burden by any significant undermines the goals of the rule. that small entities are under-complying degree for most of the over 50,000 small At the same time, in the proposal the with the law. The commenter also noted entities covered by the rule because Bureau estimated just three additional observations by small businesses that their burden is already relatively low Federal class action settlements per year they have greater incentives to comply given their low exposure to class against small entities that are not debt with laws due to a greater need to retain actions. The Bureau is also concerned collectors. Assuming the same number customers.1282 that such an exemption would of State class action settlements, and Two credit union and community potentially create significant four times more class actions that do not bank industry commenters also urged an unintended market distortions. Of settle on a class basis, this would mean exemption from the class rule for course, any exemption to the class rule 30 cases filed against the roughly 45,000 depository institutions with $10 billion would reduce burden by allowing the small entities that are not debt or less in assets. In their view, the duty exempted providers to shield collectors. By comparison, the Bureau to consider the impact on these themselves from class action liability. estimated that there would be 22 institutions under Dodd-Frank section However, the Bureau has found that the additional Federal class action 1022(b)(2)(A)(ii) feeds into the criteria rule is for the benefit of consumers and settlements against small debt for considering total assets of an is in the public interest even after institution for purposes of an exemption rule, the costs and benefits are inextricably linked, factoring in the costs that would be as the burden of class action exposure provides the under Dodd-Frank section 1022(b)(3). associated with the rule (see Part VI). In These commenters stated that, in their primary benefit of the rule—deterrence. light of these findings, and the nature of 1284 As discussed above, the Bureau estimated the view, institutions of this size are less the costs and benefits of the class rule, number of additional class actions for small entities likely to harm customers because of the Bureau evaluated a potential using the same methodology as was used in its Section 1022(b)(2) Analysis. That is, the rate of their relationship-based business model, exemption to the class rule for small and added that they are not subject to class action settlements with small entities in the entities by considering whether such Study was assumed to be the same for firms with entities will be disproportionately arbitration agreements. Because few class actions in 1281 The commenter noted, for example, that SERs the Study were filed against small entities who estimated it costs between $15,000 and $50,000 to burdened by the rule, compared to large 1283 were not debt collectors, the Bureau defend a class action, that employee time is entities. correspondingly estimated few additional cases diverted, and business reputation can suffer, even against these entities due to the proposal. The when the company has done nothing wrong. See 1283 In general, an exemption for small entities to underlying low rate of class actions against small SBREFA Report, supra note 419, at 18–19 and a regulation might be justified if the benefits of entities may reflect better practices of these entities, appendix A. applying a rule to small entities were or reduced incentives by class counsel to bring 1282 Id. at 34. disproportionately smaller. In the case of the class cases, or some combination.

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collectors, the same number of State expected costs from the class rule than exemption, any such exemption still class action settlements and four times large entities. For this to be true, the would be problematic. The Bureau more cases that are not settled on a class cost to small entities from defending a believes that fashioning an appropriate basis. This would mean 220 total class action would have to be not just threshold for a small-entity exemption Federal and State Class actions filed larger, but large enough to account for would impose substantial complexity, against about 4,300 small debt the difference between the 1-in-1,500 particularly around how such a collectors. annual risk of a new class action for threshold would address the various Based on the Bureau’s estimate of 30 small entities and the 1-in-3 annual risk markets covered by the final rule. As additional Federal and State class action for larger entities, or 500 times larger. noted, other than a request for a cases against roughly 45,000 small non- Considering the facts available to it, threshold specific to depository debt collectors, all else being equal (and the Bureau does not believe the institutions, the Bureau received no the Bureau does not assume that is the differences in burden justify an comments on how to adopt a broad case), there is only a 1-in-1,500 chance exemption for small entities. In threshold that could apply to providers that any given firm would face an addition, the Bureau has other concerns that provide multiple different types of additional class action lawsuit each regarding the small entity exemption products and services only some of year. This is substantially lower than suggested by commenters. which are covered by the rule and with the risk for large firms that are not debt First, the risk of a class action lawsuit, a variety of corporate structures. collectors. The Bureau estimates that while relatively low for small entities, Furthermore, the Bureau is concerned there are 1,740 firms affected by the rule will nonetheless provide a measure of that any threshold would be difficult to that are not small and that are not debt deterrence. In particular, small entities apply to small entities that are service collectors, and that there would be with poor compliance practices are providers to larger entities. In addition, roughly 560 additional putative Federal more likely to be the target of a class complex legal questions would arise in and State class actions lawsuits filed action, but might continue their poor situations in which a provider crossed against these firms in a typical year, or practices or reduce compliance further over or dropped under the threshold a roughly 1-in-3 annual risk of an if shielded from class action liability. after the rule takes effect. additional putative class action Moreover, as discussed above in Parts Finally, with regard to the member- lawsuit.1285 VI and VIII, due to resource constraints, ownership structure of credit unions, The Bureau acknowledges that, as regulators will tend to prioritize public the Bureau does not believe that issue some commenters and SBREFA enforcement actions against violations pertains to the size of the credit union. participants asserted, it may be that the of the law with larger aggregate harms. Therefore, the concern expressed by occurrence of a class action lawsuit To the extent that this entails targeting commenters that credit unions already larger entities, this potentially leaves harms small entities more than large have sufficient incentives for class actions as the only feasible means ones. Although damage claims and compliance does not seem relevant to of redress for customers of small entities payments to consumers are presumably the specific issue of a potential small that violate the law. At the same time, a direct function of a firm’s size in most entity exemption. the Bureau believes that consumers cases, those few small entities that do have no effective means of avoiding the 7. Description of the Steps the Agency face a lawsuit could feel a greater increased risk of harm that a small Has Taken To Minimize Any Additional impact than any given large business entity exemption would create when Cost of Credit for Small Entities that faces such a suit given that there are dealing with small providers. The size Although SERs expressed concern likely fixed costs to defending a class of particular institutions and their that the proposal could affect costs that action lawsuit (i.e., the time it takes to affiliates is not generally a matter of they bear when they seek out business resolve a class action costs a certain public record let alone known to credit to facilitate their operations, the amount in defense costs). Small entities individual consumers and the Study Bureau believes based on its estimates could have fewer cash reserves to pay a showed consumers already do not take derived from current litigation levels as judgement, or as commenters suggested, arbitration agreements into account discussed above that the vast majority of small entities may be more likely to when selecting providers. Thus, small providers’ cost of credit will not settle because they do not have the consumers would have little means to be impacted by the final rule. The 1286 resources to fight the class action. avoid the greater risks they may be Bureau did not receive any comments Nevertheless, to the extent this is true, exposed to by small providers who are on this subject in response to the the Bureau believes it is unlikely that not covered by the rule. proposal. Although the Bureau small entities on net would have greater Second, the Bureau also is concerned estimates a higher likelihood that a with the potential for market distortions smaller debt collector would be subject 1285 The number of additional cases for large or unfair or potentially arbitrary to incremental class litigation at any entities follows from the Bureau’s estimates in table 1, in the Section 1022(b)(2) Analysis above, and the distinctions that a small entity given time, most of these entities are firm counts presented in table 3. The Bureau exemption could create for market already subject to class litigation due to estimated there that there would be 514 additional participants. The Bureau does not agree the fact that they may or may not be able class action settlements across all industries over a with the community bank industry to rely on an arbitration agreement from five-year period. Deducting the 264 settlements affecting debt collectors and then dividing by five commenter that suggested it would be their clients. As such, the Bureau yields 50 cases. Deducting the three cases affecting appropriate to exempt smaller believes it is unlikely that these firms small entities leaves 47 class settlements. With the depository institutions even if the will experience an adverse impact on Bureau’s assumption of five times more cases Bureau does not exempt providers of the their cost of credit. In any event, the settled on an individual basis, this makes 282 total putative Federal class cases. Assuming an equal same products who are nonbanks. Such Study indicated that the majority of number of putative State class cases yields 564. differential exposure to legal risk based cases filed as class actions are resolved 1286 As noted in Part VI above, courts can take on the same conduct could create within a few months, such that any into account the financial condition of the market distortions of the sort that the adverse impact is likely to be only defendant both in approving settlements and imposing judgements. Thus, it is unlikely that a Bureau is charged with minimizing. temporary. firm would actually become bankrupt as a result of Third, even if all types of market As noted in the SBREFA Report, SERs a putative class action. participants were eligible for a small expressed concerns about how the

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proposals under consideration would would effectively state that no person The second information collection affect their borrowing costs. None of can use the agreement to stop the requirement relates to reporting these SERs reported that they actually consumer from being part of a class requirements. The provision will had spoken with their lender or that, action case in court.1289 The Bureau require providers to submit specified when they sought credit in the past, proposed this language and providers arbitral and court records to the Bureau their lender inquired as to whether they will be required to use it unless an relating to any arbitration agreement used arbitration agreements in their enumerated exception applies. The entered into after the compliance consumer contracts. Bureau will also permit providers to use date.1295 The rule will require the an alternative provision in connection submission of three general categories of X. Paperwork Reduction Act with arbitration agreements in contracts documents to the Bureau. The first Under the Paperwork Reduction Act for multiple products or services, some category will require providers to of 1995 (PRA) (44 U.S.C. 3501 et seq.), of which are not covered by the final submit any submission to a court that Federal agencies are generally required rule.1290 The Bureau will further permit relies upon an arbitration agreement in to seek the Office of Management and providers to include optional support of the provider’s attempt to seek Budget (OMB) approval for information adjustments to these provisions, where dismissal, deferral, or stay of a case.1296 collection requirements prior to applicable.1291 The second category will require implementation. Under the PRA, the The final rule contains two exceptions providers to submit certain records in Bureau may not conduct or sponsor, to this first information collection connection with any claim filed in and, notwithstanding any other requirement. Under the first exception, arbitration by or against the provider provision of law, a person is not if a provider enters into an arbitration concerning a covered consumer required to respond to an information agreement that existed previously (and financial product or service. In collection unless the information was entered into by another person after particular, providers will be required to collection displays a valid control the compliance date),1292 and the submit the following four types of number assigned by OMB. OMB has agreement does not already contain the documents in connection with any tentatively assigned control #3170–0064 provision required by § 1040.4(a)(2)(i) claim filed in arbitration: (A) The initial to these collections of information, (or the alternative provision permitted claim and any counterclaim; (B) the however this control number is not yet by proposed § 1040.4(a)(2)(ii)), the answer to any initial claim and/or active. provider must either ensure that the counterclaim, if any; (C) the arbitration This final rule contains information agreement is amended to contain a agreement filed with the arbitrator or collection requirements that have not specified provision or send any arbitration administrator; (D) the yet been approved by the OMB and, consumer to whom the agreement judgment or award, if any, issued by the therefore, are not effective until OMB applies a written notice containing arbitrator or arbitration administrator; approval is obtained. The unapproved specified language. The provider is and (E) if an arbitrator or arbitration information collection requirements are required to ensure the agreement is administrator refuses to administer or listed below. A complete description of amended or provide the written notice dismisses a claim due to the provider’s the information collection requirements, within 60 days of entering into the failure to pay required filing or including the burden estimate methods, agreement.1293 Under the second administrative fees, any communication is provided in the information exception, the requirement to ensure the provider receives from the arbitrator collection request (ICR) that the Bureau that an arbitration agreement entered or an arbitration administrator related to has submitted to OMB under the into after the compliance date contains such a refusal.1297 The third category requirements of the PRA. the provision required by will require providers to submit any The Bureau believes that this final § 1040.4(a)(2)(i) (or the alternative communications the provider receives rule will impose the following two new provision permitted by § 1040.4(a)(2)(ii)) from an arbitrator or arbitration information collection requirements will not apply to an arbitration administrator related to a determination (recordkeeping, reporting, or disclosure agreement for a general-purpose that an arbitration agreement covered by requirements) on covered entities or reloadable prepaid card if certain the final rule does not comply with the members of the public that would conditions are satisfied with respect to administrator’s fairness principles, constitute collections of information when the card was packaged and rules, or similar requirements.1298 requiring OMB approval under the PRA. purchased in relation to the compliance The Bureau received no comments Both information collections would date. For a prepaid card provider that specifically addressing the PRA notice, apply to agreements entered into after has the ability to contact the consumer although some industry commenters the compliance date of the rule.1287 in writing, the provider must also, made general comments regarding the The first information collection within 30 days of obtaining the expected burden of the proposal, requirement relates to disclosure consumer’s contact information, notify including burdens accounted for in the requirements. The final rule will require the consumer in writing that the PRA. As explained in detail in the providers that enter into arbitration arbitration agreement complies with the Supporting Statement filed with this agreements with consumers to ensure requirements of § 1040.4(a)(2) by rule and available at Regulations.gov or that these arbitration agreements providing an amended arbitration Reginfo.gov, the Bureau believes that the contain a specified provision, with two agreement to the consumer.1294 burden estimates contained in the limited exceptions as described Supporting Statement with the ICR that below.1288 The specified provision requirement does not impose a material burden, the Bureau has submitted to OMB under and thus the Bureau does not further discuss it in the requirements of the PRA are this Section 1022(b)(2) Analysis. 1287 See § 1040.5(a). 1289 See § 1040.4(a)(2)(i). sufficiently conservative, such that even 1288 See § 1040.4(a)(2). In addition to the one-time 1290 See § 1040.4(a)(2)(ii). if all of the assertions of the commenters change described directly above, some providers 1291 could be affected on an ongoing basis or sporadic See § 1040.4(a)(2)(iv)–(vi). 1295 basis in the future as they acquire existing contracts 1292 See comment 4(a)(2)–2 for an example of See § 1040.4(b). as the result of regular or occasional activity, under when this could occur. 1296 See § 1040.4(b)(1)(iii). § 1040.4(a)(2). As noted above in the Section 1293 See § 1040.4(a)(2)(iii). 1297 See § 1040.4(b)(1)(i). 1022(b)(2) Analysis, the Bureau believes that this 1294 See § 1040.5(b). 1298 See § 1040.4(b)(1)(ii).

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were entirely supported by data, they risks to consumers in the offering or (C) Except that this paragraph would still point to a burden less than provision of consumer financial (a)(1)(iii) does not apply when the or equal to the Bureau’s estimates. products or services, including referral or selection activity by the Pursuant to 44 U.S.C. 3507, the developments in markets for such creditor described in paragraphs Bureau will publish a separate notice in products or services. (a)(1)(iii)(A) or (B) of this section is the Federal Register announcing the incidental to a business activity of that submission of this these information § 1040.2 Definitions. creditor that is not covered by this collection requirements to OMB as well (a) Class action means a lawsuit in section; as OMB’s action on this these which one or more parties seek or (iv) Acquiring, purchasing, or selling submissions, including the OMB control obtain class treatment pursuant to an extension of consumer credit covered number and expiration date. Federal Rule of Civil Procedure 23 or by paragraph (a)(1)(i) of this section; or The Bureau has a continuing interest any State process analogous to Federal (v) Servicing an extension of in the public’s opinion of its collections Rule of Civil Procedure 23. consumer credit covered by paragraph of information. At any time, comments (b) Consumer means an individual or (a)(1)(i) of this section; regarding the burden estimate, or any an agent, trustee, or representative (2) Extending automobile leases as other aspect of the information acting on behalf of an individual. defined by 12 CFR 1090.108 or collection, including suggestions for (c) Pre-dispute arbitration agreement brokering such leases; reducing the burden, may be sent to the means an agreement between a covered (3)(i) Providing services to assist with Consumer Financial Protection Bureau person as defined by 12 U.S.C. 5481(6) debt management or debt settlement, (Attention: PRA Office), 1700 G Street and a consumer providing for modify the terms of any extension of NW., Washington, DC 20552, or by arbitration of any future dispute consumer credit covered by paragraph email to [email protected]. concerning a consumer financial (a)(1)(i) of this section, or avoid product or service covered by foreclosure; List of Subjects in 12 CFR Part 1040 § 1040.3(a). (ii) Providing products or services Banks, Banking, Business and (d) Provider means: represented to remove derogatory industry, Claims, Consumer protection, (1) A person as defined by 12 U.S.C. information from, or improve, a person’s Contracts, Credit, Credit unions, 5481(19) that engages in an activity credit history, credit record, or credit Finance, National banks, Reporting and covered by § 1040.3(a) to the extent that rating; recordkeeping requirements, Savings the person is not excluded under (4) Providing directly to a consumer a associations. § 1040.3(b); or consumer report, as defined by the Fair (2) An affiliate of a provider as Credit Reporting Act, 15 U.S.C. Authority and Issuance defined in paragraph (d)(1) of this 1681a(d), a credit score, as defined by ■ For the reasons set forth above, the section when that affiliate is acting as a 15 U.S.C. 1681g(f)(2)(A), or other Bureau adds 12 CFR part 1040 to service provider to the provider with information specific to a consumer Chapter X in Title 12 of the Code of which the service provider is affiliated derived from a consumer file, as defined Federal Regulations, as set forth below: consistent with 12 U.S.C. 5481(6)(B). by 15 U.S.C. 1681a(g), in each case except for a consumer report provided PART 1040—ARBITRATION § 1040.3 Coverage and exclusions from solely in connection with an adverse coverage. AGREEMENTS action as defined in 15 U.S.C. 1681a(k) (a) Covered products and services. with respect to a product or service that Sec. Except for persons when excluded from is not covered by this section; 1040.1 Authority and purpose. coverage pursuant to paragraph (b) of (5) Providing accounts subject to the 1040.2 Definitions. this section, this part applies to the Truth in Savings Act, 12 U.S.C. 4301 et 1040.3 Coverage and exclusions from offering or provision of the following seq., as implemented by 12 CFR part coverage. products or services when such offering 1040.4 Limitations on the use of pre- 707 and Regulation DD, 12 CFR part dispute arbitration agreements. or provision is a consumer financial 1030; 1040.5 Compliance date and temporary product or service as defined by 12 (6) Providing accounts or remittance exception. U.S.C. 5481(5): transfers subject to the Electronic Fund Supplement I to Part 1040—Official (1)(i) Providing an ‘‘extension of Transfer Act, 15 U.S.C. 1693 et seq., as Interpretations. credit’’ that is ‘‘consumer credit’’ when implemented by Regulation E, 12 CFR Authority: 12 U.S.C. 5512(b) and (c) and performed by a ‘‘creditor’’ as those part 1005; 5518(b). terms are defined in Regulation B, 12 (7) Transmitting or exchanging funds CFR 1002.2; as defined by 12 U.S.C. 5481(29) except § 1040.1 Authority and purpose. (ii) ‘‘Participat[ing] in [ ] credit when necessary to another product or (a) Authority. The regulation in this decision[s]’’ within the meaning of 12 service if that product or service: part is issued by the Bureau of CFR 1002.2(l) when performed by a (i) Is offered or provided by the Consumer Financial Protection (Bureau) ‘‘creditor’’ with regard to ‘‘consumer person transmitting or exchanging pursuant to sections 1022(b)(1) and (c) credit’’ as those terms are defined in 12 funds; and and 1028(b) of the Dodd-Frank Wall CFR 1002.2; (ii) Is not covered by this section; Street Reform and Consumer Protection (iii)(A) Referring applicants or (8) Accepting financial or banking Act (Dodd-Frank Act) (12 U.S.C. prospective applicants for ‘‘consumer data or providing a product or service to 5512(b)(1) and (c) and 5518(b)). credit’’ to creditors when performed by accept such data directly from a (b) Purpose. The purposes of this part a ‘‘creditor’’ as those terms are defined consumer for the purpose of initiating a are the furtherance of the public interest in 12 CFR 1002.2; or payment by a consumer via any and the protection of consumers (B) Selecting or offering to select payment instrument as defined by 12 regarding the use of agreements for creditors to whom requests for U.S.C. 5481(18) or initiating a credit consumer financial products and ‘‘consumer credit’’ may be made when card or charge card transaction for the services providing for arbitration of any done by a ‘‘creditor’’ as those terms are consumer, except by a person selling or future dispute, and also to monitor for defined in 12 CFR 1002.2; marketing a good or service that is not

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covered by this section, for which the (A) Is not subject to the Bureau’s one product or service, only some of payment or credit card or charge card rulemaking authority under 12 U.S.C. which are covered by the Arbitration transaction is being made; 5517(a)(2)(B); or Agreements Rule issued by the (9) Providing check cashing, check (B) Is subject to the Bureau’s Consumer Financial Protection Bureau. collection, or check guaranty services; rulemaking authority only under 12 The following provision applies only to or U.S.C. 5517(a)(2)(B)(i) but not 12 U.S.C. class action claims concerning the (10) Collecting debt arising from any 5517(a)(2)(B)(ii) or (iii); or products or services covered by that of the consumer financial products or (ii) Purchases or acquires an extension Rule: We agree that neither we nor services described in paragraphs (a)(1) of consumer credit excluded by anyone else will rely on this agreement through (9) of this section when paragraph (b)(4)(i) of this section. to stop you from being part of a class performed by: (5) Any ‘‘employer’’ as defined in the action case in court. You may file a class (i) A person offering or providing the Fair Labor Standards Act, 29 U.S.C. action in court or you may be a member product or service giving rise to the debt 203(d), to the extent it is offering or of a class action filed by someone else.’’ being collected, an affiliate of such providing a product or service described (iii) When the pre-dispute arbitration person, or a person acting on behalf of in paragraph (a) of this section to its agreement existed previously between such person or affiliate; employee as an employee benefit; or other parties and does not contain either (ii) A person purchasing or acquiring (6) A person to the extent providing the provision required by paragraph an extension of consumer credit covered a product or service in circumstances (a)(2)(i) of this section or the alternative by paragraph (a)(1)(i) of this section, an where they are excluded from the permitted by paragraph (a)(2)(ii) of this affiliate of such person, or a person Bureau’s rulemaking authority section: acting on behalf of such person or including pursuant to 12 U.S.C. 5517 or (A) The provider shall either ensure affiliate; or 5519. the pre-dispute arbitration agreement is (iii) A debt collector as defined by 15 amended to contain the provision U.S.C. 1692a(6). § 1040.4 Limitations on the use of pre- specified in paragraph (a)(2)(i) or dispute arbitration agreements. (b) Excluded persons. This part does (a)(2)(ii) of this section or provide any not apply to the following persons in (a) Use of pre-dispute arbitration consumer to whom the agreement the following circumstances: agreements in class actions—(1) General applies with the following written (1)(i) A person regulated by the rule. A provider shall not rely in any notice: ‘‘We agree not to rely on any pre- Securities and Exchange Commission as way on a pre-dispute arbitration dispute arbitration agreement to stop defined by 12 U.S.C. 5481(21); or agreement entered into after the date set you from being part of a class action (ii) A person to the extent regulated forth in § 1040.5(a) with respect to any case in court. You may file a class action by a State securities commission as aspect of a class action that concerns in court or you may be a member of a described in 12 U.S.C. 5517(h) as either: any of the consumer financial products class action filed by someone else.’’ (A) A broker dealer; or or services covered by § 1040.3, When the pre-dispute arbitration (B) An investment adviser; or including to seek a stay or dismissal of agreement applies to multiple products (iii) A person regulated by the particular claims or the entire action, or services, only some of which are Commodity Futures Trading unless and until the presiding court has covered by § 1040.3, the provider may, Commission as defined by 12 U.S.C. ruled that the case may not proceed as in this written notice, include the 5481(20) or a person with respect to any a class action and, if that ruling may be following optional additional language: account, contract, agreement, or subject to appellate review on an ‘‘This notice applies only to class action transaction to the extent subject to the interlocutory basis, the time to seek claims concerning the products or jurisdiction of the Commodity Futures such review has elapsed or such review services covered by the Arbitration Trading Commission under the has been resolved such that the case Agreements Rule issued by the Commodity Exchange Act, 7 U.S.C. 1 et cannot proceed as a class action. Consumer Financial Protection Bureau.’’ seq. (2) Provision required in covered pre- (B) The provider shall ensure the pre- (2)(i) A Federal agency as defined in dispute arbitration agreements. Upon dispute arbitration agreement is 28 U.S.C. 2671; entering into a pre-dispute arbitration amended or provide the notice to (ii) Any State, Tribe, or other person agreement for a consumer financial consumers within 60 days of entering to the extent such person qualifies as an product or service covered by § 1040.3 into the pre-dispute arbitration ‘‘arm’’ of a State or Tribe under Federal after the date set forth in § 1040.5(a): agreement. sovereign immunity law and the (i) Except as provided elsewhere in (iv) A provider may add any one or person’s immunities have not been this paragraph (a)(2) or in § 1040.5(b), a more of the following sentences at the abrogated by the U.S. Congress; provider shall ensure that any such pre- end of the disclosures required by (3) Any person with respect to a dispute arbitration agreement contains paragraphs (a)(2)(i) and (ii) of this product or service described in the following provision: ‘‘We agree that section: paragraph (a) of this section that the neither we nor anyone else will rely on (A)(1) ‘‘This provision does not apply person and any of its affiliates this agreement to stop you from being to parties that entered into this collectively provide to no more than 25 part of a class action case in court. You agreement before March 19, 2018.’’ consumers in the current calendar year may file a class action in court or you (2) ‘‘This provision does not apply to and to no more than 25 consumers in may be a member of a class action filed products or services first provided to the preceding calendar year; by someone else.’’ you before March 19, 2018 that are (4) A merchant, retailer, or other seller (ii) When the pre-dispute arbitration subject to an arbitration agreement of nonfinancial goods or services to the agreement applies to multiple products entered into before that date.’’ extent such person: or services, only some of which are (B) ‘‘This provision does not apply to (i) Offers or provides an extension of covered by § 1040.3, the provider may persons that are excluded from the consumer credit covered by paragraph include the following alternative Consumer Financial Protection Bureau’s (a)(1)(i) of this section that is of the type provision in place of the one required Arbitration Agreements Rule.’’ described in 12 U.S.C. 5517(a)(2)(A)(i); by paragraph (a)(2)(i) of this section: (C) ‘‘This provision also applies to the and ‘‘We are providing you with more than delegation provision.’’ A provider using

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this sentence as part of the disclosure (E) If an arbitrator or arbitration easily accessible and retrievable by the required by paragraph (a)(2)(i) or (ii) of administrator refuses to administer or public on its internet site. this section in a pre-dispute arbitration dismisses a claim due to the provider’s (5) Further redaction prior to Internet agreement is not required to separately failure to pay required filing or posting. Prior to making records insert the disclosure required by administrative fees, any communication identified in paragraph (b)(1) of this paragraph (a)(2)(i) or (ii) of this section the provider receives from the arbitrator section easily accessible and retrievable into a delegation provision that relates or an arbitration administrator related to by the public as required by paragraph to such a pre-dispute arbitration such a refusal; (b)(4) of this section, the Bureau shall agreement. (ii) Any communication the provider make such further redactions as are (v) In any provision or notice required receives from an arbitrator or an needed to comply with applicable by this paragraph (a)(2), if the provider arbitration administrator related to a privacy laws. uses a standard term in the rest of the determination that a pre-dispute (6) Deadline for internet posting of agreement to describe the provider or arbitration agreement for a consumer arbitral and court records. The Bureau the consumer, the provider may use that financial product or service covered by shall initially make records submitted to term instead of the term ‘‘we’’ or ‘‘you.’’ § 1040.3 does not comply with the the Bureau by providers under (vi) In any provision or notice administrator’s fairness principles, paragraph (b)(1) of this section easily required by this paragraph (a)(2), if a rules, or similar requirements, if such a accessible and retrievable by the public person has a genuine belief that determination occurs; and sovereign immunity from suit under (iii) In connection with any case in on its internet site no later than July 1, applicable law may apply to any person court by or against the provider 2019. The Bureau will annually make that may seek to assert the pre-dispute concerning any of the consumer records submitted under paragraph arbitration agreement, then the financial products or services covered (b)(1) available each year thereafter for provision or notice may include, after by § 1040.3: documents received by the end of the the sentence reading ‘‘You may file a (A) Any submission to a court that prior calendar year. class action in court or you may be a relies on a pre-dispute arbitration § 1040.5 Compliance date and temporary member of a class action filed by agreement in support of the provider’s exception. someone else,’’ the following language: attempt to seek dismissal, deferral, or (a) Compliance date. Compliance with ‘‘However, the defendants in the class stay of any aspect of a case; and action may claim they cannot be sued (B) The pre-dispute arbitration this part is required for any pre-dispute due to their sovereign immunity. This agreement relied upon in the motion or arbitration agreement entered into on or provision does not create or waive any filing. after March 19, 2018. such immunity.’’ In the preceding (2) Deadline for submission. A (b) Exception for pre-packaged sentence, the word ‘‘notice’’ may be provider shall submit any record general-purpose reloadable prepaid substituted for the word ‘‘provision’’ required pursuant to paragraph (b)(1) of card agreements. Section 1040.4(a)(2) when the included language is in a this section within 60 days of filing by shall not apply to a provider that enters notice. the provider of any such record with the into a pre-dispute arbitration agreement (vii) A provider may provide any arbitrator, arbitration administrator, or for a general-purpose reloadable prepaid provision or notice required by this court, and within 60 days of receipt by card if the requirements set forth in paragraph (a)(2) in a language other than the provider of any such record filed or either paragraphs (b)(1) or (2) of this English if the pre-dispute arbitration sent by someone other than the section are satisfied. agreement also is written in that other provider, such as the arbitration (1) For a provider that does not have language. administrator, the court, or the the ability to contact the consumer in (b) Submission of arbitral and court consumer. writing: records. For any pre-dispute arbitration (3) Redaction. Prior to submission of (i) The consumer acquires a general- agreement for a consumer financial any records pursuant to paragraph (b)(1) purpose reloadable prepaid card in product or service covered by § 1040.3 of this section, a provider shall redact person at a retail store; entered into after the date set forth in the following information: § 1040.5(a), a provider shall comply (i) Names of individuals, except for (ii) The pre-dispute arbitration with the requirements set forth below. the name of the provider or the agreement was inside of packaging (1) Records to be submitted. A arbitrator where either is an individual; material when the general-purpose provider shall submit a copy of the (ii) Addresses of individuals, reloadable prepaid card was acquired; following records to the Bureau, in the excluding city, State, and zip code; and form and manner specified by the (iii) Email addresses of individuals; (iii) The pre-dispute arbitration Bureau: (iv) Telephone numbers of agreement was packaged prior to the (i) In connection with any claim filed individuals; compliance date of the rule. in arbitration by or against the provider (v) Photographs of individuals; (2) For a provider that has the ability concerning any of the consumer (vi) Account numbers; to contact the consumer in writing: financial products or services covered (vii) Social Security and tax (i) The requirements set forth in by § 1040.3: identification numbers; paragraphs (b)(1)(i) through (iii) of this (A) The initial claim and any (viii) Driver’s license and other section are satisfied; and counterclaim; government identification numbers; and (B) The answer to any initial claim (ix) Passport numbers. (ii) Within 30 days of obtaining the and/or counterclaim, if any; (4) Internet posting of arbitral and consumer’s contact information, the (C) The pre-dispute arbitration court records. The Bureau shall provider notifies the consumer in agreement filed with the arbitrator or establish and maintain on its publicly writing that the pre-dispute arbitration arbitration administrator; available internet site a central agreement complies with the (D) The judgment or award, if any, repository of the records that providers requirements of § 1040.4(a)(2) by issued by the arbitrator or arbitration submit to it pursuant to paragraph (b)(1) providing an amended pre-dispute administrator; and of this section, and such records shall be arbitration agreement to the consumer.

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Supplement I to Part 1040—Official applies to a product or service, as well as a financial product or service is debt Interpretations pre-dispute arbitration agreement that is collection, when the underlying loan that is included within, annexed to, incorporated the subject of collection is a consumer Section 1040.2—Definitions into, or otherwise made a part of a larger financial product or service. 2(c) Pre-dispute arbitration agreement. agreement that governs the terms of the 2. Mobile phone applications and online 1. Scope of the term includes agreements provision of a product or service. access tools. If a provider of a consumer with covered persons that are not providers. 2(d) Provider. financial product or service covered by this i. While § 1040.2(c) defines ‘‘pre-dispute 1. Providers of multiple products or part offers or provides a consumer a arbitration agreement’’ as an agreement services. A provider as defined in § 1040.2(d) technological means for accessing between a covered person and a consumer, that also engages in offering or providing information about that product or service, the rule’s substantive requirements, which products or services not covered by § 1040.3 such as a mobile phone application or an are contained in § 1040.4, apply only to must comply with this part only for the internet Web site, this part shall apply to the ‘‘providers.’’ ‘‘Covered persons’’ as that term products or services that it offers or provides application or internet Web site as it is defined in 12 U.S.C. 5481(6) include that are covered by § 1040.3. For example, a concerns that product or service. persons excluded from the Bureau’s merchant that transmits funds for its Paragraph (a)(1)(iii). rulemaking authority under 12 U.S.C. 5517 customers as a general service, when that 1. Offering or providing creditor referral or and 5519. Therefore, the requirements funds transmittal activity is not necessary to selection services. Section 1040.3(a)(1)(iii) contained in § 1040.4 would not apply to any its offering or provision of products or includes in the coverage of part 1040 such excluded persons entering into a pre- services that are not covered by this part, providing referrals or selecting or offering to dispute arbitration agreement because they would be covered pursuant to § 1040.3(a)(7) select creditors for consumer credit are not ‘‘providers,’’ by virtue of the with respect to the transmittal of funds. That consistent with the meaning in 12 CFR definition in § 1040.2(d) which excludes same merchant generally would not be 1002.2(l) by a creditor as defined in 12 CFR persons described in § 1040.3(b) including its covered with respect to the sale of durable 1002.2(l). Section 1040.3(a)(1)(iii) does not paragraph (b)(6) (under which any person is goods to consumers, however, except when apply when such a creditor’s referral or excluded under § 1040.3(b) to the extent it is extending consumer credit in certain selection activity is incidental to its business not subject to the Bureau’s rulemaking circumstances as provided in 12 U.S.C. activity not covered by this section. See authority including under sections 1027 or 5517(a)(2)(B)(ii) or (iii). § 1040.3(a)(1)(iii)(C). For example, a 1029). The requirements in § 1040.4 could 2. Affiliated service providers. Section merchant may regularly and in the ordinary apply, however, to the use of any such pre- 1040.2(d)(2) defines the term ‘‘provider’’ to course of its business provide creditor dispute arbitration agreement by a different include an affiliate of another provider as referrals or selection services to help a person that meets the definition of provider defined in § 1040.2(d)(1) when the affiliate is consumer pay for nonfinancial goods or in § 1040.2(d), when the pre-dispute acting as a service provider to the other services sold by that merchant. By virtue of arbitration agreement was entered into after provider consistent with 12 U.S.C. such activities, such a merchant may be a the compliance date. 5481(6)(B). The rule applies to such an creditor as defined in 12 CFR 1002.2(l). ii. For example, an automobile dealer that affiliated service provider in connection with Nonetheless, such a merchant would not be extends consumer credit is a covered person the offering or provision of a covered covered by § 1040.3(a)(1)(iii) because its under 12 U.S.C. 5481(6). Its pre-dispute consumer financial product or service by the creditor referral or selection services are arbitration agreement would therefore fall other provider, even when the affiliated incidental to its sale of goods or services not within the scope of the definition in service provider is not itself directly engaged covered by this section. § 1040.2(c). However, an automobile dealer in offering or providing a consumer financial Paragraph (a)(1)(v). excluded from the Bureau’s rulemaking product or service covered by § 1040.3(a). 1. Servicing of credit. Section authority in circumstances described by However, even if an affiliated service 1040.3(a)(1)(v) includes in the coverage of Dodd-Frank section 1029 would not be provider does not meet the definition of part 1040 servicing of extensions of required to comply with the requirements in provider in § 1040.2(d)(2) because it provides consumer credit covered by § 1040.3(a)(1)(i). § 1040.4, because those requirements apply services to a person who is excluded from the Servicing of extensions of consumer credit only to providers, and such dealers are rule under § 1040.3(b) and thus is not a includes, but is not limited to, student loan excluded by § 1040.3(b)(6) and therefore are provider, the affiliated service provider still servicing as defined in 12 CFR 1090.106 and not providers under § 1040.2(d). The could be a provider as defined in mortgage loan servicing as defined in 12 CFR requirements in § 1040.4 would apply, § 1040.2(d)(1). For example, if an affiliate of 1024.2(b). however, to the use of the automobile a merchant excluded by § 1040.3(b)(6) Paragraph (a)(3)(i). dealer’s pre-dispute arbitration agreement by services consumer credit extended by the 1. Debt relief products and services. a different person that meets the definition of merchant, the affiliate may, in its own right, Section 1040.3(a)(3)(i) includes in the provider, such as a servicer or purchaser or be ‘‘servicing an extension of consumer coverage of part 1040 services that offer to acquirer of the automobile loan, when the credit covered by paragraph (a)(1)(i) of this renegotiate, settle, or modify the terms of a agreement was entered into after the section’’ as discussed in § 1040.3(a)(1)(v). As consumer’s debt. Providers of these services compliance date. a result, the affiliate servicer may meet the would be covered by § 1040.3(a)(3)(i) 2. Delegation provisions. The term pre- definition of provider in § 1040.2(d)(1) even regardless of the source of the debt, including dispute arbitration agreement as defined in though the merchant is not a provider. but not limited to when seeking to relieve § 1040.2(c) includes delegation provisions. consumers of a debt that does not arise from Delegation provisions are agreements to Section 1040.3—Coverage and Exclusions a consumer credit transaction as described by arbitrate threshold issues concerning a pre- From Coverage § 1040.3(a)(1)(i) or from a consumer financial dispute arbitration agreement, and may 3(a) Covered products and services. product or service more generally. sometimes appear elsewhere in a contract 1. Consumer financial products or services Paragraph (a)(3)(ii). containing or relating to the arbitration pursuant to 12 U.S.C. 5481(5). Section 1. Credit repair products or services. agreement. 1040.3(a) provides that the products or Section 1040.3(a)(3)(ii) includes in the 3. Form of pre-dispute arbitration services listed therein are covered by part coverage of part 1040 products or services agreements. A pre-dispute arbitration 1040 when they are consumer financial represented to remove derogatory agreement for a consumer financial product products or services as defined by 12 U.S.C. information from, or improve, a person’s or service includes any agreement between a 5481(5). Products or services generally meet credit history, credit record, or credit rating. covered person and a consumer providing for this definition in either of two ways: They The description of these products and arbitration of any future disputes between the are offered or provided for use by consumers services in § 1040.3(a)(3)(ii) is generally parties concerning a consumer financial primarily for personal, family, or household based upon the coverage of credit repair product or service described in § 1040.3(a), purposes, or they are delivered, offered, or goods or services in regulations regardless of the form or structure of the provided in connection with the first type of implementing 15 U.S.C. 6101 et seq., codified agreement. Examples include a standalone consumer financial products or services. An at 16 CFR 310.4(a)(2). However, part 1040 pre-dispute arbitration agreement that example of the second type of consumer also would apply even if such credit repair

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goods or services would not be covered refers to any federally recognized Indian product or service is not an employee benefit under the regulations implementing 15 Tribe, as defined by the Secretary of the for purposes of § 1040.3(b)(5). U.S.C. 6101 et seq., codified at 16 CFR Interior under section 104(a) of the Federally Section 1040.4—Limitations on the Use of 310.4(a)(2), solely because they were not the Recognized Indian Tribe List Act of 1994, 25 Pre-Dispute Arbitration Agreements subject of telemarketing as defined in 16 CFR U.S.C. 479a–1(a). 310.2(gg). Paragraph (b)(3). 1. Enters into a pre-dispute arbitration Paragraph (a)(8). 1. Including consumers to whom affiliates agreement. 1. Credit card and charge card provide a product or service toward the i. Examples of when a provider enters into transactions. Section 1040.3(a)(8) includes in numerical threshold for exemption of a a pre-dispute arbitration agreement for the coverage of part 1040 certain payment person under § 1040.3(b)(3). Section purposes of § 1040.4 include but are not processing activities involving the initiation 1040.3(b)(3) provides an exclusion to persons limited to when the provider: of credit card or charge card transactions. providing a product or service covered by A. Provides to a consumer, after the date The terms ‘‘credit card’’ and ‘‘charge card’’ § 1040.3(a) if no more than 25 consumers are set forth in § 1040.5(a), a new product or are defined in Regulation Z, 12 CFR provided the product or service in the service covered by § 1040.3(a) that is subject 1026.2(a)(15). For purposes of § 1040.3(a)(8), current and prior calendar years by the to a pre-existing agreement to arbitrate future those definitions in Regulation Z apply. person and its affiliates. The exclusion disputes between the parties, and the Paragraph (a)(10). applies based on the frequency with which provider is a party to that agreement, 1. Collection of debt by the same person the product is provided, regardless of the regardless of whether that agreement arising from covered and noncovered number of times a product is offered. Note, predates the date set forth in § 1040.5(a). products and services. Section however, that participating in a credit When that agreement predates the date set 1040.3(a)(10)(i) includes in the coverage of decision with regard to consumer credit in forth in § 1040.5(a), § 1040.4 applies only part 1040 the collection of debt by a provider circumstances described in § 1040.3(a)(1)(ii), with respect to any such new product or that arises from its providing any of the for example, constitutes providing a product service; products and services described in or service covered by § 1040.3(a), even if an B. Acquires or purchases after the date set paragraphs (a)(1) through (9) of § 1040.3, application for consumer credit is denied. In forth in § 1040.5(a) a product or service including, for example, an extension of addition, for purposes of this test, the covered by § 1040.3(a) that is subject to a pre- consumer credit described in § 1040.3(a)(1). number of consumers to whom affiliates of a dispute arbitration agreement and becomes a party to that pre-dispute arbitration If the person collecting such debt also person provide a product or service is agreement, even if the seller is excluded from collects other debt that does not arise from combined with the number of consumers to coverage under § 1040.3(b) or the pre-dispute any of the products and services described in whom the person itself provides that product arbitration agreement was entered into before paragraphs (a)(1) through (9) of § 1040.3, the or service. The term ‘‘affiliate’’ is defined in the date set forth in § 1040.5(a); or collection of that other debt is not included 12 U.S.C. 5481(1) as any person that controls, C. Adds a pre-dispute arbitration in the coverage of § 1040.3(a)(10)(i). For or is controlled by, or is under common agreement after the date set forth in example, if a creditor extended consumer control with another person. § 1040.5(a) to an existing product or service. 2. Effect of exceeding the numerical credit to consumers and business credit to ii. Examples of when a provider does not other persons, § 1040.3(a)(10)(i) would threshold for the exemption. If, during a enter into a pre-dispute arbitration agreement include in the coverage of part 1040 the calendar year, a person to that point for purposes of § 1040.4 include but are not collection of the consumer credit but not the excluded by § 1040.3(b)(3) for a given limited to when the provider: collection of the business credit. Similarly, if product or service described in § 1040.3(a) A. Modifies, amends, or implements the a debt buyer purchases a portfolio of credit provides that product or service to a 26th terms of a product or service that is subject card debt that includes both consumer and consumer, then that person ceases to be to a pre-dispute arbitration agreement business debt, § 1040.3(a)(10)(ii) would eligible for this exclusion at that time with without engaging in the conduct described in include in the coverage of part 1040 only the respect to that product or service. The comment 4–1.i after the date set forth in collection of the consumer credit card debt. provider must begin complying with this part § 1040.5(a). However, a provider does enter 2. Collection of debt by affiliates. with respect to the covered product or into a pre-dispute arbitration agreement for Paragraphs (a)(10)(i) and (ii) of § 1040.3 cover service provided to that 26th consumer. In purposes of § 1040.4 when the modification, certain collection activities not only by addition, the provider will not be eligible for amendment, or implementation constitutes providers themselves, but also by their the exclusion in § 1040.3(b)(3) whenever it the provision of a new product or service. affiliates. The term ‘‘affiliate’’ is defined in 12 offers or provides that product or service for See comment 4–1.i(A). U.S.C. 5481(1) as any person that controls, or the remainder of that calendar year and the B. Acquires or purchases a product or is controlled by, or is under common control following calendar year. service that is subject to a pre-dispute with another person. Paragraph (b)(4). arbitration agreement but does not become a 3(b) Excluded Persons. 1. Exemption for merchants who purchase party to the pre-dispute arbitration agreement Paragraph (b)(2)(ii). or acquire consumer credit from other that applies to the product or service. 1. Exclusion for States under Federal merchants who are exempt. Section 2. Application of section 1040.4 to sovereign immunity law. Section 1040.3(b)(4)(ii) provides an exemption for a providers that do not enter into pre-dispute 1043.3(b)(2)(ii) excludes States and other merchant who purchases or acquires arbitration agreements. persons to the extent they would be an arm consumer credit from another merchant i. Pursuant to § 1040.4(a)(1), a provider that of the State under Federal sovereign when the merchant from whom the credit is has not entered into a pre-dispute arbitration immunity law and their immunity has not being purchased or acquired is exempt under agreement cannot rely on any pre-dispute been abrogated by the U.S. Congress. For § 1040.3(b)(4)(i). This exemption in arbitration agreement entered into by another purposes of this rule, the term State includes § 1040.3(b)(4)(ii) applies not only to the person after the compliance date specified in any State, territory, or possession of the purchase or acquisition itself, but also to any § 1040.5(a) with respect to any aspect of a United States, the District of Columbia, the servicing or collection activities by the class action concerning a consumer financial Commonwealth of Puerto Rico, the merchant purchaser or acquirer. product or service covered by § 1040.3. In Commonwealth of the Northern Mariana Paragraph (b)(5). addition, pursuant to § 1040.4(b), the Islands, Guam, American Samoa, and the 1. Exemption for employers providing provider is required to submit certain U.S. Virgin Islands. employee benefits. Section 1040.3(b)(5) specified records concerning claims filed in 2. Exclusion for Tribes under Federal provides an exemption for an employer to the arbitration pursuant to such pre-dispute sovereign immunity law. Section extent it is offering or providing a consumer arbitration agreements. However, as 1040.3(b)(2)(ii) excludes Tribes and other financial product or service to an employee discussed in comment 4(a)(2)–1, persons to the extent that they would be an as an employee benefit. If an employer offers § 1040.4(a)(2) does not apply to providers arm of a Tribe under Federal sovereign or provides a consumer financial product or that do not enter into pre-dispute arbitration immunity law and their immunity has not service covered by § 1040.3(a) to an employee agreements. been abrogated by the U.S. Congress. For on terms and conditions that the employer ii. For example, when a debt collector purposes of this exclusion, the term ‘‘Tribe’’ makes available to the general public, such collecting on consumer credit covered by

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§ 1040.3(a)(1)(i) has not entered into a pre- the consumer financial products or services not also include the language required by dispute arbitration agreement, § 1040.4(a)(1) covered pursuant to § 1040.3. § 1040.4(a)(2) within a separate delegation nevertheless prohibits the debt collector from 3. Class actions concerning multiple provision—the language can be included relying on a pre-dispute arbitration products or services. In a class action once and applies to both the pre-dispute agreement entered into by the creditor after concerning multiple products or services arbitration agreement and the delegation the compliance date specified in § 1040.5(a) only some of which are covered by § 1040.3, provision. with respect to any aspect of a class action the prohibition in § 1040.4(a)(1) applies only 4(b) Submission of arbitral records. filed against the debt collector concerning its to claims that concern the consumer financial 1. Submission by entities other than debt collection products or services covered products or services covered by § 1040.3. providers. Section 1040.4(b) requires by section § 1040.3. The debt collector in this Paragraph 4(a)(2) Required provision. providers to submit specified arbitral and example is subject to § 1040.4(a)(1) even if 1. Application of section 1040.4(a)(2) to court records to the Bureau. Providers are not the creditor was a merchant, government, or providers that do not enter into pre-dispute required to submit the records themselves if other person who was excluded from arbitration agreements. Section 1040.4(a)(2) they arrange for another person, such as an coverage by § 1040.3(b)(5). sets forth requirements only for providers arbitration administrator or an agent of the 4(a) Use of pre-dispute arbitration that enter into pre-dispute arbitration provider, to submit the records on the agreements in class actions. agreements for a covered product or service providers’ behalf. The obligation to comply Paragraph 4(a)(1) General rule. after the compliance date set forth in with § 1040.4(b) nevertheless remains on the 1. Reliance on a pre-dispute arbitration § 1040.5(a). Accordingly, the requirements of provider, and thus the provider must ensure agreement. § 1040.4(a)(2) do not apply to a provider that that the person submits the records in i. Examples of conduct that constitutes does not enter into a pre-dispute arbitration accordance with § 1040.4(b). reliance. Sections 1040.4(a)(1) and (2) both agreement with a consumer. 2. Redaction by entities other than use the term ‘‘rely on.’’ For purposes of these 2. Entering into a pre-dispute arbitration providers. Section 1040.4(b)(3) requires provisions, reliance on a pre-dispute agreement that had existed previously providers to redact records before submitting arbitration agreement includes, but is not between other parties. Section them to the Bureau. Providers are not limited to, doing any of the following on the 1040.4(a)(2)(iii) requires a provider that required to perform the redactions basis of a pre-dispute arbitration agreement: enters into a pre-dispute arbitration themselves and may arrange for another A. Seeking dismissal, deferral, or stay of agreement that had existed previously as person, such as an arbitration administrator, any aspect of a class action; between other parties and does not contain or an agent of the provider, to redact the B. Seeking to exclude a person or persons the provision required by § 1040.4(a)(2)(i) or records. The obligation to comply with from a class in a class action; (ii) to ensure the agreement is amended to § 1040.4(b) nevertheless remains on the C. Objecting to or seeking a protective contain either of those provisions, as provider and thus the provider must ensure order intended to avoid responding to applicable, or to provide a written notice to that the person redacts the records in discovery in a class action; any consumer to whom the agreement accordance with § 1040.4(b). D. Filing a claim in arbitration against a applies. This could occur, when, for Paragraph 4(b)(1) Records to be submitted. consumer who has filed a claim on the same example, Bank A is acquiring Bank B after Paragraph 4(b)(1)(ii). issue in a class action; the compliance date specified in § 1040.5(a), 1. Determinations that a pre-dispute E. Filing a claim in arbitration against a and Bank B had entered into pre-dispute arbitration agreement does not comply with consumer who has filed a claim on the same arbitration agreements before the compliance an arbitration administrator’s fairness issue in a class action after the trial court has date specified in § 1040.5(a). If, as part of the principles. Section 1040.4(b)(1)(ii) requires denied a motion to certify the class but before acquisition, Bank A enters into the pre- submission to the Bureau of any an appellate court has ruled on an dispute arbitration agreements of Bank B, communication the provider receives related interlocutory appeal of that motion, if the Bank A would be required either to ensure to any arbitration administrator’s time to seek such an appeal has not elapsed the account agreements were amended to determination that the provider’s pre-dispute or the appeal has not been resolved; and contain the provision required by arbitration agreement entered into after the F. Filing a claim in arbitration against a § 1040.4(a)(2)(i) or the alternative permitted date set forth in § 1040.5(a) does not comply consumer who has filed a claim on the same by § 1040.4(a)(2)(ii), or to provide the notice with the administrator’s fairness principles issue in a class action after the trial court in specified in § 1040.4(a)(2)(iii)(B). See or rules. The submission of such records is that class action has granted a motion to comment 4–1 for examples of when a required both when the determination occurs dismiss the claim and, in doing so, the court provider enters into a pre-dispute arbitration in connection with the filing of a claim in noted that the consumer has leave to refile agreement. arbitration as well as when it occurs if no the claim on a class basis, if the time to refile 3. Notice to consumers. Section claim has been filed. However, when the the claim has not elapsed. 1040.4(a)(2)(iii) requires a provider that determination occurs with respect to a pre- ii. Example of conduct that does not enters into a pre-dispute arbitration dispute arbitration agreement that the constitute reliance. Reliance on a pre-dispute agreement that does not contain the provider has not entered into with any arbitration agreement for purposes of provision required by § 1040.4(a)(2)(i) or (ii) consumers, submission of any § 1040.4(a)(1) and (2) does not include, to either ensure the agreement is amended to communication related to that determination among other things, a class action defendant contain a specified provision or to provide is not required. For example, if the provider seeking or taking steps to preserve the any consumers to whom the agreement submits a prototype pre-dispute arbitration defendant’s ability to seek arbitration after applies with written notice. The notice may agreement for review by the arbitration the trial court has denied a motion to certify be provided in any way that the provider administrator and never includes it in any the class and either an appellate court has communicates with the consumer, including consumer agreements, the pre-dispute affirmed that decision on an interlocutory electronically. The notice may be provided arbitration agreement would not be entered appeal of that motion, or the time to seek either as a standalone document or included into and thus submission to the Bureau of such an appeal has elapsed. in another notice that the customer receives, communication related to a determination 2. Protected petitioning conduct. A class such as a periodic statement, to the extent made by the administrator concerning the action defendant does not violate permitted by other laws and regulations. pre-dispute arbitration agreement would not § 1040.4(a)(1) by relying on a pre-dispute 4. Contract provision for a delegation be required. arbitration agreement where it has a genuine provision. If a provider has included in its 2. Examples of fairness principles, rules, or belief that it is not subject to this part. For pre-dispute arbitration agreement the similar requirements. Section 1040.4(b)(1)(ii) example, a class action defendant does not language required by § 1040.4(a)(2), and the requires submission to the Bureau of records violate § 1040.4(a)(1) by relying on a pre- provider’s pre-dispute arbitration agreement related to any administrator’s determination dispute arbitration agreement where it has a contains a delegation provision, the provider that a provider’s pre-dispute arbitration genuine belief either that it is not covered by must also separately insert the language agreement violates the administrator’s the rule because it is not a provider pursuant required by § 1040.4(a)(2) into the delegation fairness principles, rules, or similar to § 1040.2(d), or that none of the claims provision, except under § 1040.4(a)(2)(iv)(C). requirements. What constitutes an asserted in the class action concern any of Under § 1040.4(a)(2)(iv)(C), the provider need administrator’s fairness principles, rules, or

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similar requirements should be interpreted i. Objects to or seeks a protective order virtue of the temporary exception in broadly. Examples of such principles or rules intended to avoid responding to discovery; § 1040.5(b)(2), the provider must still comply include, but are not limited to: ii. Is only referred to in an answer to a with § 1040.4(a)(1). i. The American Arbitration Association’s complaint or a counterclaim; or Paragraph 5(b)(2). Consumer Due Process Protocol; or iii. Is only incidentally part of an 1. Examples. Section 1040.5(b)(2)(ii) ii. JAMS Policy on Consumer Arbitrations attachment to a submission. For instance, if requires a provider that has the ability to Pursuant to Pre-Dispute Clauses Minimum a motion attaches the entire consumer contact the consumer in writing to provide Standards of Procedural Fairness. financial contract, including the pre-dispute an amended pre-dispute arbitration Paragraph 4(b)(1)(iii). arbitration agreement, but the motion does agreement to the consumer in writing within 1. Reliance on a pre-dispute arbitration not cite or rely on the pre-dispute arbitration 30 days after the issuer has the ability to agreement, the provider is not required to agreement. Section 1040.4(b)(1)(iii) requires contact the consumer. A provider is able to submit the motion to the Bureau. that a provider shall submit to the Bureau contact the consumer when, for example, the certain submissions in court that rely on a Section 1040.5—Compliance Date and consumer registers the card and gives the pre-dispute arbitration agreement entered Temporary Exception provider the consumer’s mailing address or email address. into after the compliance date set forth in 5(b) Exception for pre-packaged general- § 1040.5(a) with respect to certain aspects of purpose reloadable prepaid card agreements. Dated: June 27, 2017. a case concerning any of the consumer 1. Application of § 1040.4(a)(1) to Richard Cordray, financial products or services covered by providers of general-purpose reloadable Director, Bureau of Consumer Financial § 1040.3. prepaid card agreements. Where Protection. 2. A submission does not rely on a pre- § 1040.4(a)(2) does not apply to a provider dispute arbitration agreement, for purposes of that enters into a pre-dispute arbitration [FR Doc. 2017–14225 Filed 7–18–17; 8:45 am] § 1040(b)(1)(iii), if it: agreement on or after the compliance date by BILLING CODE 4810–AM–P

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