Vol. 81 Tuesday, No. 100 May 24, 2016

Part II

Bureau of Consumer Financial Protection

12 CFR Part 1040 Arbitration Agreements; Proposed Rule

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BUREAU OF CONSUMER FINANCIAL Number (RIN) for this rulemaking. authorized the Bureau, after completing PROTECTION Because paper mail in the Washington, the Study (hereinafter Study), to issue DC area and at the Bureau is subject to regulations restricting or prohibiting the 12 CFR Part 1040 delay, commenters are encouraged to use of arbitration agreements if the [Docket No. CFPB–2016–0020] submit comments electronically. In Bureau found that such rules would be general, all comments received will be in the public interest and for the RIN 3170–AA51 posted without change to http:// protection of consumers.3 Congress also www.regulations.gov. In addition, required that the findings in any such Arbitration Agreements comments will be available for public rule be consistent with the Bureau’s AGENCY: Bureau of Consumer Financial inspection and copying at 1275 First Study.4 Protection. Street NE., Washington, DC 20002, on In accordance with this authority, the official business days between the hours ACTION: Proposed rule with request for Bureau is now issuing this proposal and public comment. of 10 a.m. and 5 p.m. eastern time. You request for public comment. The can make an appointment to inspect the proposed rule would impose two sets of SUMMARY: Pursuant to section 1028(b) of documents by telephoning (202) 435– limitations on the use of pre- the Dodd-Frank Wall Street Reform and 7275. arbitration agreements by covered Consumer Protection Act (Pub. L. 111– All comments, including attachments providers of consumer financial 203), the Bureau of Consumer Financial and other supporting materials, will products and services. First, it would Protection (Bureau) is proposing to become part of the public record and prohibit providers from using a pre- establish 12 CFR part 1040, which subject to public disclosure. Sensitive dispute arbitration agreement to block would contain regulations governing personal information, such as account consumer class actions in court and two aspects of consumer finance dispute numbers or Social Security numbers, would require providers to insert resolution. First, the proposed rule should not be included. Comments language into their arbitration would prohibit covered providers of generally will not be edited to remove agreements reflecting this limitation. certain consumer financial products and any identifying or contact information. This proposal is based on the Bureau’s services from using an agreement with FOR FURTHER INFORMATION CONTACT: preliminary findings—which are a consumer that provides for arbitration Owen Bonheimer, Benjamin Cady, consistent with the Study—that pre- of any future dispute between the Lawrence Lee, Nora Rigby, Counsels; dispute arbitration agreements are being parties to bar the consumer from filing Eric Goldberg, Senior Counsel, Office of widely used to prevent consumers from or participating in a class action with Regulations, Consumer Financial seeking relief from legal violations on a respect to the covered consumer Protection Bureau, at 202–435–7700. class basis, and that consumers rarely financial product or service. Second, the SUPPLEMENTARY INFORMATION: file individual lawsuits or arbitration proposal would require a covered I. Summary of the Proposed Rule cases to obtain such relief. provider that is involved in an Second, the proposal would require arbitration pursuant to a pre-dispute The Bureau of Consumer Financial providers that use pre-dispute arbitration agreement to submit Protection (Bureau) is proposing arbitration agreements to submit certain specified arbitral records to the Bureau. regulations governing agreements that records relating to arbitral proceedings The Bureau proposes that the provide for the arbitration of any future to the Bureau. The Bureau intends to disputes between consumers and rulemaking would apply to certain use the information it collects to providers of certain consumer financial consumer financial products and continue monitoring arbitral products and services. Congress services. The Bureau is also proposing proceedings to determine whether there directed the Bureau to study these pre- to adopt official interpretations to the are developments that raise consumer dispute arbitration agreements in the proposed regulation. protection concerns that may warrant Dodd-Frank Wall Street Reform and further Bureau action. The Bureau DATES: Comments must be received on Consumer Protection Act (Dodd-Frank intends to publish these materials on its or before August 22, 2016. or Dodd-Frank Act).1 In 2015, the Web site in some form, with appropriate ADDRESSES: You may submit comments, Bureau published and delivered to redactions or aggregation as warranted, identified by Docket No. CFPB–2016– Congress a study of arbitration.2 In the to provide greater transparency into the 0020 or RIN 3170–AA51, by any of the Dodd-Frank Act, Congress also following methods: arbitration of consumer disputes. • Email: FederalRegisterComments@ 1 Public Law 111–203, 124 Stat. 1376 (2010), The proposal would apply to cfpb.gov. Include Docket No. CFPB– section 1028(a). providers of certain consumer financial 2016–0020 or RIN 3170–AA51 in the 2 Bureau of Consumer Fin. Prot., Arbitration products and services in the core subject line of the email. Study: Report to Congress, Pursuant to Dodd-Frank consumer financial markets of lending • Wall Street Reform and Consumer Protection Act money, storing money, and moving or Electronic: http:// § 1028(a) (2015), available at http:// www.regulations.gov. Follow the files.consumerfinance.gov/f/201503_cfpb_ exchanging money, including most instructions for submitting comments. arbitration-study-report-to-congress-2015.pdf. providers that are engaged in: • Mail: Monica Jackson, Office of the Specific portions of the Study are cited in this • Extending or regularly participating proposal where relevant, and the entire Study will Executive Secretary, Consumer be included in the docket for this rulemaking at in decisions regarding consumer credit Financial Protection Bureau, 1700 G www.regulations.gov. See Bureau of Consumer Fin. under Regulation B implementing the Street NW., Washington, DC 20552. Prot., Request for Information Regarding Scope, Equal Credit Opportunity Act (ECOA), • Hand Delivery/Courier: Monica Methods and Data Sources for Conducting Study of engaging primarily in the business of Pre-Dispute Arbitration Agreements, 77 FR 25148 Jackson, Office of the Executive (Apr. 27, 2012) (hereinafter Arbitration Study RFI). providing referrals or selecting creditors Secretary, Consumer Financial Before releasing the Study, the Bureau released for consumers to obtain such credit, and Protection Bureau, 1275 First Street NE., preliminary results in late 2013. Bureau of the acquiring, purchasing, selling, or Washington, DC 20002. Consumer Fin. Prot., Arbitration Study Preliminary servicing of such credit; Results (Dec. 12, 2013) (hereinafter Preliminary Instructions: All submissions should Results), available at http:// include the agency name and docket files.consumerfinance.gov/f/201312_cfpb_ 3 Dodd-Frank section 1028(b). number or Regulatory Information arbitration-study-preliminary-results.pdf. 4 Id.

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• extending or brokering of dispute.6 Parties may include language In addition, and of particular automobile leases as defined in Bureau in their contracts, before any dispute relevance here, Congress directed the regulation; has arisen, committing to resolve future Bureau to study the use of arbitration • providing services to assist with disputes between them in arbitration agreements in connection with other, debt management or debt settlement, rather than in court or allowing either non-mortgage consumer financial modify the terms of any extension of party the option to seek resolution of a products and services and authorized consumer credit, or avoid foreclosure; future dispute in arbitration. Such pre- the Bureau to prohibit or restrict the use • providing directly to a consumer a dispute arbitration agreements—which of such agreements if it finds that such this proposal generally refers to as action is in the public interest and for consumer report as defined in the Fair 7 13 Credit Reporting Act, a credit score, or ‘‘arbitration agreements’’ —have a long the protection of consumers. Congress other information specific to a consumer history, primarily in commercial also required that the findings in any contracts, where companies typically such rule be consistent with the from a consumer report, except for bargain to create agreements tailored to Study.14 The Bureau solicited input on adverse action notices provided by an their needs.8 In 1925, Congress passed the appropriate scope, methods, and employer; 15 • what is now known as the Federal data sources for the Study in 2012 and providing accounts under the Truth Arbitration Act (FAA) to require that released results of its three-year study in in Savings Act and accounts and courts enforce agreements to arbitrate, March 2015.16 Part III of this proposed remittance transfers subject to the including those entered into both before rule summarizes the Bureau’s process Electronic Fund Transfer Act; and after a dispute has arisen.9 for completing the Study and its results. • transmitting or exchanging funds In the last few decades, companies To place these results in greater context, (except when integral to another have begun inserting arbitration this Part provides a brief overview of: product or service not covered by the agreements in a wide variety of (1) Consumers’ rights under Federal and proposed rule), certain other payment standard-form contracts, such as in State laws governing consumer financial processing services, and check cashing, contracts between companies and products and services; (2) court check collection, or check guaranty consumers, employees, and investors. mechanisms for seeking relief where services consistent with the Dodd-Frank The use of arbitration agreements in those rights have been violated, and, in Act; and such contracts has become a contentious particular, the role of the class action • collecting debt arising from any of legal and policy issue due to concerns device in protecting consumers; and (3) the above products or services by a about whether the effects of arbitration the evolution of arbitration agreements provider of any of the above products or agreements are salient to consumers, and their increasing use in markets for services, their affiliates, an acquirer or whether arbitration has proved to be a consumer financial products and purchaser of consumer credit, or a fair and efficient dispute resolution services. person acting on behalf of any of these mechanism, and whether arbitration A. Consumer Rights Under Federal and persons, or by a debt collector as agreements effectively discourage the State Laws Governing Consumer defined by the Fair Debt Collection filing or resolution of certain claims in Financial Products and Services Practices Act. court or in arbitration. Companies often provide consumer Consistent with the Dodd-Frank Act, In light of these concerns, Congress has taken steps to restrict the use of financial products and services under the proposed rule would apply only to the terms of a written contract. In agreements entered into after the end of arbitration agreements in connection with certain consumer financial addition to being governed by such the 180-day period beginning on the contracts and the relevant State’s regulation’s effective date.5 The Bureau products and services and other consumer and investor relationships. contract law, the relationship between a is proposing an effective date of 30 days consumer and a financial service after a final rule is published in the Most recently, in the 2010 Dodd-Frank Act, Congress prohibited the use of provider is typically governed by Federal Register. To facilitate consumer protection laws at the State implementation and ensure compliance, arbitration agreements in connection 10 level, Federal level, or both, as well as the Bureau is proposing language that with mortgage , authorized the Securities and Exchange Commission by other State laws of general providers would be required to insert applicability (such as tort law). into such arbitration agreements to (SEC) to regulate arbitration agreements in contracts between consumers and Collectively, these laws create legal explain the effect of the rule. The rights for consumers and impose duties proposal would also permit providers of securities broker-dealers or investment 11 on the providers of financial products general-purpose reloadable prepaid advisers, and prohibited the use of arbitration agreements in connection and services that are subject to those cards to continue selling packages that laws. contain non-compliant arbitration with certain whistleblower 12 agreements, if they give consumers a proceedings. Early Consumer Protection in the Law compliant agreement as soon as Prior to the twentieth century, the law 6 Arbitration, Black’s Law Dictionary (10th ed. consumers register their cards and the 2014). generally embraced the notion of caveat 17 providers comply with the proposed 7 Proposed § 1040.2(d) would define the phrase emptor or ‘‘buyer beware.’’ State rule’s requirement not to use an ‘‘pre-dispute arbitration agreement.’’ When referring arbitration agreement to block a class to the definition, in proposed § 1040.2(d), this 13 Dodd-Frank section 1028(b). action. proposal will use the full term or otherwise clarify 14 Id. the intended usage. 15 Arbitration Study RFI, supra note 2. 8 II. Background See infra Part II.C. 16 Study, supra note 2. The Bureau also delivered 9 9 U.S.C. 1 et seq. the Study to Congress. See also Letter from Arbitration is a dispute resolution 10 Dodd-Frank section 1414(e) (codified as 15 Catherine Galicia, Ass’t Dir. of Legis. Aff., Bureau process in which the parties choose one U.S.C. 1639c(e)). of Consumer Fin. Prot. to Hon. Jeb Hensarling, or more neutral third parties to make a 11 Dodd-Frank sections 921(a) and 921(b) Chairman, Comm. on Fin. Serv. (Mar. 10, 2015) (on final and binding decision resolving the (codified as 15 U.S.C. 78o(o) and 15 U.S.C. 80b– file with the Bureau). 5(f)). 17 Caveat emptor assumed that buyer and seller 12 Dodd-Frank section 922(b) (codified as 18 conducted business face to face on roughly equal 5 Dodd-Frank section 1028(d). U.S.C. 1514A(e)). Continued

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common law afforded some minimal respect to credit transactions.24 In 1977, substantially more available to litigants, consumer protections against fraud, Congress passed the Fair Debt including consumers. The class action usury, or breach of contract, but these Collection Practices Act (FDCPA) to procedure in the Federal Rules, as common law protections were limited promote the fair treatment of consumers discussed in detail in Part II.B below, in scope. In the first half of the who are subject to debt collection allows a representative individual to twentieth century, Congress began activities.25 group his or her claims together with passing legislation intended to protect Also in the 1960s, States began those of other, absent individuals in one consumers, such as the Wheeler-Lea Act passing their own consumer protection lawsuit under certain circumstances. of 1938.18 The Wheeler-Lea Act statutes modeled on the FTC Act to Because TILA and the other Federal amended the Federal Trade Commission prohibit unfair and deceptive practices. consumer protection statutes discussed Act of 1914 (FTC Act) to provide the Unlike the Federal FTC Act, however, above permitted private rights of action, FTC with the authority to pursue unfair these State statutes typically provide for those private rights of action were or deceptive acts and practices.19 These private enforcement.26 The FTC enforceable through a class action, early Federal laws did not provide for encouraged the adoption of consumer unless the statute expressly prohibited private rights of action, meaning that protection statutes at the State level and it.29 they could only be enforced by the worked directly with the Council of Congress calibrated enforcement government. State Governments to draft the Uniform through private class actions in several Trade Practices Act and Consumer of the consumer protection statutes by Modern Era of Federal Consumer Protection Law, which served as a specifically referencing class actions Financial Protections model for many State consumer and adopting statutory damage schemes In the late 1960s, Congress began protection statutes.27 Currently, forty- that are pegged to a percentage of the passing consumer protection laws nine of the fifty States and the District defendants’ net worth.30 For example, focused on financial products, of Columbia have State consumer when consumers initially sought to beginning with the Consumer Credit protection statutes modeled on the FTC bring TILA class actions, a number of Protection Act (CCPA) in 1968.20 The Act that allow for private rights of courts applying Federal Rule 23 denied CCPA included the Truth in Lending action.28 motions to certify the class because of Act (TILA), which imposed disclosure the prospect of extremely large damages and other requirements on creditors.21 Class Actions Pursuant to Federal resulting from the aggregation of a large In contrast to earlier consumer Consumer Protection Laws number of claims for statutory protection laws such as the Wheeler-Lea In 1966, shortly before Congress first damages.31 Congress addressed this by Act, TILA permits private enforcement began passing consumer financial amending TILA in 1974 to cap class by providing consumers with a private protection statutes, the Federal Rules of action damages in such cases to the right of action, authorizing consumers to Civil Procedure (Federal Rules or FRCP) lesser of 1 percent of the defendant’s 32 pursue claims for actual damages and were amended to make class actions assets or $100,000. Congress has twice statutory damages and allowing increased the cap on class action consumers who prevail in litigation to 24 Public Law 94–239, 90 Stat. 251 (1976). damages in TILA: To $500,000 in 1976 33 recover their attorney’s fees and costs.22 25 Public Law 95–109, 91 Stat. 874 (1977). Other and $1,000,000 in 2010. Many other Congress followed the enactment of such Federal consumer protection laws include statutes similarly cap damages in class those enumerated in the Dodd-Frank Act and made actions.34 Further, the legislative history TILA with several other consumer subject to the Bureau’s rulemaking, supervision, financial protection laws, many of and enforcement authority: Alternative Mortgage of other statutes indicates a particular which provided private rights of action Transaction Parity Act of 1982, 12 U.S.C. 3801; intent to permit class actions given the for at least some statutory violations. Consumer Leasing Act of 1976, 15 U.S.C. 1667; Electronic Fund Transfer Act (EFTA), 15 U.S.C. 29 See, e.g., Wilcox v. Commerce Bank of Kansas For example, in 1970, Congress passed 1693 (except with respect to § 920 of that Act); Fair City, 474 F.2d 336, 343–44 (10th Cir. 1973). the Fair Credit Reporting Act (FCRA), Credit Billing Act, 15 U.S.C. 1666; Home Mortgage 30 A minority of Federal statutes provide private which promotes the accuracy, fairness, Disclosure Act of 1975, 12 U.S.C. 2801; Home rights of action but do not cap damages in class and privacy of consumer information Owners Protection Act of 1998, 12 U.S.C. 4901; action cases. For example, the Telephone Consumer Federal Deposit Insurance Act, 12 U.S.C. 1831t (b)– Protection Act (47 U.S.C. 227(b)(3)), the FCRA (15 contained in the files of consumer (f); Gramm-Leach-Bliley Act 15 U.S.C. 6802–09 U.S.C. 1681n, 1681o), and the Credit Repair reporting agencies, as well as providing (except with respect to section 505 as it applies to Organizations Act (15 U.S.C. 1679g) do not cap consumers to their own section 501(b) of that Act); Home Ownership and damages in class action cases. 23 Equity Protection Act of 1994 (HOEPA), 15 U.S.C. 31 See, e.g., Ratner v. Chem. Bank N.Y. Trust Co., information. In 1976, Congress passed 1601; Interstate Land Sales Full Disclosure Act, 15 ECOA to prohibit creditors from 54 FRD. 412, 416 (S.D.N.Y. 1972). U.S.C. 1701; Real Estate Settlement Procedures Act 32 See Public Law 93–495, 88 Stat. 1518, section discriminating against applicants with of 1974 (RESPA), 12 U.S.C. 2601; S.A.F.E. Mortgage 408(a). Licensing Act of 2008, 12 U.S.C. 5101; Truth in 33 Truth in Lending Act Amendments, Public Law Savings Act (TISA), 12 U.S.C. 4301, and section 626 94–240, 90 Stat. 260 (1976); Dodd-Frank section terms (much as English common law assumed that of the Omnibus Appropriations Act of 2009, 15 civil actions generally involved roughly equal 1416(a)(2). U.S.C. 1638. Federal consumer protection laws also 34 parties in direct contact with each other). J.R. include the Bureau’s authority to take action to For example, ECOA provides for the full recovery of actual damages on a class basis and caps Franke & D.A. Ballam, New Applications of prevent a covered person or service provider from punitive damages to the lesser of $500,000 or 1 Consumer Protection Law: Judicial Activism or committing or engaging in an unfair, deceptive, and percent of a creditor’s net worth; RESPA limits total Legislative Directive?, 32 Santa Clara L. Rev. 347, abusive acts or practices, Dodd-Frank section 1031, class action damages (including actual or statutory 351–55 (1992). and its disclosure authority, Dodd-Frank section 18 damages) to the lesser of $1,000,000 or 1 percent Wheeler-Lea Act of 1938, Public Law 75–447, 1032. of the net worth of a mortgage servicer; the FDCPA 52 Stat. 111 (1938). 26 Victor E. Schwartz & Cary Silverman, Common- limits class action recoveries to the lesser of 19 See FTC Act section 5. Prior to the Wheeler- Sense Construction of Consumer Protection Acts, 54 Lea Act, the FTC had the authority to reach ‘‘unfair $500,000 or 1 percent of the net worth of the debt U. Kan. L. Rev. 1, 15–16 (2005). collector; and EFTA provides for a cap on statutory methods of competition in commerce’’ but only if 27 Id. they had an anticompetitive effect. See FTC v. damages in class actions to the lesser of $500,000 28 Id. at 16. Every State that adopted a version of Raladam Co., 283 U.S. 643, 649 (1931). or 1 percent of a defendant’s net worth and lists FTC Act prohibits deception; some prohibit unfair 20 factors to consider in determining the proper Public Law 90–321, 82 Stat. 146 (1968). practices as well. See Carolyn L. Carter, Consumer amount of a class award. See 15 U.S.C. 1691e(b) 21 Id. at Title I. Protection in the States, Nat’l Consumer L. Ctr. (ECOA), 12 U.S.C. 2605(f)(2) (RESPA), 15 U.S.C. 22 15 U.S.C. 1640(a). (2009) at 5, available at https://www.nclc.org/ 1692k(a)(2)(B) (FDCPA), and 15 U.S.C. 23 Public Law 91–508, 84 Stat. 1114–2 (1970). images/pdf/udap/report_50_states.pdf. 1693m(a)(2)(B) (EFTA).

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potential for a small recovery in many what is now called class action impracticable.’’ 47 Class actions have consumer finance cases for individual litigation.40 been brought not only by individuals, damages.35 Similarly, many States The bill of peace was recognized in but also by companies, including 48 permit class action litigation to early United States case law and financial institutions. vindicate violations of their versions of ultimately adopted by several State Class Action Procedure Pursuant to Rule the FTC Act.36 A minority of States courts and the Federal courts.41 23 expressly prohibit class actions to Nevertheless, the use and impact of that A class action can be filed and enforce their FTC Acts. 37 procedure remained relatively limited maintained under Rule 23 in any case B. History and Purpose of the Class through the nineteenth and into the where there is a private right to bring a Action Procedure twentieth centuries. In 1938, the Federal civil action, unless otherwise prohibited Rules were adopted to govern civil by law. Pursuant to Rule 23(a), a class The default rule in United States litigation in Federal court, and Rule 23 action must meet all of the following courts, inherited from England, is that established a procedure for class requirements: (1) A class of a size such only those who appear as parties to a actions.42 That procedure’s ability to that joinder of each member as an given case are bound by its outcome.38 bind absent class members was never individual litigant is impracticable; (2) As early as the medieval period, clear, however.43 questions of law or fact common to the however, English courts recognized that That changed in 1966, when Rule 23 class; (3) a class representative whose litigating many individual cases was amended to create the class action claims or defenses are typical of those regarding the same issue was inefficient mechanism that largely persists in the of the class; and (4) that the class for all parties and thus began to permit same form to this day.44 Rule 23 was representative will adequately represent a single person in a single case to amended at least in part to promote those interests.49 The first two represent a group of people with efficiency in the courts and to provide prerequisites—numerosity and common interests.39 English courts later for compensation of individuals when commonality—focus on the absent or developed a procedure called the ‘‘bill many are harmed by the same represented class, while the latter two of peace’’ to adjudicate disputes conduct.45 The 1966 revisions to Rule tests—typicality and adequacy—address involving common questions and 23 prompted similar changes in most the desired qualifications of the class multiple parties in a single action. The States. As the Supreme Court has since representative. Pursuant to Rule 23(b), a class action also must meet one of the process allowed for judgments binding explained, class actions promote following requirements: (1) Prosecution all group members—whether or not they efficiency in that ‘‘the . . . device saves the resources of both the courts and the of separate actions risks either were participants in the suit—and inconsistent adjudications that would contained most of the basic elements of parties by permitting an issue potentially affecting every [class establish incompatible standards of

35 member] to be litigated in an See, e.g., Electronic Fund Transfer Act, H. Rept. 47 46 Amchem Prod., Inc. v. Windsor, 521 U.S. 591, No. 95–1315, at 15 (1978). The Report stated: economical fashion under Rule 23.’’ 616 (1997), citing Fed. R. Civ. P. 23 advisory ‘‘Without a class-action suit an institution could As to small harms, class actions provide committee’s note, 28 U.S.C. app. at 698 (stating that violate the title with respect to thousands of a mechanism for compensating a class action may be justified under Rule 23 where consumers without their knowledge, if its financial individuals where ‘‘the amounts at stake ‘‘the class may have a high degree of cohesion and impact was small enough or hard to discover. Class prosecution of the action through representatives action suits for damages are an essential part of for individuals may be so small that would be quite unobjectionable, or the amounts at enforcement of the bill because, all too often, separate suits would be stake for individuals may be so small that separate although many consumers have been harmed, the suits would be impracticable’’). See also id. at 617 actual damages in contrast to the legal costs to (citing Mace v. Van Ru Credit Corp., 109 F.3d 338, 40 Wright, Miller & Kane, 7A Fed. Prac. & Proc. individuals are not enough to encourage a 344 (7th Cir. 1997) (‘‘The policy at the very core of Civ. 1751 (3d. ed.). consumer to sue. Suits might only be brought for the class action mechanism is to overcome the 41 violations resulting in large individual losses while Id. Federal Equity Rule 48, in effect from 1842 problem that small recoveries do not provide the many small individual losses could quickly add up to 1912, officially recognized representative suits incentive for any individual to bring a action to thousands of dollars.’’ where parties were too numerous to be prosecuting his or her own rights. A class action 36 The laws of at least 14 States expressly permit conveniently brought before the court, but did not solves this problem by aggregating the relatively class action lawsuits. See, e.g., Cal. Bus. & bind absent members to the judgment. Id. In 1912, paltry potential recoveries into something worth Professions Code 17203 (2016); Haw. Rev. Stat. Federal Equity Rule 38 replaced Rule 48 and someone’s (usually an attorney’s) labor.’’). allowed absent members to be bound by a final Ann. sec. 480–13.3 (2015); Idaho Code Ann. sec. 48 See, e.g., Financial Institution Plaintiffs’ judgment. Id. 48–608(1) (2015); Ind. Code Ann. sec. 24–5–0.5– Consol. Class Action Compl. at 1, 5, In re: The 42 4(b) (2015); Kan. Stat. Ann. sec. 50–634(c) and (d) See Fed. R. Civ. P. 23 (1938). Home Depot, Inc. Customer Data Breach Litig., MDL (2012); Mass. Gen. Laws ch. 93A, sec. 9(2) (2016); 43 See American Pipe & Constr. Co. v. Utah, 414 No. 14–02583 (N.D. Ga. May 27, 2015), Dkt. No. 104 Mich. Comp. Laws sec. 445.911(3) (2015); Mo. Rev. U.S. 538, 545–46 (1974) (‘‘The Rule [prior to its (complaint filed on behalf of putative class of Stat. sec. 407.025(2) and (3) (2015); N.H. Rev. Stat. amendment] . . . contained no mechanism for ‘‘similarly situated banks, credit unions, and other sec. 358–A:10-a (2015); N.M. Stat. sec. 57–12–10(E) determining at any point in advance of final financial institutions’’ that had ‘‘issued and owned (2015); Ohio Rev. Code sec. 1345.09(B) (2016); R.I. judgment which of those potential members of the payment cards compromised by the Home Depot Gen. Laws sec. 6–13.1–5.2(b) (2015); Utah Code sec. class claimed in the complaint were actual data breach’’); Mem. & Order at 2, 14, In re: Target 13–11–19 and 20 (2015); Wyo. Stat. sec. 40–12– members and would be bound by the judgment.’’). Corp. Customer Data Security Breach Litig., MDL 108(b) (2015). 44 See, e.g., Robert H. Klonoff, The Decline of No. 14–2522 (D. Minn. Sept. 15, 2015), Dkt No. 589 37 See, e.g., Ala. Code sec. 8–19–10(f) (2002); Ga. Class Actions, 90 Wash. U. L. Rev. 729, 746–47 (granting certification to plaintiff class made up of Code Ann. sec. 10–1–399 (2015); La. Rev. Stat. Ann. (2013) (‘‘The Rule 23(a) and (b) criteria, by their banks, credit unions, and other financial sec. 51:1409(A) (2006); Mont. Code Ann. sec. 30– terms, have not changed in any significant way institutions that had ‘‘issued payment cards such as 14–133(1) (2003); S.C. Code Ann. sec. 37–5–202(1) since 1966, but some courts have become credit and debit cards to consumers who, in turn, (1999). increasingly skeptical in reviewing whether a used those cards at Target stores during the period 38 Ortiz v. Fibreboard Corp., 527 U.S. 815, 832– particular case satisfies those requirements’’). of the 2013 data breach,’’ noting that ‘‘given the 33 (1999). 45 See American Pipe, 414 U.S. at 553 (‘‘A number of financial institutions involved and the 39 For instance, in early English cases, a local contrary rule allowing participation only by those similarity of all class members’ claims, Plaintiffs priest might represent his parish, or a guild might potential members of the class who had earlier filed have established that the class action device is the be represented by its formal leadership. Samuel motions to intervene in the suit would deprive Rule superior method for resolving this dispute’’); In re Issacharoff, Assembling Class Actions, 90 Wash U. 23 class actions of the efficiency and economy of TJX Cos. Retail Security Breach Litig., 246 FRD. 389 L. Rev. 699, 704 (2014) (citing Stephen C. Yeazell, litigation which is a principal purpose of the (D. Mass. 2007) (denying class certification in From Medieval Group Litigation to the Modern procedure.’’). putative class action by financial institutions). Class Action 40 (1987)). 46 Califano v. Yamasaki, 442 U.S. 682, 701 (1979). 49 Fed. R. Civ. P. 23(a)(1) through (4).

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conduct for the defendant or would, as the class,54 may reject any settlement certification decisions, given the unique a practical matter, be dispositive of the agreement if it is not ‘‘fair, reasonable importance of the certification decision, interests of others; (2) defendants have and adequate,’’ 55 and must ensure that which can dramatically change the acted or refused to act on grounds the payment of attorney’s fees is dynamics of a class action case.61 In generally applicable to the class; or (3) ‘‘reasonable.’’ 56 The court also 2003, the Advisory Committee amended common questions of law or fact addresses objections from class Rule 23 to require courts to define predominate over any individual class members who seek a different outcome classes that they are certifying, increase member’s questions, and a class action to the case (e.g., lower attorney’s fees or the amount of scrutiny that courts must is superior to other methods of a better settlement). These requirements apply to class settlement proposals, and adjudication. are designed to ensure that all parties to impose additional requirements on class These and other requirements of Rule class litigation have their rights counsel.62 In 2015, the Advisory 23 are designed to ensure that class protected, including defendants and Committee further identified several action lawsuits safeguard absent class absent class members. issues that ‘‘warrant serious examination’’ and presented members’ due process rights because Developments in Class Action ‘‘conceptual sketches’’ of possible they may be bound by what happens in Procedure Over Time the case.50 Further, the courts may further amendments.63 protect the interests of absent class Since the 1966 amendments, Rule 23 Federal courts have also shaped class members through the exercise of their has generated a significant body of case action practice through their 57 substantial supervisory authority over law as well as significant controversy. interpretations of Rule 23. In the last the quality of representation and In response, Congress and the Advisory five years, the Supreme Court has specific aspects of the litigation. In the Committee on the Federal Rules of Civil decided several major cases refining typical Federal class action, an Procedure (which has been delegated class action procedure. In Wal-Mart individual plaintiff (or sometimes the authority to change Rule 23 under Stores, Inc. v. Dukes, the Court several individual plaintiffs), the Rules Enabling Act) have made a interpreted the commonality represented by an attorney, files a series of targeted changes to Rule 23 to requirement of Rule 23(a)(2) to require lawsuit on behalf of that individual and calibrate the equities of class plaintiffs that the common question that is the others similarly situated against a and defendants. Meanwhile, the courts basis for certification be central to the 64 defendant or defendants.51 Those have also addressed concerns about disposition of the case. In Comcast similarly situated individuals may be a Rule 23 in the course of interpreting the Corp. v. Behrend, the Court reaffirmed rule and determining its application in small group (as few as 40 or even less) that district courts must undertake a the context of particular types of cases. or as many as millions that are alleged ‘‘rigorous analysis’’ of whether a For example, Congress passed the putative class satisfies the to have suffered the same injury as the Private Securities Litigation Reform Act individual plaintiff. That individual predominance requirements in Rule (PSLRA) in 1995. Enacted partially in 23(b)(3) and reinforced that individual plaintiff, typically referred to as a response to concerns about the costs to named or lead plaintiff, cannot properly damages issues may foreclose class defendants of litigating class actions, the certification altogether.65 In Campbell- proceed with a class action unless the PSLRA reduced discovery burdens in court certifies that the case meets the Ewald Co. v. Gomez, decided this term, the early stages of securities class the Court held that a defendant cannot requirements of Rule 23, including the actions.58 In 2005, Congress again requirements of Rule 23(a) and (b) moot a class action by offering complete adjusted the class action rules when it relief to an individual plaintiff before discussed above. If the court does certify adopted the Class Action Fairness Act that the case can go forward as a class class certification (unless the individual (CAFA) in response to concerns about plaintiff agrees to accept that relief).66 In action, potential class members who do abuses of class action procedure in some not opt out of the class are bound by the Tyson Foods, Inc. v. Bouaphakeo, the State courts.59 Among other things, Court held that statistical techniques eventual outcome of the case.52 If not CAFA expanded the subject matter presuming that all class members are certified, the case proceeds only to bind jurisdiction of Federal courts to allow identical to the average observed in a the named plaintiff. them to adjudicate most large class sample can be used to establish A certified class case proceeds actions.60 The Advisory Committee also similarly to an individual case, except periodically reviews and updates Rule 61 Fed. R. Civ. P. 23(f). See also Newberg on Class that the court has an additional 23. In 1998, the Advisory Committee Actions § 7:41; Committee Notes on Rules, 1998 responsibility in a class case, pursuant amended Rule 23 to permit Amendment (‘‘This permissive interlocutory appeal to Rule 23 and the relevant case law, to interlocutory appeals of class provision is adopted under the power conferred by actively supervise classes and class 28 U.S.C. 1292(e). Appeal from an order granting or denying class certification is permitted in the sole proceedings and to ensure that the lead 54 See, e.g., Fed. R. Civ. P. 23(e) (‘‘The claims, discretion of the court of appeals. No other type of plaintiff keeps absent class members issues, or defenses of a certified class may be Rule 23 order is covered by this provision.’’). See informed.53 Among its tasks, a court settled, voluntarily dismissed, or compromised only 28 U.S.C. app. at 163 (2014). must review any attempts to settle or with the court’s approval.’’). This does not apply to 62 Fed. R. Civ. P. 23(c)(2)(B). See also 28 U.S.C. settlements with named plaintiffs reached prior to app. at 168 (2014) (‘‘Rule 23(c)(2)(B) is revised to voluntarily dismiss the case on behalf of the certification of a class. require that the notice of class certification define 55 Fed. R. Civ. P. 23(e)(2). the certified class in terms identical to the terms 50 See, e.g., Amchem Prod., Inc., 521 U.S. at 619– 56 Fed. R. Civ. P. 23(h). used in (c)(1)(B).’’). 21. 57 See, e.g., David Marcus, The History of the 63 See, e.g., Rule 23 Subcomm. Rept., in Adv. 51 Rule 23 also permits a class of defendants. Modern Class Action, Part I: Sturm und Drang, Comm. on Civil Rules Agenda Book for April 9–10, 52 In some circumstances, absent class members 1953–1980, 90 Wash. U. L. Rev. 587, 610 2015 at 243–97, available at http:// are not given an opportunity to opt out. E.g., Fed. (participants in the debate ‘‘quickly exhausted www.uscourts.gov/rules-policies/archives/agenda- R. Civ. P. 23(b)(1)(B) (providing for ‘‘limited fund’’ virtually every claim for and against an invigorated books/advisory-committee-rules-civil-procedure- class actions when claims are made by numerous Rule 23’’). april-2015. persons against a fund insufficient to satisfy all 58 Private Securities Litigation Reform Act of 64 564 U.S. 338, 131 S. Ct. 2541 (2011); see also claims); Fed. R. Civ. P. 23(b)(2) (providing for class 1995, Public Law 104–67, 109 Stat. 737 (1995). Klonoff, supra note 44, at 775. actions in which the plaintiffs are seeking primarily 59 Class Action Fairness Act of 2005, Public Law 65 133 S. Ct. 1426 (2013). injunctive or corresponding declaratory relief). 109–2, 119 Stat. 4 (2005). 66 Campbell-Ewald Co. v. Gomez, 136 S. Ct. 1036, 53 Fed. R. Civ. P. 23(g). 60 28 U.S.C. 1332(d), 1453, and 1711–15. 1046–48 (Jan. 20, 2016).

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classwide liability where each class for limited or streamlined discovery FAA remains in force today. Among member could have relied on that procedures as compared to those in other things, the FAA makes agreements sample to establish liability had each many court proceedings.74 to arbitrate ‘‘valid, irrevocable, and brought an individual action.67 Finally, enforceable, save upon such grounds as History of Arbitration in a case not yet decided as of the date exist at law or in equity for the of this proposal with implications for The use of arbitration to resolve revocation of any contract.’’ 84 certain types of class actions, Spokeo, disputes between parties is not new.75 Expansion of Consumer Arbitration and Inc. v. Robins, the Court is considering In England, the historical roots of Arbitration Agreements whether a plaintiff has standing to sue arbitration date to the medieval period, if they allege a violation of a Federal when merchants adopted specialized From the passage of the FAA through statute that allows for statutory rules to resolve disputes between the 1970s, arbitration continued to be damages—in this case, FCRA—and them.76 English merchants began used in commercial disputes between claim only those damages without utilizing arbitration in large numbers companies.85 Beginning in the 1980s, making a claim for actual damages.68 during the nineteenth century.77 however, companies began to use However, English courts were hostile arbitration agreements in contracts with C. Arbitration and Arbitration towards arbitration, limiting its use consumers, investors, employees, and Agreements through doctrines that rendered certain franchisees that were not negotiated.86 As described above at the beginning types of arbitration agreements By the 1990s, some of Part II, arbitration is a dispute unenforceable.78 Arbitration in the providers began including arbitration resolution process in which the parties United States in the eighteenth and agreements in their form consumer choose one or more neutral third parties nineteenth centuries reflected both agreements.87 to make a final and binding decision traditions: it was used primarily by One notable feature of these resolving the dispute.69 The typical merchants, and courts were hostile agreements it that they could be used to arbitration agreement provides that the toward it.79 Through the early 1920s, block class action litigation and often parties shall submit any disputes that U.S. courts often refused to enforce class arbitration as well.88 The may arise between them to arbitration. arbitration agreements and awards.80 Arbitration agreements generally give In 1920, New York enacted the first Judicial Review Under the Federal Arbitration Act, each party to the contract two distinct modern arbitration statute in the United 5 N.Y.U. J. Law & Bus. 745, 754 n.45 (2009). 84 rights. First, either side can file claims States, which strictly limited courts’ 9 U.S.C. 2. 85 See, e.g., Soia Mentschikoff, Commercial against the other in arbitration and power to undermine arbitration Arbitration, 61 Colum. L. Rev. 846, 850 (1961) obtain a decision from the arbitrator.70 decisions and arbitration agreements.81 (noting that, as of 1950, nearly one-third of trade Second, with some exceptions, either Under that law, if one party to an associations used a mechanism like the American side can use the arbitration agreement to Arbitration Association as a means of dispute arbitration agreement refused to proceed resolution between trade association members, and require that a dispute proceed in to arbitration, the statute permitted the that over one-third of other trade associations saw arbitration instead of court.71 The other party to seek a remedy in State members make their own individual arrangements typical agreement also specifies an court to enforce the arbitration for arbitrations); see also id. at 858 (noting that organization called an arbitration 82 AAA heard about 240 commercial arbitrations a agreement. In 1925, Congress passed year from 1947 to 1950, comparable to the volume administrator. Administrators, which the United States Arbitration Act, which of like cases before the U.S. District Court of the may be for-profit or non-profit was based on the New York arbitration Southern District of New York in the same time organizations, facilitate the selection of law and later became known as the period). Arbitration was also used in the labor context where unions had bargained with an arbitrator to decide the dispute, 83 Federal Arbitration Act (FAA). The employers to create specialized dispute resolution provide for basic rules of procedure and mechanisms pursuant to the Labor Management operations support, and generally 74 See Study, supra note 2, section 4 at 16–17. Relations Act. 29 U.S.C. 401–531. administer the arbitration.72 Parties 75 The use of arbitration appears to date back at 86 Stephen J. Ware, Arbitration Clauses, Jury- usually have very limited rights to least as far as the Roman Empire. See, e.g., Amy J. Waiver Clauses and Other Contractual Waivers of Schmitz, Ending a Mud Bowl: Defining Arbitration’s Constitutional Rights, 67 Law & Contemp. Problems appeal from a decision in arbitration to Finality Through Functional Analysis, 37 Ga. L. 179 (2004). 73 a court. Most arbitration also provides Rev. 123, 134–36 (2002); Derek Roebuck, Roman 87 Sallie Hofmeister, Bank of America is Upheld Arbitration (2004). on Consumer Arbitration, N.Y. Times, Aug. 20, 67 Tyson Foods, Inc. v. Bouaphakeo, 136 S. Ct. 76 See, e.g., Jeffrey W. Stempel, Pitfalls of Public 1994 (‘‘ ‘The class action cases is where the real 663, 670 (Mar. 22, 2016). Policy: The Case of Arbitration Agreements, 22 St. money will be saved [by arbitration agreements],’ 68 Spokeo Inc. v. Robins, 135 S. Ct. 1892 (2015) Mary’s L.J. 259, 269–70 (1990). Peter Magnani, a spokesman for the bank, said.’’); (noting that the question before the court is 77 Id. John P. Roberts, Mandatory Arbitration by Financial ‘‘[w]hether Congress may confer Article III standing 78 See, e.g., Schmitz, supra note 75, at 137–39. Institutions, 50 Cons. Fin. L.Q. Rep. 365, 367 (1996) (identifying an anonymous bank ‘‘ABC’’ as having upon a plaintiff who suffers no concrete harm, and 79 See, e.g., Stempel, supra note 76 at 273–74. adopted arbitration provisions in its contracts for who therefore could not otherwise invoke the 80 David S. Clancy & Matthew M.K. Stein, An consumer credit cards, deposit accounts, and safety jurisdiction of a Federal court, by authorizing a Uninvited Guest: Class Arbitration and the Federal deposit boxes); Hossam M. Fahmy, Arbitration: private right of action based on a bare violation of Arbitration Act’s Legislative History, 63 Bus. Law. Wiping Out Consumers Rights?, 64 Tex. B.J. 917, a Federal statute’’). 55, 58 & n.11 (2007) (citing, inter alia, Haskell v. 917 (2001) (citing Barry Meier, In Fine Print, 69 See supra note 6. McClintic-Marshall Co., 289 F. 405, 409 (9th Cir. Customers Lose Ability to Sue, N.Y. Times, Mar. 10, 70 Id. 1923) (refusing to enforce arbitration agreement 1997, at A1 (noting in 2001 that ‘‘[t]he use of 71 As described in the Study, however, most because of a ‘‘settled rule of the common law that consumer arbitration expanded eight years ago arbitration agreements in consumer financial a general agreement to submit to arbitration did not when Bank of America initiated its current policy,’’ contracts contain a ‘‘small claims court carve-out’’ oust the courts of jurisdiction, and that rule has when ‘‘notices of the new arbitration requirements that provides the parties with a contractual right to been consistently adhered to by the federal courts’’); were sent along with monthly statements to 12 pursue a claim in small claims court. Study, supra Dickson Manufacturing Co. v. Am. Locomotive Co., million customers, encouraging thousands of other note 2, section 2 at 33–34. 119 F. 488, 490 (C.C.M.D. Pa. 1902) (refusing to companies to follow the same policy’’). 72 See id., section 2 at 34. enforce an arbitration agreement where plaintiff 88 See, e.g., Alan S. Kaplinsky & Mark J. Levin, 73 See 9 U.S.C. 9. See also Hall Street Assocs., revoked its consent to arbitration). Excuse Me, But Who’s the Predator? Banks Can Use L.L.C. v. Mattel, Inc., 552 U.S. 576, 584 (2008) 81 43 N.Y. Stat. 833 (1925). Arbitration Clauses as a Defense, 7 Bus. L. Today (holding that parties cannot expand the grounds for 82 Id. 24 (1998) (‘‘Lenders that have not yet implemented vacating arbitration awards in Federal court by 83 9 U.S.C. 1, et seq. The FAA was codified in arbitration programs should promptly consider contract); Preliminary Results, supra note 2 at 6, 1947. Public Law 282, 61 Stat. 669 (July 30, 1947). doing so, since each day that passes brings with it n.4. James E. Berger & Charlene Sun, The Evolution of Continued

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agreements could block class actions 214,000 arbitrations, most of which series of class actions filed against NAF filed in court because, when sued in a were consumer debt collection were consolidated in a multidistrict class action, companies could use the proceedings brought by companies.91 litigation and NAF settled those in 2011 arbitration agreement to dismiss or stay by agreeing to suspend $1 billion in Legal Challenges to Arbitration the class action in favor of arbitration. pending debt collection arbitrations.96 Agreements Yet the agreements often prohibited The American Arbitration Association class arbitration as well, rendering The increase in the prevalence of (AAA) likewise announced a plaintiffs unable to pursue class claims arbitration agreements coincided with moratorium on administering company- in either litigation or arbitration.89 More various legal challenges to their use in filed debt collection arbitrations, recently, some consumer financial consumer contracts. One set of articulating significant concerns about providers themselves have disclosed in challenges focused on the use of due process and fairness to consumers their filings with the SEC that they rely arbitration agreements in connection subject to such arbitrations.97 on arbitration agreements for the with debt collection disputes. In the late A second group of challenges asserted express purpose of shielding themselves 2000s, consumer groups began to that the invocation of arbitration from class action liability.90 criticize the fairness of debt collection agreements to block class actions was Since the early 1990s, the use of arbitration proceedings administered by unlawful. Because the FAA permits arbitration agreements in consumer the NAF, the most widely used challenges to the validity of arbitration financial contracts has become arbitration administrator for debt agreements on grounds that exist at law widespread, as shown by Section 2 of collection.92 In 2008, the San Francisco or in equity for the revocation of any the Study (which is discussed in detail City Attorney’s office filed a civil action contract,98 challengers argued that in Part III.D below). By the early 2000s, against NAF alleging that NAF was provisions prohibiting arbitration from a few consumer financial companies biased in favor of debt collectors.93 In proceeding on a class basis—as well as had become heavy users of arbitration 2009, the Minnesota Attorney General other features of particular arbitration proceedings to obtain debt collection sued NAF, alleging an institutional agreements—were unconscionable judgments against consumers. For conflict of interest because a group of under State law or otherwise example, in 2006 alone, the National investors with a 40 percent ownership unenforceable.99 Initially, these Arbitration Forum (NAF) administered stake in an affiliate of NAF also had a challenges yielded conflicting results. majority ownership stake in a debt Some courts held that class arbitration the risk of additional multimillion-dollar class collection firm that brought a number of waivers were not unconscionable.100 action lawsuits that might have been avoided had cases before NAF.94 A few days after the Other courts held that such waivers arbitration procedures been in place.’’); see also filing of the lawsuit, NAF reached a were unenforceable on Bennet S. Koren, Our Mini Theme: Class Actions, settlement with the Minnesota Attorney 101 7 Bus. L. Today 18 (1998) (industry attorney unconscionability grounds. Some of recommends adopting arbitration agreements General pursuant to which it agreed to because ‘‘[t]he absence of a class remedy ensures stop administering consumer 96 Mem. and Order, In re National Arbitration that there will be no formal notification and most arbitrations completely, although NAF Forum Trade Practices Litigation, No. 10-md-02122 claims will therefore remain unasserted.’’). did not admit liability.95 Further, a (D. Minn. Aug. 8, 2011). 89 Even if a pre-dispute arbitration agreement 97 See AAA Press Release, The American does not prohibit class arbitration, an arbitrator may Arbitration Association Calls for Reform of Debt 91 not permit arbitration to go forward on a class basis Carrick Mollenkamp, et al., Turmoil in Collection Arbitration (July 23, 2009), available at unless the arbitration agreement itself shows the Arbitration Empire Upends Credit-Card Disputes, https://www.nclc.org/images/pdf/arbitration/ Wall St. J., Oct. 16, 2009. See also Public Citizen, parties agreed to do so. See Stolt-Nielsen S.A. v. testimonysept09-exhibit3.pdf. See also American The Arbitration Trap: How Companies AnimalFeeds Int’l Corp., 559 U.S. 662, 684 (2010) Arbitration Association, Consumer Debt Collection Ensnare Consumers (2007), available at http:// (‘‘[A] party may not be compelled under the FAA Due Process Protocol Statement of Principles www.citizen.org/publications/ to submit to class arbitration unless there is a (2010), available at https://www.adr.org/aaa/ publicationredirect.cfm?ID=7545. contractual basis for concluding that the party ShowProperty?nodeId=%2FUCM%2FADRSTG_ 92 See Mollencamp, supra note 91. In addition to agreed to do so.’’) (emphasis in original). Both the 003865. JAMS has reported to the Bureau that it cases relating to debt collection arbitrations, NAF AAA and JAMS class arbitration procedures reflect only handles a small number of debt collection was later added as a defendant to the Ross v. Bank the law; both require an initial determination as to claims and often those arbitrations are initiated by of America case, a putative class action pertaining whether the arbitration agreement at issue provides consumers. to non-disclosure of foreign currency conversion 98 9 U.S.C. 2 (providing that agreements to for class arbitration before a putative class fees; NAF was alleged to have facilitated an arbitrate ‘‘shall be valid, irrevocable, and arbitration can move forward. See AAA, antitrust conspiracy among credit card companies enforceable, save upon such grounds as exist at law Supplementary Rules for Class Arbitrations, Rule 3 to adopt arbitration agreements. NAF settled those or in equity for the revocation of any contract.’’). (effective Oct. 8, 2003) (‘‘Upon appointment, the allegations. See Order Preliminarily Approving 99 arbitrator shall determine as a threshold matter, in Class Action Settlement as to Defendant National See, e.g., Opening Br. on the Merits, Discover a reasoned, partial final award on the construction Arbitration Forum Inc., In re Currency Conversion Bank v. Superior Court, No. S113725, 2003 WL of the arbitration clause, whether the applicable Fee Antitrust Litig., MDL 1409 (S.D.N.Y. Dec. 13, 26111906, at 5 (Cal. 2005) (‘‘[A] ban on class actions arbitration clause permits the arbitration to proceed 2011). in an adhesive consumer contract such as the one on behalf of or against a class (the ‘‘Clause 93 California v. National Arbitration Forum, Inc., at issue here is unconscionable because it is one- Construction Award.’’); JAMS Class Action No. 473–569 (S.F. Sup. Ct. Mar. 2009). sided and effectively non-mutual—that is, it benefits only the corporate defendant, and could Procedures, Rule 2: Construction of the Arbitration 94 See Complaint at 2, State of Minnesota v. never operate to the benefit of the consumer.’’) Clause (effective May 1, 2009) (‘‘[O]nce appointed, National Arbitration Forum, Inc. No. 27–cv– 100 the Arbitrator, following the law applicable to the 0918550 (4th Jud. Dist. Minn. July 14, 2009), See, e.g., Strand v. U.S. Bank N.A., 693 NW.2d validity of the arbitration clause as a whole, or the available at https://www.nclc.org/images/pdf/ 918 (N.D. 2005); Edelist v. MBNA America Bank, validity of any of its terms, or any court order unreported/naf_complaint.pdf. 790 A.2d 1249 (Sup. Ct. of Del., New Castle Cty. applicable to the matter, shall determine as a 95 Press Release, State of Minnesota, Office of the 2001). threshold matter whether the arbitration can Attorney General, National Arbitration Forum 101 See, e.g., Brewer v. Missouri Title Loans, Inc., proceed on behalf of or against a class.’’). Barred from Credit Card and Consumer Arbitrations 323 SW.3d 18 (Mo. 2010) (en banc); Feeney v. Dell, 90 See, e.g., Services, Annual Under Agreement with Attorney General Swanson Inc., 908 NE.2d 753 (Mass. 2009); Fiser v. Dell Report (Form 10–K) (Feb. 25, 2015) at 43 (‘‘[W]e (July 19, 2009), available at http:// Computer Corp., 188 P.3d 1215 (N.M. 2008); have historically relied on our arbitration clause in pubcit.typepad.com/files/nafconsentdecree.pdf. Tillman v. Commercial Credit Loans, Inc., 655 agreements with customers to limit our exposure to NAF settled the City of San Francisco’s claims in SE.2d 362 (N.C. 2008); Dale v. Comcast Corp., 498 consumer class action litigation . . .’’); Synchrony 2011 by agreeing to cease administering consumer F.3d 1216 (11th Cir. 2007) (holding that class action Financial, Annual Report (Form 10–K) (Feb. 23, arbitrations in California in perpetuity and to pay ban in arbitration agreement substantively 2015) at 45 (‘‘[H]istorically the arbitration provision a $1 million penalty. News Release, City Attorney unconscionable under Georgia law); Scott v. in our customer agreements generally has limited Dennis Herrera, Herrera Secures $5 Million Cingular Wireless, 161 P.3d 1000 (Wash. 2007) (en our exposure to consumer class action litigation Settlement, Consumer Safeguards Against BofA banc); Kinkel v. Cingular Wireless LLC, 857 NE.2d . . . .’’). Credit Card Subsidiary (Aug. 22, 2011). 250 (Ill. 2006); Muhammad v. Cnty. Bank of

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these decisions also held that the FAA common, Federal regulators, Congress, Since 1975, FTC regulations did not preempt application of a state’s and State legislatures began to take implementing the Magnuson-Moss unconscionability doctrine.102 notice of their impact on the ability of Warranty Act (MMWA) have barred the Before 2011, courts were divided on consumers to resolve disputes. One of use, in consumer warranty agreements, whether arbitration agreements that bar the first entities to regulate arbitration of arbitration agreements that would class proceedings were unenforceable agreements was the National result in binding decisions.112 Some because they violated some states’ laws. Association of Securities Dealers—now courts in the late 1990s disagreed with Then, in 2011, the Supreme Court held known as the Financial Industry the FTC’s interpretation, but the FTC in AT&T Mobility v. Concepcion that Regulatory Authority (FINRA)—the self- promulgated a final rule in 2015 that the FAA preempted application of regulating body for the securities ‘‘reaffirm[ed] its long-held view’’ that California’s unconscionability doctrine industry that also administers the MMWA ‘‘disfavors, and authorizes to the extent it would have precluded arbitrations between member companies the Commission to prohibit, mandatory enforcement of a consumer arbitration and their customers.107 Under FINRA’s binding arbitration in warranties.’’ 113 In agreement with a provision prohibiting Code of Arbitration for customer doing so, the FTC noted that the the filing of arbitration on a class basis. disputes, FINRA members have been language of the MMWA presupposed The Court concluded that any State prohibited since 1992 from enforcing an that the kinds of informal dispute law—even one that serves as a general arbitration agreement against any settlement mechanisms the FTC would contract law defense—that ‘‘[r]equir[es] member of a certified or putative class permit would not foreclose the filing of 114 the availability of classwide arbitration unless and until the class treatment is a civil action in court. interferes with fundamental attributes of denied (or a certified class is More recently, the Centers for arbitration and thus creates a scheme Medicare and Medicaid Services (CMS) decertified) or the class member has inconsistent with the FAA.’’ 103 The proposed a rule that would revise the opted out of the class or class relief.108 Court reasoned that class arbitration requirements that long-term health care FINRA’s code also requires this eliminates the principal advantage of facilities must meet to participate in the limitation to be set out in any member arbitration—its informality—and Medicare and Medicaid programs.115 company’s arbitration agreement. The increases risks to defendants (due to the 109 Among the new proposed rules are a high stakes of mass resolution combined SEC approved this rule in 1992. In number of requirements for any with the absence of multilayered addition, since 1976, the regulations of arbitration agreements between long- review).104 As a result of the Court’s the Commodities Futures Trading term care facilities and residents of holding, parties to litigation could no Commission (CFTC) implementing the those facilities, including that there be longer prevent the use of an arbitration Commodity Exchange Act have required a stand-alone agreement signed by the agreement to block a class action in that arbitration agreements in resident; that care at the facility not be 110 court on the ground that a prohibition commodities contracts be voluntary. conditioned on signing the agreement; on class arbitration in the agreement In 2004, the Federal National Mortgage and that the agreement be clear in form, was unconscionable under the relevant Association (Fannie Mae) and the manner and language as to what State law.105 The Court further held, in Federal Home Mortgage arbitration is and that the resident is a 2013 decision, that a court may not Corporation (Freddie Mac)— waiving a right to judicial relief and that use the ‘‘effective vindication’’ government-sponsored enterprises that arbitration be conducted by a neutral doctrine—under which a court may purchase a large share of mortgages— arbitrator in a location that is invalidate an arbitration agreement that ceased purchasing mortgages that 111 operates to waive a party’s right to contained arbitration agreements. www.washingtonpost.com/wp-dyn/articles/A18052- pursue statutory remedies—to 2004Oct8.html. invalidate a class arbitration waiver on 107 See FINRA Arbitration and Mediation, https:// 112 10 CFR 703.5(j). The FTC’s rules do permit www.finra.org/arbitration-and-mediation. warranties that require consumers to resort to an the grounds that the plaintiff’s cost of 108 FINRA Code of Arbitration Procedure for informal dispute resolution mechanism before individually arbitrating the claim Customer Disputes 12204(d). For individual proceeding in a court, but decisions from such exceeds the potential recovery.106 disputes between brokers and customers, FINRA informal proceedings are not binding and may be requires individual arbitration. challenged in court. (By contrast, most arbitration Regulatory and Legislative Activity 109 See SE.C., Order Approving Proposed Rule awards are binding and may only be challenged on As arbitration agreements in Change Relating to the Exclusion of Class Actions very limited grounds as provided by the FAA.) The From Arbitration Proceedings, 57 FR 52659–52661 FTC’s rulemaking was based on authority expressly consumer contracts became more (Nov. 4, 1992) (citing Securities and Exchange Act, delegated by Congress in its passage of the MMWA section 19(b)(1) and Rule 19b–4). In a separate pertaining to informal dispute settlement Rehoboth Beach, Del., 912 A.2d 88 (N.J. 2006); context, the SEC has opposed attempts by procedures. 15 U.S.C. 2310(a)(2). Until 1999, courts Discover Bank v. Superior Court, 113 P.3d 1100 companies to include arbitration agreements in upheld the validity of the rule. See 80 FR 42719; (Cal. 2005). their securities filings in order to force shareholders see also Jonathan D. Grossberg, The Magnuson- 102 See, e.g., Feeney, 908 NE.2d at 767–69; Scott, to arbitrate disputes rather than litigate them in Moss Warranty Act, the Federal Arbitration Act, 161 P.3d at 1008–09; Discover Bank, 113 P.3d at court. See, e.g., Carl Schneider, Arbitration and the Future of Consumer Protection, 93 Cornell 1110–17. Provisions in Corporate Governance Documents, L. Rev. 659, 667 (2008). After 1999, two appellate 103 AT&T Mobility LLC v. Concepcion, 563 U.S. Harv. L. Sch. Forum on Corp. Governance and Fin. courts questioned whether the MMWA was 333, 344 (2011). Reg. (Apr. 27, 2012), available at https:// intended to reach arbitration agreements. See Final 104 Id. at 348–51. corpgov.law.harvard.edu/2012/04/27/arbitration- Action Concerning Review of the Interpretations of 105 See Robert Buchanan Jr., The U.S. Supreme provisions-in-corporate-governance-documents/ Magnuson-Moss Warranty Act, 80 FR 42710, 42719 Court’s Landmark Decision in AT&T Mobility v. (‘‘According to published reports, the SEC advised & nn.115–116 (July 20, 2015) (citing Davis v. Concepcion: One Year Later, Bloomberg Law, May Carlyle that it would not grant an acceleration order Southern Energy Homes, Inc., 305 F.3d 1268 (11th 8, 2012, available at http://www.bna.com/att-v- permitting the registration statement to become Cir. 2002); Walton v. Rose Mobile Homes, LLC, 298 concepcion-one-year-later/ (noting that 45 out of 61 effective unless the arbitration provision was F.3d 470 (5th Cir. 2002)). cases involving a class waiver in an arbitration withdrawn.’’). Carlyle subsequently withdrew its 113 See FTC Final Action Concerning Review of agreement were sent to arbitration). The Court did arbitration provision. the Interpretations of Magnuson-Moss Warranty not preempt all State law contract defenses under 110 Arbitration or Other Dispute Settlement Act, 80 FR 42710, 42719 (July 20, 2015). all circumstances; rather, these doctrines remain Procedures, 41 FR 42942, 42946 (Sept. 29, 1976); 17 114 See id. available provided that they are not applied in a CFR 166.5(b). 115 Centers for Medicare & Medicaid Services, manner that disfavors arbitration. 111 See Kenneth Harney, Fannie Follows Freddie Medicare and Medicaid Programs, Reform of 106 Co. v. Italian Colors in Banning Mandatory Arbitration, Wash. Post., Requirements for Long-Term Care Facilities, 80 FR Restaurant, 133 S. Ct. 2304, 2309 (2013). Oct. 9, 2004, available at http:// 42168 (July 16, 2015).

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convenient to both parties.116 Finally, amended federal agriculture law to the FAA preempts conflicting State the Department of Education recently require, among other things, that law.128 announced that it is proposing options livestock or poultry contracts containing Arbitration Today in the context of a negotiated arbitration agreements disclose the right rulemaking to limit the impact of of the producer or grower to decline the Today, the AAA is the primary arbitration agreements in certain college arbitration agreement; the Department of administrator of consumer financial enrollment agreements, specifically by Agriculture issued a final rule arbitrations.129 The AAA’s consumer addressing the use of arbitration implementing the statute in 2011.122 financial arbitrations are governed by agreements to bar students from the AAA Consumer Arbitration Rules, As previously noted, Congress again bringing group claims.117 which includes provisions that, among Congress has also taken several steps addressed arbitration agreements in the other things, limit filing and to address the use of arbitration 2010 Dodd-Frank Act. Dodd-Frank administrative costs for consumers.130 agreements in different contexts. In section 1414(a) prohibited the use of The AAA also has adopted the AAA 2002, Congress amended Federal law to arbitration agreements in mortgage Consumer Due Process Protocol, which require that, whenever a motor vehicle contracts, which the Bureau creates a floor of procedural and 123 franchise contract contains an implemented in its Regulation Z. substantive protections and affirms that arbitration agreement, arbitration may Section 921 of the Act authorized the ‘‘[a]ll parties are entitled to a be used to resolve the dispute only if, SEC to issue rules to prohibit or impose fundamentally-fair arbitration after a dispute arises, all parties to the conditions or limitations on the use of process.’’ 131 A second entity, JAMS, dispute consent in writing to the use of arbitration agreements by investment administers consumer financial arbitration.118 In 2006, Congress passed advisers.124 Section 922 of the Act arbitrations pursuant to the JAMS the Military Lending Act (MLA), which, invalidated the use of arbitration Streamlined Arbitration Rules & among other things, prohibited the use agreements in connection with certain Procedures 132 and the JAMS Consumer of arbitration provisions in extensions of whistleblower proceedings.125 Finally, Minimum Standards. These credit to active servicemembers, their and as discussed in greater detail below, administrators’ procedures for spouses, and certain dependents.119 As section 1028 of the Act required the arbitration differ in several respects first implemented by Department of Bureau to study the use of arbitration from the procedures found in court, as Defense (DoD) regulations in 2007, the agreements in contracts for consumer discussed in Section 4 of the Study and MLA applied to ‘‘[c]losed-end credit financial products and services and summarized below at Part III.D. with a term of 91 days or fewer in which authorized this rulemaking.126 The Further, although virtually all the amount financed does not exceed authority of the Bureau and the SEC are arbitration agreements in the consumer $2,000.’’ 120 In July 2015, DoD similar under the Dodd-Frank Act financial context expressly preclude promulgated a final rule that except that the SEC does not have to arbitration from proceeding on a class significantly expanded that definition of complete a study before promulgating a basis, the major arbitration ‘‘consumer credit’’ to cover closed-end rule. State legislatures have also taken administrators do provide procedures loans that exceeded $2,000 or had terms steps to regulate the arbitration process. for administering class arbitrations and longer than 91 days as well as various Several States, most notably California, forms of open-end credit, including require arbitration administrators to 128 See Doctor’s Assocs., Inc. v. Casarotto, 517 121 disclose basic data about consumer U.S. 681, 687 (1996) (‘‘Courts may not, however, credit cards. In 2008, Congress invalidate arbitration agreements under state laws arbitrations that take place in the applicable only to arbitration provisions.’’); Perry v. 116 See id. at 42264–65; see also id. at 42211. State.127 States are constrained in their Thomas, 482 U.S. 483, 492 n.9 (1987) (‘‘[S]tate law, 117 See U.S. Dep’t of Education Press Release, U.S. ability to regulate arbitration because whether of legislative or judicial origin, is Department of Education Takes Further Steps to applicable if that law arose to govern issues Protect Students from Predatory Higher Education concerning the validity, revocability, and Institutions (Mar. 11, 2016), available at https:// subcontractors receiving Department of Defense enforceability of contracts generally. A state-law www.ed.gov/news/press-releases/us-department- funds from requiring employees or independent principle that takes its meaning precisely from the education-takes-further-steps-protect-students- contractors arbitrate certain kinds of employment fact that a contract to arbitrate is at issue does not predatory-higher-education-institutions. claims. See Department of Defense Appropriations comport with this requirement of [FAA] sec. 2.’’). 118 21st Century Department of Justice Act of 2010, Public Law 111–118, 123 Stat. 3454 129 See infra Part III.D. (2010), section 8116. Appropriations Authorization Act, Public Law 107– 130 AAA, Consumer Arbitration Rules. 122 Food, Conservation, and Energy Act of 2008, 273, section 11028(a)(2), 116 Stat. 1835 (2002), 131 AAA, Consumer Due Process Protocol Public Law 110–234, section 11005, 122 Stat. 1356– codified at 15 U.S.C. 1226(a)(2). The statute defines Statement of Principles, Principle 1. Other 58 (2008), codified at 7 U.S.C. 197c; ‘‘motor vehicle franchise contract’’ as ‘‘a contract principles include that all parties are entitled to a Implementation of Regulations Required Under under which a motor vehicle manufacturer, neutral arbitrator and administrator (Principle 3), Title XI of the Food, Conservation and Energy Act importer, or distributor sells motor vehicles to any that all parties retain the right to pursue small of 2008; Suspension of Delivery of Birds, other person for resale to an ultimate purchaser and claims (Principle 5), and that face-to-face arbitration Additional Capital Investment Criteria, Breach of authorizes such other person to repair and service should be conducted at a ‘‘reasonably convenient’’ Contract, and Arbitration, 76 FR 76874, 76890 (Dec. the manufacturer’s motor vehicles.’’ Id. at section location (Principle 6). The AAA explained that it 9, 2011). 11028(a)(1)(B), 116 Stat. 1835, codified at 15 U.S.C. adopted these principles because, in its view, 123 1226(a)(1)(B). See Dodd-Frank section 1414(a) (codified as ‘‘consumer contracts often do not involve arm’s 119 John Warner National Defense Authorization 15 U.S.C. 1639c(e)(1)) (‘‘No residential mortgage length negotiation of terms, and frequently consist Act for Fiscal Year 2007, Public Law 109–364, 120 loan and no extension of credit under an open end of boilerplate language.’’ The AAA further Stat. 2083 (2006). consumer credit plan secured by the principal explained that ‘‘there are legitimate concerns 120 Limitations on Terms of Consumer Credit dwelling of the consumer may include terms which regarding the fairness of consumer conflict Extended to Service Members and Dependents, 72 require arbitration or any other nonjudicial resolution mechanisms required by suppliers. This FR 50580 (Aug. 31, 2007) (codified at 32 CFR 232). procedure as the method for resolving any is particularly true in the realm of binding controversy or settling any claims arising out of the 121 See 32 CFR 232.8(c). Creditors must comply arbitration, where the courts are displaced by transaction.’’); 12 CFR 1026.36(h)(1). with the requirements of the rule for transactions private adjudication systems.’’ Id. at 4. 124 or accounts established or consummated on or after Dodd-Frank section 921(b). 132 JAMS, Streamlined Arbitration Rules & October 3, 2016, subject to certain exemptions. 32 125 Dodd-Frank section 922(c)(2). Procedures (effective July 1, 2014), available at CFR 232.13(a). The rule applies to credit card 126 Dodd-Frank section 1028(a). http://www.jamsadr.com/rules-streamlined- accounts under an open-end consumer credit plan 127 Cal. Civ. Proc. Code sec. 1281.96 (amended arbitration/. If a claim or counterclaim exceeds only on October 3, 2017. 32 CFR 232.13(c)(2). effective Jan. 1, 2015); DC Code secs. 16–4430; Md. $250,000, the JAMS Comprehensive Arbitration Earlier, Congress passed an appropriations Comm. L. Code, secs. 14–3901–05; 10 M.R.S.A. sec. Procedures, not the Streamlined Rules & provision prohibiting Federal contractors and 1394 (Maine). Procedures, apply. Id. Rule 1(a).

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have occasionally administered them in A. April 2012 Request for Information agreements for credit cards, an analysis class arbitrations involving providers of At the outset of its work, on April 27, that had never before been 140 consumer financial products and 2012, the Bureau published a Request conducted. 133 services. These procedures, which for Information (RFI) in the Federal In some cases, commenters to the RFI are derived from class action litigation Register concerning the Study.137 The encouraged the Bureau to study a topic, procedures used in court, are described RFI sought public comment on the but the Bureau did not do so because in Section 4.8 of the Study. These class appropriate scope, methods, and data certain effects did not appear arbitration procedures will only be used sources for the Study. Specifically, the measurable. For example, some by the AAA or JAMS if the arbitration Bureau asked for input on how it should commenters suggested that the Bureau administrator first determines that the address three topics: (1) The prevalence study the effect of arbitration arbitration agreement can be construed of arbitration agreements in contracts for agreements on the development, as permitting class arbitration. These consumer financial products and interpretation, and application of the class arbitration procedures are not services; (2) arbitration claims involving rule of law. The Bureau did not identify widely used in consumer financial consumers and companies; and (3) other a robust data set that would allow services disputes: Reviewing consumer impacts of arbitration agreements on empirical analysis of this phenomenon. financial arbitrations pertaining to six consumers and companies, such as Nonetheless, legal scholars have product types filed over a period of impacts on the incidence of consumer subsequently attempted to quantify this three years, the Study found only claims against companies, prices of effect in relation to consumer law.141 three.134 Industry has criticized class consumer financial products and B. December 2013 Preliminary Report arbitration on the ground that it lacks services, and the development of legal procedural safeguards. For example, precedent. The Bureau also requested In December 2013, the Bureau issued class arbitration generally has limited comment on whether and how the a 168-page report summarizing its judicial review of arbitrator decisions Study should address additional topics. preliminary results on a number of 142 (for example, on a decision to certify a In response to the RFI, the Bureau topics (Preliminary Results). One class or an award of substantial received and reviewed 60 comment purpose of releasing the Preliminary 135 damages). letters. The Bureau also met with Results was to solicit additional input from the public about the Bureau’s work III. The Arbitration Study numerous commenters and other stakeholders to obtain additional on the Study to date. In the Preliminary Section 1028(a) of the Dodd-Frank Act feedback on the RFI. Results, the Bureau also included a directed the Bureau to study and The feedback received through this section that set out a detailed roadmap provide a report to Congress on ‘‘the use process substantially affected the scope of the Bureau’s plans for future work, of agreements providing for arbitration of the study the Bureau undertook. For including the Bureau’s plans to address of any future dispute between covered example, several industry trade topics that had been suggested in persons and consumers in connection association commenters suggested that response to the RFI.143 with the offering or providing of the Bureau study not only consumer In February 2014, the Bureau invited consumer financial products or financial arbitration but also consumer stakeholders for in-person discussions services.’’ Pursuant to section 1028(a), financial litigation in court. The Study with staff regarding the Preliminary the Bureau conducted a study of the use incorporates an extensive analysis of Results, as well as the Bureau’s future of pre-dispute arbitration agreements in consumer financial litigation—both work plan. Several external contracts for consumer financial individual litigation and class stakeholders, including industry products and services and, in March actions.138 Commenters also advised the associations and consumer groups, took 2015, delivered to Congress its Bureau to compare the relationship that opportunity and provided Arbitration Study: Report to Congress, between public enforcement actions and additional input regarding the Study. Pursuant to Dodd-Frank Wall Street private class actions. The Study C. Comments on Survey Design Reform and Consumer Protection Act included extensive research into this 136 Pursuant to the Paperwork Reduction § 1028(a). subject, including an analysis of public This Part describes the process the Act enforcement actions filed over a period Bureau used to carry out the Study and of five years by State and Federal In the Preliminary Results, the Bureau summarizes the Study’s results. regulators and the relationship, or lack indicated that it planned to conduct a survey of consumers. The purpose of the 133 of relationship of these cases to private See AAA Class Arbitration dockets, available 139 survey was to assess consumer at https://www.adr.org/aaa/faces/services/ class litigation. Commenters also disputeresolutionservices/casedocket?_ recommended that the Bureau study awareness of arbitration agreements, as afrLoop=368852573510045&_afrWindowMode=0&_ whether arbitration reduces companies’ well as consumer perceptions of, and afrWindowId=null. dispute resolution costs and the expectations about, dispute resolution 134 Study, supra note 2, section 5, at 86–87. The relationship between any such cost with respect to disputes between review of class action filings in five of these markets consumers and financial services also identified one of these two class arbitrations, savings and the cost and availability of as well as an additional class action arbitration filed consumer financial products and with JAMS following the dismissal or stay of a class services. To investigate this, the Study 140 Id., section 10 at 7–14. litigation. Id., section 6, at 59. includes a ‘‘difference-in-differences’’ 141 See Myriam Gilles, The End of Doctrine: 135 In a recent amicus curiae filing, the U.S. regression analysis using a Private Arbitration, Public Law and the Anti- Chamber of Commerce argued that ‘‘[c]lass Lawsuit Movement, (Benjamin N. Cardozo Sch. of arbitration is a worst-of-all-worlds Frankenstein’s representative random sample of the L. Faculty Research Paper No. 436, 2014), available monster: It combines the enormous stakes, formality Bureau’s Credit Card Database (CCDB), at http://papers.ssrn.com/sol3/papers.cfm?abstract_ and expense of litigation that are inimical to to look for price impacts associated with id=2488575 (analyzing cases under ‘‘counterfactual bilateral arbitration with exceedingly limited changes relating to arbitration scenarios’’ as to ‘‘what doctrinal developments in judicial review of the arbitrators’ decisions.’’ Br. of antitrust and consumer law . . . would not have the Chamber of Commerce of the United States of occurred over the past decade if arbitration clauses America as Amicus Curiae in Support of Pl.- 137 Arbitration Study RFI, supra note 2. had been deployed to the full extent now authorized Appellants at 9, Marriott Ownership Resorts, Inc. v. 138 See generally Study, supra note 2, sections 6 by the Supreme Court’’). Sterman, No. 15–10627 (11th Cir. Apr. 1, 2015). and 8. 142 Preliminary Results, supra note 2. 136 Study, supra note 2. 139 Id., section 9. 143 Id. at 129–31.

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providers.144 Pursuant to the Paperwork class actions (Section 9 of the Study); actions in the consumer finance area.148 Reduction Act, the Bureau also and The Study also includes the findings of undertook an extensive public outreach 9. The extent to which arbitration the Bureau’s survey of over 1,000 credit and engagement process in connection agreements lead to lower prices for card consumers, focused on exploring with its consumer survey (the results of consumers (Section 10 of the Study). their knowledge and understanding of which are published in Section 3 of the As described further in each arbitration and other dispute resolution Study). The Bureau obtained approval subsection below, the Bureau’s research mechanisms. The sections below for the consumer survey from the Office on several of these topics drew in part describe in detail the process the Bureau of Management and Budget (OMB), and upon data sources previously followed in undertaking each section of each version of the materials submitted unavailable to researchers. For example, the Study and summarize the main to OMB during this process included the AAA voluntarily provided the results of each section.149 draft versions of the survey Bureau with case files for consumer Prevalence and Features of Arbitration instrument.145 In June 2013, the Bureau arbitrations filed from the beginning of Agreements (Section 2 of Study) published a Federal Register notice that 2010, approximately when the AAA solicited public comment on its began maintaining electronic records, to Section 2 of the Study addresses two proposed approach to the survey and the end of 2012. Compared to data sets central issues relating to the use of received 17 comments in response. In previously available to researchers, the arbitration agreements: How frequently July 2013, the Bureau hosted two AAA case files covered a much longer such agreements appear in contracts for roundtable meetings to consult with period and were not limited to case files consumer financial products and various stakeholders including industry for cases resulting in an award. Using services and what features such groups, banking trade associations, and this data set, the Bureau conducted the agreements contain. Among other consumer advocates. After considering first analysis of arbitration frequency findings, the Study determined that the comments and conducting two focus and outcomes specific to consumer arbitration agreements are commonly groups to help refine the survey, but financial products and services.146 used in contracts for consumer financial before undertaking the survey, the Similarly, the Bureau submitted orders products and services and that the AAA Bureau published a second Federal to financial service providers in the is the primary administrator of Register notice in May 2014, which checking account and payday loan consumer financial arbitrations. generated an additional seven markets, pursuant to its market To conduct this analysis, the Bureau comments. monitoring authority under Dodd-Frank reviewed contracts for six product markets: Credit cards, checking D. The March 2015 Arbitration Study section 1022(c)(4), to obtain a sample set of agreements of those institutions. accounts, general purpose reloadable The Bureau ultimately focused on Using these agreements, among others (GPR) prepaid cards, payday loans, nine empirical topics in the Study: gathered from other sources, the Bureau private student loans, and mobile 1. The prevalence of arbitration conducted the most comprehensive wireless contracts governing third-party agreements in contracts for consumer analysis to date of the arbitration billing services.150 Previous studies that financial products and services and content of contracts for consumer analyzed the prevalence and features of their main features (Section 2 of the financial products and services.147 arbitration agreements in contracts for Study); The results of the Study also broke consumer financial products and 2. Consumers’ understanding of new ground because the Study, services either relied on small samples 151 dispute resolution systems, including compared to prior research, generally or limited their study to one market. arbitration and the extent to which considered larger data sets than had As a result, the Bureau’s inquiry in dispute resolution clauses affect been reviewed by other researchers Section 2 of the Study represents the consumer’s purchasing decisions while also narrowing its analysis to most comprehensive analysis to date of (Section 3 of the Study); consumer financial products and the arbitration content of contracts for 3. How arbitration procedures differ services. In total, the Study included the consumer financial products and from procedures in court (Section 4 of review of over 850 agreements for services. the Study); certain consumer financial products and 4. The volume of individual consumer 148 services; 1,800 consumer financial Since the publication of the Study, the Bureau financial arbitrations, the types of determined that 41 FDIC enforcement actions were services arbitrations filed over a three- claims, and how they are resolved inadvertently omitted from the results published in year period; a random sample of the (Section 5 of the Study); Section 9 of the Study. The corrected total number nearly 3,500 individual consumer of enforcement actions reviewed in Section 9 was 5. The volume of individual and class finance cases identified as having been 1,191. Other figures, including the identification of consumer financial litigation, the types public enforcement cases with overlapping private filed over a period of three years; and of claims, and how they are resolved actions, were not affected by this omission. all of the 562 consumer finance class 149 (Section 6 of the Study); Overall, the markets assessed in the Study actions identified in Federal and represent lending money (e.g., small-dollar open- 6. The extent to which consumers sue ended credit, small-dollar closed-ended credit, companies in small claims court with selected State courts of the same time period. The study also included over large-dollar unsecured credit, large-dollar secured respect to disputes involving consumer credit), storing money (i.e., consumer deposits), and financial services (Section 7 of the 40,000 small claims court filings over moving or exchanging money. The Study also the course of a single year. The Bureau included debt relief and debt collection disputes Study); arising from these consumer financial products and 7. The size, terms, and beneficiaries of supplemented this research by assembling and analyzing all of the services. Study, supra note 2, section 1 at 7–9. consumer financial class action While credit scoring and credit monitoring were not settlements (Section 8 of the Study); more than 400 consumer financial class included in these product categories, settlements 8. The relationship between public action settlements in Federal courts over regarding such products were included in the a five-year period and more than 1,100 Study’s analysis of class action settlements, as well enforcement and consumer financial as the Study’s analysis of the overlap between State and Federal public enforcement public enforcement actions and private class action 144 Id. at 129. litigation. 145 The survey was assigned OMB control number 146 Study, supra note 2, section 5 at 19–68. 150 Study, supra note 2, section 2 at 3. 3170–0046. 147 See generally id., section 2. 151 Id., section 2 at 4–6.

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The Bureau’s sample of credit card wireless services 156 which also govern percent of the storefront payday loan contracts consisted of contracts filed by third-party billing services.157 contracts—included such 423 issuers with the Bureau as required The analysis of the agreements that agreements.164 In the private student by the Credit Card Accountability, the Bureau collected found that tens of loan and mobile wireless markets, the Responsibility and Disclosure Act millions of consumers use consumer Study found that most of the large (CARD Act) as implemented by financial products or services that are companies—85.7 percent of the private Regulation Z.152 Taken together, these subject to arbitration agreements, and student loan contracts, and 87.5 percent contracts covered nearly all consumers that, in some markets such as checking of the mobile wireless contracts—used accounts and credit cards, large 165 in the credit card market. For deposit arbitration agreements. providers are more likely to have the accounts, the Bureau identified the 100 In addition to examining the agreements than small providers.158 In prevalence of arbitration agreements, largest banks and the 50 largest credit the credit card market, the Study found Section 2 of the Study reviewed 13 unions, and constructed a random that small bank issuers were less likely features sometimes included in such sample of 150 small and mid-size banks. to include arbitration agreements than agreements.166 One feature the Bureau The Bureau obtained the deposit large bank issuers.159 Likewise, only 3.3 studied was which entity or entities account agreements for these percent of credit unions in the credit were designated by the contract to institutions by downloading them from card sample used arbitration administer the arbitration. The Study the institutions’ Web sites and through agreements.160 As a result, while 15.8 found that the AAA was the orders sent to institutions using the percent of credit card issuers included predominant arbitration administrator Bureau’s market monitoring authority. such agreements in their contracts, 53 for all the consumer financial products For prepaid cards, the Bureau’s percent of credit card loans outstanding the Bureau examined in the Study. The 161 sample included agreements from two were subject to such agreements. In contracts studied specified the AAA as sources. The Bureau gathered the checking account market, the Study at least one of the possible arbitration again found that larger banks tended to agreements for 52 GPR prepaid cards administrators in 98.5 percent of the include arbitration agreements in their that were listed on the Web sites of two credit card contracts with arbitration consumer checking contracts (45.6 agreements; 98.9 percent of the checking major card networks and a Web site that percent of the largest 103 banks, provided consolidated card information account contracts with arbitration representing 58.8 percent of insured agreements; 100 percent of the GPR as of August 2013. The Bureau also deposits).162 In contrast, only 7.1 obtained agreements from GPR prepaid prepaid card contracts with arbitration percent of small-and mid-sized banks agreements; 85.5 percent of the card providers that had been included and 8.2 percent of credit unions used storefront payday loan contracts with in several recent studies of the terms of 163 arbitration agreements. In the prepaid arbitration agreements; and 66.7 percent GPR prepaid cards and that continued card and payday loan markets, the 153 of private student loan contracts with to be available as of August 2014. For Study found that the substantial arbitration agreements.167 The contracts the storefront payday loan market, the majority of contracts—92.3 percent of specified the AAA as the sole option in Bureau again used its market monitoring GPR prepaid card contracts and 83.7 17.9 percent of the credit card contracts authority to obtain a sample of 80 with arbitration agreements; 44.6 payday loan contracts from storefront 156 Facilities-based mobile wireless service providers are wireless providers that ‘‘offer mobile percent of the checking account payday lenders in California, Texas, and voice, messaging, and/or data services using their contracts with arbitration agreements; Florida.154 For the private student loan own network facilities,’’ in contrast to providers 63.0 percent to 72.7 percent of the GPR market, the Bureau sampled seven that purchase mobile services wholesale from prepaid card contracts with arbitration facilities-based providers and resell the services to private student loan contracts the consumers, among other types of providers. Federal agreements; 27.4 percent of the payday form contract used by 250 credit unions Communications Commission, Annual Report and loan contracts with arbitration that use a leading credit union service Analysis of Competitive Market Conditions with agreements; and one of the private organization.155 For the mobile wireless Respect to Mobile Wireless, at 37–39 (2013), student loan contracts the Bureau available at https://www.fcc.gov/document/16th- 168 market, the Bureau reviewed the mobile-competition-report. reviewed. wireless contracts of the eight largest 157 Study, supra note 2, section 2 at 25–26. In In contrast, JAMS is specified in facilities-based providers of mobile mobile wireless third-party billing, a mobile relatively fewer arbitration agreements. wireless provider authorizes third parties to charge The Study found that the contracts consumers, on their wireless bill, for services provided by the third parties. Because mobile studied specified JAMS as at least one wireless third-party billing involves the extension of the possible arbitration of credit to, and processing of payments for, administrators in 40.9 percent of the consumers in connection with goods and services credit card contracts with arbitration that the provider does not directly sell and that consumers do not purchase from the provider, the agreements; 34.4 percent of the checking provision of mobile wireless third-party billing is a ‘‘consumer financial product or service’’ under the 164 Id., section 2 at 19, 22. Dodd-Frank Act. 12 U.S.C. 5481(6), 15(A)(i) and 165 Id., section 2 at 24, 26. (vii). 166 Id., section 2 at 30. 158 Study, supra note 2, section 1 at 9. 167 Id., section 2 at 38. 152 159 12 CFR 1026.58(c) (requiring credit card Id., section 2 at 10. 168 Id., section 2 at 36. The prevalence of GPR issuers to submit their currently-offered credit card 160 Id. prepaid cards with arbitration agreements agreements to the Bureau to be posted on the 161 Id. As the Study notes, the Ross settlement— specifying AAA as the sole option is presented as Bureau’s Web site). a 2009 settlement in which four of the ten largest a range because two GPR prepaid firms studied 153 Study, supra note 2, section 2 at 18. credit card issuers agreed to remove their each used two different form cardholder arbitration agreements—likely impacts these 154 Id., section 2 at 21–22. This data was agreements, with different agreements pertaining to results. Had the settling defendants in Ross different features. Because of this it was unclear supplemented with a smaller, non-random sample continued to use arbitration agreements, 93.6 precisely how much of the prepaid market share of payday loan contracts from tribal, offshore, and percent of credit card loans outstanding would be represented by each provider was covered by a other online payday lenders, which is reported in subject to arbitration agreements. Id. section 2 at 11. particular cardholder agreement. As such, for GPR Appendix C of the Study. 162 Id., section 2 at 14. prepaid cards, prevalence by market share is 155 Id, section 2 at 24. 163 Id. presented as a range rather than a single figure.

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account contracts with arbitration addressed the reallocation of arbitration differences between arbitration and agreements; 52.9 percent of the GPR fees in an award; and provisions litigation in court. Most agreements prepaid card contracts with arbitration addressing the award of attorney’s disclosed expressly that the consumer agreements; 59.2 percent of the fees.174 Most arbitration agreements would not have a right to a jury trial, storefront payday loan contracts with reviewed in the Study contained and most disclosed expressly that the arbitration agreements; and 66.7 percent provisions that had the effect of capping consumer could not be a party to a class of private student loan contracts with consumers’ up front arbitration costs at action in court.181 Depending on the arbitration agreements. JAMS was or below the AAA’s maximum product market, between one-quarter specified as the sole option in 1.5 consumer fee thresholds. These same and two-thirds of the agreements percent of the credit card contracts with arbitration agreements took noticeably disclosed four key differences between arbitration agreements (one contract); different approaches to the reallocation arbitration and litigation in court: no 1.6 percent of the checking account of arbitration fees in the arbitrator’s jury trial is available in arbitration; contracts with arbitration agreements award (approximately one-fifth of the parties cannot participate in class (one contract); 63.0 percent to 72.7 arbitration agreements in credit card, actions in court; discovery is typically percent of the GPR prepaid card checking account, and storefront payday more limited in arbitration; and appeal contracts with arbitration agreements; loan markets permitted shifting rights are more limited in arbitration.182 and none of the payday loan or private company fees to consumers).175 The The Study found that this language was student loan contracts the Bureau Study also found only negligible market often capitalized or in boldfaced reviewed.169 shares of relevant markets directed or type.183 The Bureau’s analysis also found, permitted arbitrators to award attorney’s The Study also examined whether among other things, that nearly all the fees to prevailing companies.176 A arbitration agreements limited recovery arbitration agreements studied included significant share of arbitration of damages—including punitive or provisions stating that arbitration may agreements across almost all markets consequential damages—or specified not proceed on a class basis. Across did not address attorney’s fees.177 the time period in which a claim had to each product market, 85 percent to 100 The Study found that many be brought. The Study determined that percent of the contracts with arbitration arbitration agreements permit the most agreements in the credit card, agreements—covering over 99 percent of arbitrator to reallocate arbitration fees payday loan, and private student loan market share subject to arbitration in the from one party to the other. About one- markets did not include damages six product markets studied—included third of credit card arbitration limitations. However, the opposite was such no-class-arbitration provisions.170 agreements, one-fourth of checking true of agreements in checking account Most of the arbitration agreements that account arbitration agreements, and half contracts, where more than three- included such provisions also contained of payday loan arbitration agreements fourths of the market included damages an ‘‘anti-severability’’ provision stating expressly permitted the arbitrator to limitations; prepaid card contracts, that, if the no-class-arbitration provision shift arbitration costs to the almost all of which included such were to be held unenforceable, the consumer.178 However, as the Study limitations; and mobile wireless entire arbitration agreement would pointed out, the AAA’s consumer contracts, all of which included such become unenforceable as a result.171 arbitration fee schedule, which became limitations. A review of consumer The Study found that most of the effective March 1, 2013, restricts such agreements without arbitration arbitration agreements contained a small reallocation.179 With respect to another agreements revealed a similar pattern, claims court ‘‘carve-out,’’ permitting type of provision that affects consumers’ albeit with damages limitations being either the consumer or both parties to costs in arbitration—where the somewhat less common.184 file suit in small claims court.172 The arbitration must take place—the Study The Study also found that a minority Study similarly explored the number of noted that most, although not all, of arbitration agreements in two markets arbitration provisions that allowed arbitration agreements contained set time limits other than the statute of consumers to ‘‘opt out’’ or otherwise provisions requiring or permitting limitations that would apply in a court reject an arbitration agreement. To hearings to take place in locations close proceeding for consumers to file claims exercise the opt-out right, consumers to the consumer’s place of residence.180 in arbitration. Specifically, these types must follow stated procedures, which Further, most of the arbitration of provisions appeared in 28.4 percent usually requires all authorized users on agreements the Bureau studied and 15.8 percent of the checking an account to physically mail a signed contained disclosures describing the account and mobile wireless agreements written document to the issuer by market share, respectively.185 Again, (electronic submission is permitted only 174 Id., section 2 at 58. Many contracts— a review of consumer agreements rarely), within a stated time limit. With particularly checking account contracts—included general provisions about the allocation of costs and without arbitration agreements showed the exception of storefront payday loans expenses arising out of disputes that were not that 10.7 percent of checking account and private student loans, the specific to arbitration costs. Indeed, such provisions substantial majority of arbitration were commonly included in contracts without 181 Id., section 2 at 72. agreements in each market studied arbitration agreements as well. While such 182 Id., section 2 at 72–79. provisions could be relevant to the allocation of 183 Id., section 2 at 72 and n.144. generally did not include opt-out expenses in an arbitration proceeding, the Study 184 provisions.173 did not address such provisions because they were Id., section 2 at 49. More than one-third (35 The Study analyzed three different not specific to arbitration agreements. percent) of large bank checking account contracts without arbitration agreements included either a 175 Id., section 2 at 62–66. types of cost provisions: provisions consequential damages waiver or a consequential 176 addressing the initial payment of Id., section 2 at 67. damages waiver together with a punitive damages arbitration fees; provisions that 177 Id., section 2 at 66–76. As described supra waiver. Similarly a third of prepaid card contracts when the arbitration agreement did not address the without arbitration agreements included a issue, the arbitrator is able to award attorney’s fees consequential damages waiver, a punitive damages 169 Id. when permitted elsewhere in the agreement or by waiver, or both. The only mobile wireless contract 170 Id., section 2 at 44–47. applicable law. without an arbitration agreement limited any 171 Id., section 2 at 46–47. 178 Id., section 2 at 62–66. damages recovery to the amount of the subscriber’s 172 Id., section 2 at 33–34. 179 Id., section 2 at 61–62. bill. Id. 173 Id., section 2 at 31–32. 180 Id., section 2 at 53. 185 Id., section 2 at 50.

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agreements imposed a one-year time only 2.1 percent of respondents stated respondents who stated that they could limit for consumer claims.186 No that they would seek legal advice or not sue their credit card issuers in court storefront payday loan, private student consider legal proceedings.191 Almost may not have had knowledge of the loan, or mobile wireless contracts in the the same proportion of respondents arbitration agreement: As noted above, a sample without arbitration agreements stated that they would simply pay for similar proportion of respondents had such time limits.187 the improperly assessed fee (1.7 without an arbitration agreement in their The Study assessed the extent to percent).192 A majority of respondents contract—7.7 percent compared to 6.8 which arbitration agreements included (57.2 percent) said that they would percent—reported that they could not contingent minimum recovery cancel their cards.193 sue their issuers in court.199 When provisions, which provide that Respondents also reported that factors asked if they could participate in class consumers would receive a specified relating to dispute resolution—such as action lawsuits against their credit card minimum recovery if an arbitrator the presence of an arbitration issuer, more than half of the awards the consumer more than the agreement—played little to no role respondents whose contracts had pre- amount of the company’s last settlement when they were choosing a credit card. dispute arbitration agreements thought offer. The Study found that such When asked an open-ended question they could participate (56.7 percent).200 provisions were uncommon; they about all the factors that affected their Respondents were also generally appeared in three out of the six private decision to obtain the credit card that unaware of any opt-out opportunities student loan agreements the Bureau they use most often for personal use, no afforded by their issuer. Only one reviewed, but, in markets other than respondents volunteered an answer that respondent whose current credit card student loans, they appeared in 28.6 referenced dispute resolution contract permitted opting out of the percent or less of the agreements the procedures.194 When presented with a arbitration agreement recalled being Bureau studied.188 list of nine features of credit cards— offered such an opportunity.201 features such as interest rates, customer Consumer Understanding of Dispute service, rewards, and dispute resolution Comparison of Procedures in Resolution Systems, Including procedures—and asked to identify those Arbitration and in Court (Section 4 of Arbitration (Section 3 of Study) features that factored into their decision, Study) Section 3 of the Study presented the respondents identified dispute While the Study generally limited its results of the Bureau’s telephone survey resolution procedures as being relevant scope to empirical analysis of dispute of a nationally representative sample of less often than any other option.195 resolution, Section 4 of the Study credit card holders.189 The survey As for consumers’ knowledge and compared the procedural rules that examined two main topics: (1) The default assumptions as to the means by apply in court and in arbitration. extent to which dispute resolution which disputes between consumers and Particularly given changes to the AAA clauses affected consumer’s decisions to financial service providers can be consumer fee schedule that took effect acquire credit cards; and (2) consumers’ resolved, the survey found that March 1, 2013, the procedural rules are awareness, understanding, and consumers generally lack awareness relevant to understanding the context knowledge of their rights in disputes regarding the effects of arbitration from which the Study’s empirical against their credit card issuers. In late agreements. Of the survey’s 1,007 findings arise. 2014, the Bureau’s contractor completed respondents, 570 respondents were able The Study’s procedural overview telephone surveys with 1,007 to identify their credit card issuer with described court litigation as reflected in respondents who had credit cards.190 sufficient specificity to enable the the Federal Rules and, as an example of The consumer survey found that Bureau to find the issuer’s standard a small claims court process, the when presented with a hypothetical credit card agreement and thus to Philadelphia Municipal Court Rules of situation in which their credit card compare the respondents’ beliefs with Civil Practice. It compared those issuer charged them a fee they knew to respect to the terms of their agreements procedures to arbitration procedures as 196 be wrongly assessed and in which they with the agreements’ actual terms. set out in the rules governing consumer exhausted efforts to obtain relief from Among the respondents whose credit arbitrations administered by the two the company through customer service, card contracts did not contain an leading arbitration administrators in the arbitration agreement, when asked if United States, the AAA and JAMS. The 186 Id., section 2 at 51. they could sue their credit card issuer Study compared arbitration and court 187 Id. in court, 43.7 percent answered ‘‘Yes,’’ procedures according to eleven factors: 188 Id., section 2 at 70–71 (albeit covering 43.0 7.7 percent answered ‘‘No,’’ and 47.8 The process for filing a claim, fees, legal percent of the storefront payday loan market subject percent answered ‘‘Don’t Know.’’ 197 At to arbitration agreements and 68.4 percent of the mobile wireless market subject to arbitration the same time, among the respondents issuers in small claims court; that they meant they agreements). whose credit card agreements did could bring a lawsuit even though they are subject 189 The Bureau focused its survey on credit cards contain arbitration requirements, 38.6 to an arbitration agreement; or that they had because credit cards offer strong market penetration percent of respondents answered ‘‘Yes,’’ previously ‘‘opted-out’’ of their arbitration agreements with their issuers. With those caveats in with consumers across the nation. Further, because while 6.8 percent answered ‘‘No,’’ and major credit card issuers are required to file their mind and after accounting for demographic agreements with the Bureau (12 CFR 1026.58(c)), 54.4 percent answered ‘‘Don’t weighting, the Study found that the consumers limiting the survey to credit cards permitted the Know.’’ 198 Even the 6.8 percent of whose credit cards included arbitration Bureau to verify the accuracy of many of the requirements were wrong at least 79.8 percent of the time. Id., section 3 at 20–21. respondents’ default assumptions about their 191 Id., section 3 at 18. 199 Id., section 3 at 18–20. dispute resolution rights by examining the actual 192 Id. credit card agreements to which the consumers 200 Id., section 3 at 25. 193 Id. were subject to at the time of the survey. Id., section 201 Id., section 3 at 21 & 21 n.44. Eighteen other 194 Id., section 3 at 15. 3 at 2. respondents recalled being offered an opportunity 195 190 Based on the size of the Bureau’s sample, its Id. to opt out of their arbitration requirements. But, for results were representative of the national 196 Id., section 3 at 18. the respondents whose credit card agreements the population, with a sampling error of plus or minus 197 Id., section 3 at 18–20. Bureau could identify, none of their 2013 3.1 percent, though the sampling error is larger in 198 Id. These respondents were asked additional agreements actually contained opt-out provisions. connection with sample sets of fewer than the 1,007 questions to account for the possibility that In fact, four of the agreements did not even contain respondents. Id., section 3 at 10. respondents who answered ‘‘Yes’’ meant suing their pre-dispute arbitration provisions.

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representation, the process for selecting non-attorneys to represent parties in private although not necessarily a the decision maker, discovery, arbitration.209 confidential process.216 dispositive motions, class proceedings, Selecting the Decisionmaker. The Hearings. The Study stated that if a privacy and confidentiality, hearings, Study noted that court rules generally case in court does not settle before trial judgments and awards, and appeals. do not permit parties to reject the judge or get resolved on a dispositive motion, Filing a Claim and Fees. The Study assigned to hear their case.210 In it will proceed to trial in the court in described the processes for filing a arbitration, if the parties agree on the which the case was filed. A jury may be claim in court and in arbitration. With individual they want to serve as available for these claims. On the other respect to fees, the Study noted that the arbitrator, they can choose that person hand, if an arbitration filing does not fee for filing a case in Federal court is to decide their dispute; if the parties settle, the arbitrator can resolve the $350 plus a $50 administrative fee— cannot agree on the arbitrator, the parties’ dispute based on the parties’ paid by the party filing suit, regardless arbitrator is selected following the submission of documents alone, by a of the amount being sought—and the fee procedure specified in their contract or telephone hearing, or by an in-person for a small claims filing in Philadelphia in the governing arbitration rules.211 hearing.217 Municipal Court ranges from $63 to Discovery. The Study stated that the Judgments/Awards. The Study further $112.38.202 In arbitration, under the Federal Rules provide a variety of noted that the outcome of a case in court AAA consumer fee schedule that took means by which a party can discover is reflected in a judgment, which the effect March 1, 2013, the consumer pays evidence in the possession of the prevailing party can enforce through a $200 administrative fee, regardless of opposing party or a third party, while various means of post-judgment relief, the amount of the claim and regardless the right to discovery in arbitration is and that the outcome of a case in of the party that filed the claim; in more limited.212 arbitration is reflected in an award, JAMS arbitrations, when a consumer which, once turned into a court Dispositive Motions. The Study noted initiates arbitration against the judgment, can be enforced the same as that the Federal Rules provide for a company, the consumer is required to any other court judgment.218 pay a $250 fee.203 Prior to March 1, variety of motions by which a party can Appeals. The Study stated that parties 2013, arbitrators in AAA consumer seek to dispose of the case, either in in court can appeal a judgment against arbitrations had discretion to reallocate whole or in part, while arbitration rules them to an appellate court; by fees in the ultimate award. After March typically do not expressly authorize 213 comparison, parties can challenge 1, 2013, arbitrators can only reallocate dispositive motions. arbitration awards in court only on the arbitration fees in the award if required Class Proceedings. The Study more limited grounds set out in the by applicable law or if the claim ‘‘was described the procedural rules for class FAA.219 filed for purposes of harassment or is actions under Federal Rule 23 and noted patently frivolous.’’ 204 that the Bureau was unaware of a class Consumer Financial Arbitrations: Parties in court generally bear their action procedure for small claims Frequency and Outcomes (Section 5 of own attorney’s fees, unless a statute or court.214 The Study further noted that Study) contract provision provides otherwise or the AAA and JAMS have adopted rules, Section 5 of the Study analyzed a party is shown to have acted in bad derived from Rule 23, for administering arbitrations of consumer finance faith. However, under several consumer arbitrations on a class basis.215 disputes between consumers and protection statutes, providers may be Privacy and Confidentiality. The consumer financial services providers. liable for attorney’s fees.205 Under the Study stated that court litigation This section tallied the frequency of AAA’s Consumer Rules, ‘‘[t]he arbitrator (including small claims court) is a such arbitrations, including the number may grant any remedy, relief, or public process, with proceedings of claims brought and a classification of outcome that the parties could have conducted in public courtrooms and the which claims were brought. It also received in court, including awards of record generally available for public examined outcomes, including how attorney’s fees and costs, in accordance review; by comparison, arbitration is a cases were resolved and how consumers with the law(s) that applies to the and companies fared in the relatively 206 case.’’ 209 Id., section 4 at 14. small share of cases that an arbitrator Representation. The Study noted that 210 Id. resolved on the merits. The Study in most courts, individuals can either 211 Id., section 4 at 15. performed this analysis for arbitrations represent themselves or hire a lawyer as 212 Arbitration rules on discovery give the concerning credit cards, checking their representative.207 In arbitration, arbitrator authority to manage discovery ‘‘with a accounts, payday loans, GPR prepaid the rules are more flexible than in many view to achieving an efficient and economical resolution of the dispute, while at the same time cards, private student loans, and auto courts about the identity of any party promoting equality of treatment and safeguarding purchase loans. To conduct this representative. For example, the AAA each party’s opportunity to present its claims and analysis, the Bureau used electronic Consumer Rules permit a party to be defenses.’’ AAA Commercial Rules, Rule R–22, case files from the AAA.220 Pursuant to represented ‘‘by counsel or other cited in Study, supra note 2, section 4 at 16–17. Arbitration rules do not allow for broad discovery authorized representative, unless such from third parties, which were not parties to the 216 Id., section 4 at 21–22. A small minority of is prohibited by applicable underlying agreement to arbitrate disputes. Section arbitration agreements, primarily in the checking law.’’ 208 Some states, however, prohibit 7 of the FAA, however, grants arbitrators the power account market, included provisions requiring that to subpoena witnesses to appear before them (and the proceedings remain confidential. Id., section 2 bring documents). 9 U.S.C. 7. Appellate courts are at 51–53. 202 Id., section 4 at 10. As the Study noted, a split on whether Section 7 of the FAA authorizes 217 Id., section 4 at 22–24. federal statute permits indigent plaintiffs filing in subpoenas for discovery before an arbitral hearing. 218 Id., section 4 at 24. Federal court to seek to have the court waive the Study, supra note 2, section 4 at 17 n.78. As 219 required filing fees. Id. (citing 28 U.S.C. 1915(a)). Courts may vacate arbitration awards under described above, many arbitration agreements the FAA only in limited circumstances. 9 U.S.C. 10. 203 Id., section 4 at 11–12. highlighted the difference in discovery practices in Cf. supra notes 98–106 and accompanying text 204 Id., section 4 at 11–12. arbitration proceedings as compared to litigation. (identifying the narrow grounds upon which a court 205 See, e.g., 15 U.S.C. 1640(a)(3) (TILA). See id. may determine an arbitration agreement to be 206 Study, supra note 2, section 4 at 12. 213 Study, supra note 2, section 4 at 18. unenforceable). 207 Id., section 4 at 13. 214 Id., section 4 at 18–20. 220 See Christopher R. Drahozal & Samantha 208 Id., section 4 at 13–14. 215 Id., section 4 at 20. Zyontz, An Empirical Study of AAA Consumer

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a non-disclosure agreement, the AAA affirmative claims by consumers, the companies) may appear to do poorly voluntarily provided the Bureau its average amount of such claims was before arbitrators because only weak electronic case records for consumer approximately $27,000 and the median claims are heard at hearings. As the disputes filed during the years 2010, amount of such claims was $11,500.226 Study explained, these limitations are 2011, and 2012.221 Because the AAA About 25 disputes a year involved inherent in a review of this nature and provided the Bureau with case records affirmative claims by consumers of unavoidable. for all disputes filed in arbitration $1,000 or less.227 In debt disputes, the With those significant caveats noted, during this period, Section 5 of the average disputed debt amount was the Study determined that in 32.2 Study provides a reasonably complete approximately $15,700; the median was percent of the 1,060 disputes filed picture of the frequency and typology of approximately $11,000.228 Across all six during the first two years of the study claims that consumers and companies product markets, about 25 cases per year period (341 disputes) arbitrators file in arbitration.222 involved disputed debts of $1,000 or resolved the dispute on the merits. In The Study identified about 1,847 less.229 23.2 percent of the disputes (246 filings in total—about 616 per year— Overall, consumers were represented disputes), the record shows that the with the AAA for the six product by counsel in 63.2 percent of arbitration parties settled. In 34.2 percent of markets combined.223 According to the cases.230 The rate of representation, disputes (362 disputes), the available standard AAA claim forms, about 411 however, varied widely based on the AAA case record ends in a manner that arbitrations per year were designated as product at issue; in payday and student is consistent with settlement—for having been filed by consumers alone; loan disputes, for example, consumers example, a voluntary dismissal of the the remaining filings were designated as had counsel in about 95 percent of all action—but the Bureau could not having been filed by companies or filed cases filed.231 definitively determine that settlement as mutual submission by both the To analyze the outcomes in occurred. In the remaining 10.5 percent consumer and the company.224 Forty arbitration, the Bureau confined its of disputes (111 disputes), the available percent of the arbitration filings analysis to claims filed in 2010 and AAA case record ends in a manner involved a dispute over the amount of 2011 in order to limit the number of suggesting the dispute is unlikely to debt a consumer allegedly owed to a cases that were pending at the close of have settled; for example, the AAA may company, with no additional affirmative the period for which the Bureau had have refused to administer the dispute claim by either party; in 31 percent of data. The Bureau’s analysis of because it determined that the the filings, parties brought affirmative arbitration outcomes was limited by a arbitration agreement at issue was claims with no formal dispute about the number of factors that are unavoidable inconsistent with the AAA’s Consumer amount of debt owed; in another 29 in any review of dispute resolution.232 Due Process Protocol.235 percent of the filings, consumers Among other issues, settlement terms As noted above, only a small portion disputed alleged debts, but also brought were rarely known if the parties settled of filed arbitrations reached a decision. affirmative claims against companies.225 their disputes. In many cases, even the The Study identified 341 cases filed in Although claim amounts varied by fact that a settlement occurred was 2010 and 2011 that were resolved by an product, in disputes involving difficult to discern because the parties arbitrator and for which the outcome were not required to notify the AAA of was ascertainable.236 Of these 341 cases, Arbitrations, 25 Ohio St. J. on Disp. Res. 843, 845 a settlement.233 Accordingly, an 161 disputes involved an arbitrator (2010) (reviewing 301 AAA consumer disputes covering a nine-month period in 2007, but limiting incomplete file could indicate a decision on a consumer’s affirmative analysis to disputes actually resolved by settlement, on the one hand, or that the claim. Of the cases in which the Bureau arbitrators); Drahozal & Zyontz, Creditor Claims in proceeding was still in progress but could determine the results, the Arbitration and in Court, 7 Hastings Bus. L. J. 77 relatively dormant, on the other hand. consumer obtained relief on their (2011) (follow-on study that compared debt collection claims by companies in AAA consumer Because parties settle claims affirmative claims in 32 disputes (20.3 arbitrations with debt collection claims in Federal strategically, disputes that did reach an percent).237 Consumers obtained debt court and in State court proceedings in jurisdictions arbitrator’s decision on the merits were forbearance in 19.2 percent of the cases in Virginia and Oklahoma). not a representative sample of the in which an arbitrator could have 221 Study, supra note 2, section 5 at 17. 234 222 disputes that were filed. For example, provided some form of debt forbearance While the analysis does not provide a window 238 into how arbitrations are resolved in other arbitral if parties settled all strong consumer (or (46 cases). The total amount of fora, the AAA is the predominant administrator of company) claims, then consumers (or affirmative relief awarded in all cases consumer financial arbitrations. Id., section 2 at 35. was $172,433 and total debt forbearance 223 Study, supra note 2, section 5 at 9. 226 Id., section 5 at 10. was $189,107.239 Of the 52 cases filed in 224 Id., section 1 at 11. Under the AAA policies 227 Id. 2010 and 2011 that involved consumer that applied during the period studied, a company 228 Id. could unilaterally file a debt collection dispute affirmative claims of $1,000 or less, 229 Id. against a consumer in arbitration only if a preceding arbitrators resolved 19, granting 230 debt collection litigation had been dismissed or Id., section 5 at 29. affirmative relief to consumers in four stayed in favor of arbitration. Companies could file 231 Id., section 5 at 28–32. disputes mutually with consumers; they could also 232 Id., section 5 at 4–7. As a result, the Bureau 235 file counterclaims in dispute filed by consumers was only able to determine a substantive outcome Id. against them. Id., section 5 at 27 n.56. As noted in in 341 cases. 236 Id., section 5 at 13. the Study, the Bureau did not attempt to verify 233 Id., section 5 at 6. 237 Id. whether the representation on the claim forms as 234 Id., section 5 at 7 (noting that it is ‘‘quite 238 Id. to the party filing the case was accurate. For challenging to attempt to answer even the simple 239 Of the 244 cases in which companies made example, in a number of cases that were designated question of how well do consumers (or companies) claims or counterclaims that the Bureau could as having been filed by a consumer, the record fare in arbitration’’). The Study notes further that determine were resolved by arbitrators, companies indicates that the consumer failed to prosecute the the same selection bias concerns apply to disputes obtained relief in 227 disputes. The total amount of action and that the company actually paid the fees filed in litigation and that ‘‘[t]hese various relief in those cases was $2,806,662. These totals and obtained a quasi-default judgment. In other considerations warrant caution in drawing included 60 cases in which the company advanced cases, a law firm representing consumers filed a conclusions as to how well consumers or fees for the consumer and obtained an award number of student loan disputes but indicated on companies fare in arbitration as compared to without participation by the consumer. Excluding the checkbox that the action was being filed by the litigation.’’ Id. For example, the Study found that those 60 cases, the total amount of relief awarded company. Id., section 5 at 19 n.38. the disputes that parties filed in arbitration differ by arbitrators to companies was $2,017,486. Id., 225 Id., section 1 at 11. from the disputes filed in litigation. Id. section 5 at 12.

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such cases.240 With respect to disputes that consumers travelled an average of which the complaint was filed in order involving company claims, the Bureau 30 miles and a median of 15 miles to to analyze relevant case events. The could determine the terms of arbitrator attend the hearing.247 Bureau also collected State court class awards relating to company claims in action complaints from three States Consumer Financial Litigation: 244 of the 421 disputes involving (Utah, Oklahoma, and New York) and Frequency and Outcomes (Section 6 of company claims filed in 2010 and seven counties that had a public Study) 2011.241 Arbitrators provided electronic database in which complaints companies some type of relief in 227, or The Study’s review of consumer were regularly available.250 The Bureau 93.0 percent, of those disputes. In those financial litigation in court represents, determined that it was feasible to collect 227 disputes, companies won a total of the Bureau believes, the only analysis of class action complaints from the State $2,806,662.242 the frequency and outcomes of and county databases, but not The Study found that consumers consumer finance cases to date. While complaints in individual cases from appealed very few arbitration decisions there is a large body of research those databases.251 Collectively, this and companies appealed none. regarding cases filed in court generally, State court sample accounted for 18.1 Specifically, it found four arbitral preexisting studies of consumer finance percent of the U.S. population as of appeals filed between 2010 and 2012. cases either assessed only the number of 2010.252 Consumers without counsel filed all filings—not typologies and outcomes, as The Study’s analysis of putative class four. Three of the four were closed after the Study did—or focused on the action filings identified 562 cases filed the parties failed to pay the required frequency of cases filed under by consumers from 2010 through 2012 administrator fees and arbitrator individual statutes.248 The Study in Federal courts and selected State deposits. In the fourth, a three-arbitrator performed this analysis for individual courts concerning the six products, or panel upheld an arbitration award in court litigation concerning five of the about 187 per year.253 Of these 562 favor of the company after a 15-month same six product markets as those putative class cases, 470 were filed in appeal process.243 covered by its analysis of consumer Federal court, and the remaining 92 The Study also found that very few financial arbitration: Credit cards, were filed in the State courts in the class arbitrations were filed. The Study checking accounts and debit cards; Bureau’s State court sample set.254 In identified only two filed between 2010 payday loans; GPR prepaid cards; and Federal court class cases, the most and 2012. One was still pending on a private student loans. In addition, the common claims were under the FDCPA motion to dismiss as of September 2014. study analyzed class cases filed in these and State UDAP statutes.255 In State The other file contained no information five markets and also with respect to court class cases, State law claims other than the arbitration demand that automobile loans. This analysis focused predominated.256 All Federal and State followed a State court decision granting on cases filed from 2010 to 2012, as an class cases sought monetary relief. the company’s motion seeking analogue to the years for which Unlike the AAA arbitration rules, court arbitration.244 electronic AAA records were available, rules of procedure generally do not The Study also found that, when there and captured outcomes reflected on require plaintiffs to identify specific was a decision on the merits by an dockets through February 28, 2014. claim amounts in their pleadings. arbitrator, the average time to resolution The Bureau’s class action litigation Accordingly, the Bureau had limited was 179 days, and the median time to analysis extended to all Federal district ability to ascertain the number of resolution was 150 days. When the courts. To conduct this analysis, the ‘‘small’’ claims asserted in class action record definitively indicated that a case Bureau collected complaints concerning litigation, as compared to the 25 had settled, the median time to these six products using an electronic arbitration disputes each year in the settlement was 155 days from the filing database of pleadings in Federal district markets analyzed in the AAA case set of the initial claim.245 Further, the courts.249 The Bureau also reviewed that included consumer affirmative Study found that more than half of the Federal multidistrict litigation (MDL) claims of $1,000 or less.257 The Bureau filings that reached a decision were proceedings to identify additional was able to determine, however, that resolved by ‘‘desk arbitrations,’’ consumer financial complaints filed in meaning that the proceedings were Federal court. After the Bureau 250 To determine what counties to include in the resolved solely on the basis of identified its set of Federal class data set, the Bureau started with the Census documents submitted by the parties Bureau’s list of the ten most populous U.S. complaints concerning the six products counties. The Bureau then excluded the two (57.8 percent). Approximately one-third and individual complaints concerning counties on that list that were already included in (34.0 percent) of proceedings were the five products, it collected the docket the State court sample (two in New York City) and resolved by an in-person hearing, 8.2 one additional county that did not have a public sheet from the Federal district court in electronic database in which complaints were percent by telephonic hearings, and 2.4 regularly available. The remaining seven counties percent through a dispositive motion 247 Id., section 5 at 70–71. were the counties in the Bureau’s data set. 246 with no hearing. When there was an 248 See, e.g., Thomas E. Willging, Laural L. 251 Study, supra note 2, appendix L at 71. in-person hearing, the Study estimated Hooper & Robert J. Niemic, Empirical Study of Class 252 Id., section 6 at 15; see generally id., appendix Actions in Four Federal District Courts: Final L. 253 240 Id. Report to the Advisory Committee on Civil Rules Id., section 6 at 6. Due to limitations of the (Fed. Judicial Ctr., 1996), available at http:// electronic database coverage and searchability of 241 This includes cases filed by companies as well www.uscourts.gov/file/document/empirical-study- State court pleadings, the Bureau does not believe as cases in which companies asserted counterclaims class-actions-four-federal-district-courts-final- the electronic search of U.S. District Court in consumer-initiated disputes. Id., section 5 at 14. report-advisory; ACA International, FDCPA pleadings identified a meaningful set of complaints 242 Id., section 5 at 43–44. Excluding 60 cases in Lawsuits Decline While FCRA and TCPA Filings filed in State court and subsequently removed to which companies paid filing fees for consumers Increase, (reporting on January 2014 case filings Federal court. Id., section 6 at 13. who failed to pay their initial fees—resulting in under FDCPA as reported by Webrecon), available 254 Id., section 6 at 6. Because the Bureau’s State what appears to be decisions similar to default at http://www.acainternational.org/news-fdcpa- sample accounted for about one-fifth of the U.S. judgments—companies won a total of $2,017,486. lawsuits-decline-while-fcra-and-tcpa-filings- population, the actual number of State class filings Id. at 44. increase-31303.aspx, cited in Study, supra note 2, would have been higher, but the Bureau cannot say 243 Id., section 5 at 85. section 6 at 9–11. by how much. Id. 244 Id., section 5 at 86–87. 249 LexisNexis CourtLink, http:// 255 Id. 245 Id., section 5 at 71–73. www.lexisnexis.com/en-us/products/courtlink-for- 256 Id. 246 Id., section 5 at 69–70. corporate-or-professionals.page. 257 Id.

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more than a third of the 562 class cases financial litigation filed in State courts The Bureau reviewed outcomes in all sought statutory damages only under nationwide.263 of the individual cases from four of the Federal statutes that cap damages Outside of case outcomes, however, five markets studied and a random available in class proceedings the Study noted that even comparing sample of the cases filed in the fifth (sometimes accompanied by claims for frequency or process across litigation market, resulting in an analysis of 1,205 actual damages). In addition, nearly 90 and arbitration proceedings was of cases.272 In 48.2 percent of those 1,205 264 percent of the 562 class cases did not limited utility. The Study noted that cases (581 cases), the record reflected seek statutory damages under Federal differences in data may result from that a settlement had occurred, though decisions consumers and companies statutes that do not cap damages the record only rarely (in around 5 make pertaining to arbitration and percent of those 581 cases) reflected the available in class proceedings.258 litigation, including but not limited to monetary or other relief afforded by the As with the Study’s analysis of the whether a relationship would be settlement. In 41.8 percent of the 1,205 arbitration proceedings noted above, the governed by a pre-dispute arbitration cases (504 cases), the record reflected a Study set out a number of explicit and agreement; whether a case is filed and withdrawal by at least one consumer or inherent limitations to its analysis of if so on a class or individual basis; and another outcome potentially consistent litigation outcomes.259 While the whether to seek arbitration of cases filed with settlement, such as a dismissal for available data indicated that most court in court.265 With those caveats noted, failure to prosecute or failure to serve cases were resolved by settlement or in the Study indicated that class filings (but where the plaintiff also might have a manner consistent with a settlement, result in myriad outcomes. Of the 562 withdrawn with no relief). In 6.8 the terms of any settlement were, for class cases the Study identified, 12.3 percent of the cases (82 cases), a reasons noted previously, typically percent (69 cases) had final class consumer obtained a judgment against a unavailable from the court record unless settlements approved by February 28, company party through a summary 266 the settlement was on a class basis. The 2014. As of April 2016, 18.1 percent judgment motion, a default judgment of the filings (102 cases) featured final bulk of cases, therefore, including (most common), or, in two cases, a trial. class settlements or class settlement individual cases and cases filed as a In 3.7 percent of cases (44 cases), the agreements pending approval. action against at least one company was class action but that settled on an An additional 24.4 percent of the dismissed via a dispositive motion individual basis only, resulted in class cases (137 cases) involved a non- 273 260 unrelated to arbitration. unknown substantive outcomes. class settlement and 36.7 percent (206 Individual cases generally resolved Other limitations, however, were unique cases) involved a potential non-class more quickly than class cases. Aside to the review of litigation filings. For settlement.267 In 10 percent of the class from cases that were transferred to instance, the lack of specific cases (56 cases), the action against at MDLs, Federal class cases closed in a information about claim amounts in least one company defendant was median of approximately 218 days for court filings meant that the Study was dismissed as the result of a dispositive cases filed in 2010 and 211 days for unable to offer a meaningful analysis of motion unrelated to arbitration.268 In 8 cases filed in 2011. Class cases in MDLs recovery rates.261 Further, some cases in percent of the 562 class cases (45 cases), were markedly slower, closing in a court often could not be reduced to a all claims against a company were median of approximately 758 days for single result because plaintiffs in those stayed or dismissed based on a company cases filed in 2010 and 538 days for cases may have alleged multiple claims filing an arbitration motion.269 cases filed in 2011. State class cases against multiple defendants and one The Study also identified 3,462 closed in a median of approximately case can have multiple outcomes across individual cases filed in Federal court 407 days for cases filed in 2010 and 255 274 the different claims and parties. For this concerning the five product markets days for cases filed in 2011. Aside reason, the Study reported on several studied during the period, or 1,154 per from a handful of individual cases year.270 As with putative class filings, types of outcomes, more than one of transferred to MDL proceedings, individual pleadings provide minimal individual Federal cases closed in a which may have occurred in any single 275 262 information about the overall claim median of approximately 127 days. case. In addition, while the Bureau amounts sought by plaintiffs. Less than Notwithstanding the inherent stated that its data set of State court 6 percent of the overall individual limitations noted above, the Bureau’s complaints appears to be the most litigation disputes were filed without large set of individual and class action robust available, the Bureau noted the counsel.271 litigations allowed the Study to explore dataset’s limitations. For example, the whether motions seeking to compel three states and seven additional 263 Id., section 6 at 15 n.34. See also id. at arbitration were more likely to be counties from which we collected appendix L. asserted in individual filings or in complaints filed in State court may not 264 Id., section 6 at 4. putative class action filings. Across its be representative of the consumer 265 Id. entire set of court filings, the Study 266 Id., section 6 at 7. found that motions seeking to compel 267 Id. The Bureau deemed cases to be potential 258 Id., section 6 at 22–26. The ‘‘capped’’ claims non-class settlements where a named plaintiff arbitration were much more likely to be arose from five statutory schemes: The Expedited withdrew claims or the court dismissed claims for asserted in cases filed as class actions. Funds Availability Act, EFTA, the FDCPA, TILA failure to serve or failure to prosecute, which could For most of the cases analyzed in the (including the Consumer Leasing Act and the Fair have occurred due to a non-class settlement; but the Study, it was not apparent whether the Credit Billing Act), and ECOA (which provides for record did not disclose that such a settlement punitive and actual damages but not statutory occurred. Litigants generally do not have an defendants in the proceedings had the damages). Id., section 6 at 23 n.45 (describing obligation to disclose non-class settlements. In option of moving to seek arbitration damages limitations). In over half of the cases in addition, they have certain incentives not to do so. which Federal statutory damages were sought, the 268 Id. 272 Because the 3,462 cases the Study identified consumers also sought actual damages. Id., section 269 Id. contained a high proportion of credit card cases, the 6 at 25 n.48. 270 Id., section 6 at 27–28. As noted above, the Bureau reviewed outcomes in a 13.3 percent sample 259 Id., section 6 at 2–5. Study did not include data on individual cases in of the credit card cases. Id., section 6 at 27–28. 260 Id., section 6 at 8. State courts, and the Study evaluated Federal cases 273 Id., section 6 at 48. 261 Id., section 6 at 3. in five product markets. 274 Id., section 6 at 9. 262 Id., section 6 at 3–4. 271 Id., section 6 at 7. 275 Id.

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proceedings (i.e., the Bureau was unable The Study, however, was the first to regard to whether the claim was to determine definitively whether the assess the frequency of small claims consumer financial in nature. contracts between the consumers and court filings concerning consumer As the Study noted, the number of defendants contained arbitration financial disputes across multiple claims brought by consumers that were agreements). The Bureau, however, was jurisdictions. consumer financial in nature was likely able to limit its focus to complaints The Bureau obtained the data for this much lower. Out of the 31 jurisdictions against companies that it knew to use analysis from online small claims court studied, the Bureau was able to obtain arbitration agreements in their databases operated by States and underlying case documents on a consumer contracts in the year in which counties. No centralized repository of systematic basis for only two the cases were filed by limiting its small claims court filings exists.280 The jurisdictions: Alameda County and sample set to disputes regarding credit Bureau identified 14 State databases Philadelphia County. The Bureau’s cards. In the 40 class cases where the that purport to provide statewide data analysis of all cases filed by consumers Study was able to ascertain that the case and that can be searched by year and against the credit card issuers in its was subject to an arbitration agreement, party name, although this also included sample found 39 such cases in Alameda motions seeking arbitration were filed the District of Columbia and a database County and four such cases in 65 percent of the time.276 In a for New York State that did not include Philadelphia County. When the Bureau comparable set of 140 individual New York City. This ‘‘State-level reviewed the actual pleadings, however, disputes, motions seeking arbitration sample’’ covers approximately 52 only four of the 39 Alameda cases were were filed one tenth as often, in only 5.7 million people. The Bureau also clearly individuals filing credit card percent of proceedings.277 Overall, the identified 17 counties with small claims claims against one of the ten issuers, Study identified nearly 100 Federal and court databases that met the same and none of the four Philadelphia cases State class action filings that were criteria (purporting to provide statewide were situations where individuals were dismissed or stayed because companies data and being searchable by year and filing credit card claims against one of invoked arbitration agreements by filing party name), including small claims the ten issuers. This additional analysis a motion to compel and citing an courts for three of five counties in New shows that the Bureau’s broad 278 arbitration agreement in support. York City. This ‘‘county-level sample’’ methodology likely significantly Small Claims Court (Section 7 of Study) covers approximately 35 million people overstated the actual number of small and largely avoids overlap with the claims court cases filed by consumers As described above, Section 2 of the 286 State-level sample.281 The Bureau against credit card issuers. Study found that most arbitration searched each of these 31 jurisdictions’ The Study also found that in small agreements in the six markets the databases for cases involving a set of ten claims court credit card issuers were Bureau studied contained a small claims large credit card issuers that the Bureau more likely to sue consumers than court ‘‘carve-out’’ that typically afforded estimated to cover approximately 80 consumers were to sue issuers. The either the consumer or both parties the percent of credit card balances Study estimated that, in these same right to file suit in small claims court as 282 jurisdictions, issuers in the Bureau’s an alternative to arbitration. outstanding. The Bureau cross- referenced the issuers’ advertising sample filed over 41,000 cases against Commenters on the RFI urged the individuals.287 Based on the available Bureau to study the use of small claims patterns to confirm that the issuers offered credit on a widespread basis to data, it is likely that nearly all these courts with respect to consumer 288 consumers in the jurisdictions the cases were debt collection claims. financial disputes. The Bureau 283 undertook this analysis, published the Bureau studied. Class Action Settlements (Section 8 of results of this inquiry in the Preliminary The Study estimated that, in the Study) Results, and also included these results jurisdictions the Bureau studied—with a Section 8 of the Study contains the in Section 7 of the Study. combined population of approximately results of the Bureau’s quantitative The Study’s review of small claims 85 million people—consumers filed no assessment of consumer financial class court filings represents the only study of more than 870 disputes in 2012 against 284 action settlements. As described above, the incidence and typology of consumer these ten institutions (including the Section 6 of the Study, which analyzes financial disputes in small claims court three largest retail banks in the United 285 consumer financial litigation, includes to date. Prior research suggests that States). This figure includes all cases findings about the frequency with companies make greater use of small in which an individual sued an issuer which consumer financial class actions claims court than consumers and that or a party with a name that a consumer are filed and the types of outcomes most company-filed suits in small might use to mean the issuer, without reached in such cases. However, the claims court are debt collection cases.279 dataset used for that analysis consisted than individuals sued businesses. Suzanne E. of cases filed between 2010 and 2012 Elwell & Christopher D. Carlson, The Iowa Small 276 Id., section 6 at 60–61. The court granted and outcomes of those cases through motions seeking arbitration in 61.5 percent of these Claims Court: An Empirical Analysis, 75 Iowa L. disputes. Rev. 433 (1990). In 2007, a working group of February 28, 2014. Massachusetts trial court judges and administrators 277 Id., section 6 at 61. The court granted motions To better understand the results of ‘‘recognized that a significant portion of small seeking arbitration in five of the eight individual consumer financial class actions that claims cases involve the collection of commercial disputes in which motions seeking arbitration were debts from defendants who are not represented by result in settlements, for Section 8, the filed (62.5 percent). counsel.’’ Commonwealth of Massachusetts, District Bureau conducted a search of class 278 Id., section 6 at 58 (noting that companies Court Department of the Trial Court, Report of the action settlements through an online moved to compel arbitration in 94 of the 562 class Small Claims Working Group, at 3 (Aug. 1, 2007), database for Federal district court action cases in the Bureau’s dataset, and that the available at http://www.mass.gov/courts/docs/ motion was granted in full or in part in 46 cases); lawlib/docs/smallclaimreport.pdf. dockets. The Bureau searched this id. at 58–59 (noting that the Bureau confirmed that 280 Study, supra note 2, section 7 at 5. database using terms designed to motions to compel arbitration were granted in at 281 identify final settlement orders finalized least 50 additional class cases using a methodology Id., section 7 at 5–6. described in appendix P). 282 Id., section 7 at 6. 279 As described in the Study, for example, a 1990 283 Preliminary Results, supra note 2, at 156. 286 Id., section 7 at 8–9. analysis of the Iowa small claims court system 284 Study, supra note 2, section 7 at 9. 287 Id., section 1 at 16. found that many more businesses sued individuals 285 Id., appendix Q at 120–21. 288 Id.

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from 2008 to 2012 in consumer financial number of class members who had that companies paid. The total amount cases. The selection criteria for this data received relief and the amount of that of gross relief in these 419 settlements— set differed from many other sections in relief; and the extent to which relief that is, aggregate amounts promised to the Study, in that it was not restricted went to attorneys. While several be made available to or for the benefit to a discrete number of consumer previous studies of class action of damages classes as a whole, financial products and services.289 settlements have been published, the calculated before any fees or other costs Rather, the Bureau reviewed these Study is the first to comprehensively were deducted—was about $2.7 dockets and identified settlements catalogue and analyze class action billion.301 This estimate included cash where either: (1) The complaint alleged settlements specific to consumer relief of about $2.05 billion and in-kind a violation of one of the enumerated financial markets.292 relief of about $644 million.302 These consumer protection statutes under As the Study noted, there were figures represent a floor, as the Bureau Title X of the Dodd-Frank Act; or (2) the limitations to the Bureau’s analysis. The did not include the value, or cost to the plaintiffs were primarily consumers and Study understates the number of class defendant, of making agreed behavioral the defendants were institutions selling action settlements finalized, and the changes to business practices.303 consumer financial products or engaged amount of relief provided, during the Sixty percent of the 419 settlements in providing consumer financial period under study because the Bureau (251 settlements) contained enough data services (other than consumer could not identify class settlements in for the Bureau to calculate the value of investment products and services), State court class action litigation. (The cash relief that, as of the last document regardless of the basis of the claim. To Bureau determined it was not feasible to in the case files, either had been or was the extent that the case involved any do so in a systematic way.293) Further, scheduled to be paid to class members. such consumer financial product or the claims data on the settlements the Based on these cases alone, the value of service—not only the six main product Bureau identified is incomplete, as cash payments to class members was areas identified in the AAA and dockets are often closed when the final $1.1 billion. This excludes payment of litigation sets—it was included in the approved settlement order is issued, but in-kind relief and any valuation of data set.290 final settlement orders may be issued in behavioral relief.304 The set of consumer financial class class action settlements before claims For 56 percent of the 419 settlements action settlements overlaps with the numbers are final.294 In addition, not (236 settlements), the docket contained data set used for the analysis of the every settlement offered information on enough data for the Bureau to estimate, frequency and outcomes of consumer every data point or metric that was as of the date of the last filing in the financial litigation (Section 6 of the analyzed; the Study accounts for this by case, the number of class members who Study) insofar as cases filed in 2010 referencing, for every metric reported were guaranteed cash payment because through 2012 had settled by the end of on, the number of settlements that either they had submitted a claim or 2012. The analysis of class action provided the relevant number or they were part of a class to which settlements is larger because it estimate.295 payments were to be made encompasses a wider time period The Bureau identified 422 Federal automatically. In these settlements, 34 (settlements finalized from 2008–12) to consumer financial class settlements million class members were guaranteed decrease the variance across years that that were approved between 2008 and recovery as of the time of the last could be created by unusually large 2012, resulting in an average of document available for review, having settlements and to account for the made claims or participated in an approximately 85 approved settlements 305 impact of the April 2011 Supreme Court per year.296 The bulk of these automatic distribution. Of 382 decision in Concepcion, which is settlements (89 percent) concerned debt settlements that offered cash relief, the discussed above.291 The Bureau used collection, credit cards, checking Bureau determined that 36.6 percent this data set to perform a more detailed accounts or credit reporting.297 Of these analysis of class settlement outcomes, 301 Id., section 8 at 23–24. The Study defined 422 settlements, the Bureau was able to gross relief as the total amount the defendants including issues such as the number of analyze 419.298 The Bureau identified offered to provide in cash relief (including debt class members eligible for relief in these the class size or a class size estimate in forbearance) or in-kind relief and offered to pay in settlements; the amount and types of 78.5 percent of these settlements (329 fees and other expenses. Id. relief available to class members; the 302 Id., section 8 at 24. settlements). There were 350 million 303 Id., section 8 at 23. Accordingly, where cases total class members in these settlements. did provide values for behavioral relief, such values 289 Because Section 8 of the Study focused on Excluding one large settlement with 190 were not included in the Study’s calculations settled class action disputes, the Bureau could regarding attorney’s fees as a proportion of begin its search with a relatively limited set of million class members (In re 299 consumer recovery. Id., section 8 at 5 n.10. documents: All Federal class action settlements TransUnion Privacy Litigation), these 304 Id., section 8 at 28. available on the Westlaw docket database, resulting settlements included 160 million class 305 Id., section 8 at 27. The value of cash in over 4,400 disputes settled between January 1, members.300 payments to class members in the 251 settlements 2008 and December 31, 2012. Id., appendix R. In described above ($1.1 billion), divided by the contrast, in exploring filings in Federal and State These 419 settlements included cash number of class members in the 236 settlements court in Section 6 of the Study, described above, relief, in-kind relief and other expenses described above (34 million), yields an average the volume of court filings required the Bureau to recovery figure of approximately $32 per class rely on word searches that helped limit the set of 292 See Study, supra note 2, section 8 at 6–7. member. Since the publication of the Study, some documents that the Bureau manually reviewed to 293 Id., section 8 at 10. stakeholders have reported on this $32 figure. See, the six product groups mentioned previously. Id., 294 Id., section 8 at 11. e.g., Todd Zywicki & Jason Johnston, A Ban that appendix L. 295 Id., section 8 at 10. Will Only Help Class Action Lawyers, Mercatus Ctr., 290 Id., section 8 at 8–11. The Study did, however, 296 Id., section 8 at 9. Geo. Mason Univ. blog (Mar. 18, 2016), http:// exclude disputes involving residential mortgage mercatus.org/expert_commentary/ban-will-only- 297 Id., section 8 at 11. lenders, where arbitration provisions are not help-class-action-lawyers. The Bureau notes that 298 prevalent, and another subset of disputes involving Id., section 8 at 3 n.4. For the purposes of this figure represents an approximation, because the claims against defendants that are not ‘‘covered uniformity in analyzing data, the Bureau excluded set of 251 settlements for which the Bureau had persons’’ regulated by the Bureau, such as claims three cases for which it was unable to find data on payee information was not completely congruent against merchants under the Fair and Accurate attorney’s fees. These three cases would not have with the set of 236 settlements for which the Bureau Credit Transaction Act. Id., section 8 at 9 n.25 and affected the results materially. Id. had payment information. However, the Bureau appendix S. 299 MDL No. 1350 (N.D. Ill. Sept. 17, 2008). believes that this $32-per-class-member recovery 291 Concepcion, 563 U.S. at 344. 300 Study, supra note 2, section 8 at 3. figure is a reasonable estimate.

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included automatic cash distribution individual and class claims. As of the financial class actions and public that did not require individual Study’s publication, 23 cases had been (governmental) enforcement actions. As consumers to submit a claim form or resolved in the Overdraft MDL. In Section 9 notes, some industry trade claim request.306 eleven cases, the banks’ deposit association commenters (commenting The Study also sought to calculate the agreements did not include arbitration on the RFI) urged the Bureau to study rate at which consumers claimed relief provisions; in those cases, 6.5 million whether class actions are an efficient when such a process was required to consumers obtained $377 million in and cost-effective mechanism to ensure obtain relief. The Bureau was able to relief. In three cases, the defendants’ compliance with the law given the calculate the claims rate in 25.1 percent deposit agreements had arbitration authority of public enforcement of the 419 settlements that contained provisions, but the defendants did not agencies. Specifically, these enough data for the Bureau to calculate seek arbitration; in those cases, 13.7 commenters suggested that the Bureau the value of cash relief that had been or million consumers obtained $458 explore the percentage of class actions was scheduled to be paid to class million in relief.310 Another four that are follow-on proceedings to members (105 cases). In these cases, the defendants moved to seek arbitration, government enforcement actions. Other average claims rate was 21 percent and but ultimately settled; in those cases 8.8 stakeholders have argued that private the median claims rate was 8 percent.307 million consumers obtained $180.5 class actions are needed to supplement Rates for these cases should be viewed million in relief.311 Five companies, in public enforcement, given the limited as a floor, given that the claims numbers contrast, successfully invoked resources of government agencies, and used to calculate these rates may not arbitration agreements, resulting in the that private class actions may precede have been final for many of these dismissal of the cases against them.312 public enforcement and, in some cases, settlements as of the date of the last The Overdraft MDL cases also spur the government to action. To better document in the docket and available provided useful insight into the extent understand the relationship between for review by the Bureau. The weighted to which consumers were able to obtain private class actions and public average claims rate, excluding the cases relief via informal dispute resolution— enforcement, Section 9 analyzes the providing for automatic relief, was 4 such as telephone calls to customer extent to which private class actions percent including the large TransUnion service representatives. As the Study overlap with government enforcement settlement, and 11 percent excluding notes, in 17 of the 18 Overdraft MDL activity and, when they do overlap, that settlement.308 settlements, the amount of the which types of actions come first. The Study also examined attorney’s settlement relief was finalized, and the The Bureau obtained data for this fee awards. Across all settlements that number of class members determined, analysis in two steps. First, it assembled reported both fees and gross cash and after specific calculations by an expert a sample of public enforcement actions in-kind relief, fee rates were 21 percent witness who took into account the and searched for ‘‘overlapping’’ private of cash relief and 16 percent of cash and number and amount of fees that had class actions, meaning that the cases in-kind relief. Here, too, the Study did already been reversed based on informal sought relief against the same not include any valuation for behavioral consumer complaints to customer defendants for the same conduct, relief, even when courts relied on such service. The expert witness used data regardless of the legal theory employed valuations to support fee awards. The provided by the banks to calculate the in the complaint at issue.314 The Bureau Bureau was able to compare fees to cash amount of consumer harm on a per- did this by reviewing Web sites for all payments in 251 cases (or 60 percent of consumer basis; the data showed, and Federal regulatory agencies with our data set). In these cases, of the total the calculations reflected, informal jurisdiction over consumer finance amount paid out in cash by defendants reversals of overdraft charges. Even after matters and the Web sites of the State (both to class members and in attorney’s controlling for these informal reversals, regulatory and enforcement agencies in fees), 24 percent was paid in fees.309 nearly $1 billion in relief was made the 10 largest and 10 smallest States and In addition, the Study includes a case available to more than 28 million class four county agencies in those States to study of In re Checking Account members in these MDL cases.313 identify reports on public enforcement activity over a period of five years.315 Overdraft Litigation, MDL 2036 (the Consumer Financial Class Actions and Overdraft MDL)—a multi-district Public Enforcement (Section 9 of Study) proceeding involving class actions 314 Id., section 9 at 5 and appendix U at 141. Section 9 of the Study explores the 315 The analysis included review of enforcement against a number of banks—to shed relationship between private consumer activity conducted by the Bureau, the FTC, the further light on the impact of arbitration Department of Justice (specifically the Civil Division and the Civil Rights Division), the agreements on the resolution of 310 Id., section 8 at 44. One of these three Department of Housing and Urban Development, defendants, Bank of America, had an arbitration the Office of the Comptroller of the Currency, the 306 This set of 382 settlements represents the 410 agreement in the applicable checking account former Office of Thrift Supervision, the Federal settlements in which some form of cash relief was contract, but, in 2009, began to issue checking Deposit Insurance Corporation, the Federal Reserve available, excluding 28 cases in which cash relief account agreements without an arbitration Board of Governors, the National Credit Union consisted solely of a cy pres payment or reward agreement. Prior to the transfer of the litigation to Administration. It also included review of payment to the lead plaintiff(s), because, for class the MDL, Bank of America moved to seek proceedings brought by State banking regulators, to members, these cases involve neither automatic nor individual arbitration of the dispute; but once the the extent that they had independent enforcement claims-made distributions. Study, supra note 2, litigation was transferred, Bank of America did not authority, from Alaska, California, the District of section 8 at 19. renew its motion seeking arbitration, instead listing Columbia, Florida, Georgia, Michigan, New York, 307 Study, supra note 2, section 8 at 30. arbitration as an affirmative defense. See, e.g., id., Ohio, Pennsylvania, Rhode Island, Texas, and 308 Id. Compared with the ‘‘average claims rate,’’ section 8 at 41 n.59. Vermont. And the review included State attorney which is merely the average of the claims rates in 311 Id., section 8 at 45. general actions brought by California, Texas, New the relevant class actions, the ‘‘weighted average 312 Id., section 8 at 42. York, Florida, Illinois, Pennsylvania, Ohio, Georgia, claims rate’’ factors in the relative size of the 313 Id., section 8 at 39–46. The case record does Michigan, North Carolina, New Hampshire, Rhode classes. not reveal how many consumers had received Island, Montana, Delaware, South Dakota, Alaska, 309 Id., section 8 at 35–36. These percentages informal relief of some form. It is likely that many North Dakota, the District of Columbia, Vermont, likely represent ceilings on attorney’s fee awards as other class action settlements account for similar and Wyoming. Finally, the analysis included a percentage of class payments, as they will fall as set-offs for consumers that received relief in consumer enforcement activity from city attorneys class members may have filed additional claims in informal dispute resolution, as settling defendants from Los Angeles, San Francisco, San Diego, and the settlements after the Bureau’s Study period would have economic incentives to avoid double- Santa Clara County. Study, supra note 2, appendix ended. compensating such plaintiffs. U at 141–42. See supra note 148 (noting that 41

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The Bureau used this sample because it private class actions and identified Bureau examined whether it could find wanted to capture enforcement activity overlapping public enforcement statistically significant evidence, at by both large and small States and activity, private class action complaints standard confidence level (95 percent), because it wanted to capture were preceded by public enforcement that companies that removed their enforcement activity by city attorneys, activity 36 percent of the time.320 arbitration agreements raised their in light of the increasing work by city prices (measured by total cost of credit) Arbitration Agreements and Pricing attorneys in this regard. The Bureau in a manner that was different from that (Section 10 of Study) then searched an online database to of comparable companies that did not identify overlapping private cases and Section 10 of the Study contains the remove their agreements. The Bureau searched the pleadings in those cases.316 results of a quantitative analysis was unable to identify any such Second, the Bureau essentially exploring whether arbitration evidence from the data.326 performed a similar search, but in agreements affect the price and The Bureau performed a similar reverse: The Bureau assembled a sample availability of credit to consumers. inquiry into whether affected companies of private class actions and then Commenters on the Bureau’s RFI altered the amount of credit they offered searched for overlapping public suggested that the Bureau explore consumers, all else being equal, in a enforcement actions. This sample of whether arbitration agreements lower manner that was statistically different private class actions was derived from a the prices of financial services to from that of comparable companies. The sample of the class settlements used for consumers. In academic literature, some Study notes that this inquiry was Section 8 and a review of the Web sites hypothesize that arbitration agreements subject to limitations not applicable to of leading plaintiffs’ class action law reduce companies’ dispute resolution the price inquiry, such as the lack of a firms. To find overlapping public costs and that companies ‘‘pass single metric to define credit enforcement actions (typically posted through’’ at least some cost savings to availability.327 Using two measures of on government agencies’ Web sites), the consumers in the form of lower prices, credit offered, the Study did not find Bureau searched online using keywords while others reject this notion.321 any statistically significant evidence specific to the underlying private However, as the Study notes, there is that companies that eliminated action.317 little empirical evidence to support arbitration provisions reduced the credit 322 The Study found that, where the either position. they offered.328 government brings an enforcement To address this gap in scholarship, action, there is rarely an overlapping the Study explored the effects of IV. Post-Study Outreach private class action. For 88 percent of arbitration agreements on the price and A. Stakeholder Outreach Following the the public enforcement actions the availability of credit in the credit card Study Bureau identified, the Bureau did not marketplace following a series of find an overlapping private class settlements in Ross v. Bank of America, As noted, the Bureau released the action.318 The Study similarly found an antitrust case in which, among other Arbitration Study in March 2015. After that, where private parties bring a class things, several credit card issuers were doing so, the Bureau held roundtables action, an overlapping government alleged to have colluded to introduce with key stakeholders and invited them enforcement action exists in only a arbitration agreements into their credit to provide feedback on the Study and minority of cases, and rarely exists card contracts.323 In these Ross how the Bureau should interpret its 329 when the class action settlement is settlements (separately negotiated from results. Stakeholders also provided relatively small. For 68 percent of the the settlements pertaining to the non- feedback to the Bureau or published private class actions the Bureau disclosure of currency conversion fees), their own articles commenting on and identified, the Bureau did not find an certain credit card issuers agreed to responding to the Study. The Bureau overlapping public enforcement action. remove arbitration agreements from has reviewed all of this correspondence For class action settlements of less than their consumer credit card contracts for and many of these articles in preparing $10 million, the Bureau did not identify at least three and one-half years.324 this proposal. 325 an overlapping public enforcement Using data from the CCDB, the B. Small Business Review Panel action 82 percent of the time.319 Finally, the Study found that, when 320 Id., section 9 at 4. In October 2015, the Bureau convened public enforcement actions and class 321 Compare, e.g., Amy J. Schmitz, Building a Small Business Review Panel actions overlapped, private class actions Bridges to Remedies for Consumers in International (SBREFA Panel) with the Chief Counsel eConflicts, 34 U. Ark. L. Rev. 779, 779 (2012) for Advocacy of the Small Business tended to precede public enforcement (‘‘[C]ompanies often include arbitration clauses in actions instead of the reverse. When the their contracts to cut dispute resolution costs and Administration (SBA) and the Study began with government produce savings that they may pass on to Administrator of the Office of enforcement activity and identified consumers through lower prices.’’) with Jeffrey W. Information and Regulatory Affairs with Stempel, Arbitration, Unconscionability, and the Office of Management and Budget overlapping private class actions, public Equilibrium, The Return of Unconscionability enforcement activity was preceded by Analysis as a Counterweight to Arbitration private activity 71 percent of the time. Formalism, 19 Ohio St. J. on Disp. Resol. 757, 851 326 See id., section 10 at 15. In the Study, the (2004) (‘‘[T]here is nothing to suggest that vendors Bureau described several limitations of its model. Likewise, when the Bureau began with imposing arbitration clauses actually lower their For example, it is theoretically possible that the prices in conjunction with using arbitration clauses Ross settlers had characteristics that would make FDIC enforcement actions were inadvertently in their contracts.’’). their pricing different after removal of the omitted from the results published in Section 9 of 322 Study, supra note 2, section 10 at 5. arbitration agreement, as compared to non-settlers. the Study; that the corrected total number of 323 See First Amended Class Action Complaint, In See id., section 10 at 15–17. enforcement actions reviewed in Section 9 was re Currency Conversion Antitrust Litig., MDL No. 327 Id. 1,191; and that other figures, including the 1409 (S.D.N.Y. June 4, 2009). 328 Id., section 10 at 15. identification of public enforcement cases with 324 Study, supra note 2, section 10 at 6. 329 As noted above, the Bureau similarly invited overlapping private actions, were not affected by 325 The CCDB provides loan-level information, feedback from stakeholders on the Preliminary this omission). stripped of direct personal identifiers, regarding Report published in December 2013. In early 2014, 316 Study, supra note 2, section 9 at 7. consumer and small business credit card portfolios the Bureau also held roundtables with stakeholders 317 Id., section 9 at 5–7. for a sample of large issuers, representing 85 to 90 to discuss the Preliminary Report. See supra Parts 318 Id., section 9 at 14. percent of credit card industry balances. Id., section III.A–III.C (summarizing the Bureau’s outreach 319 Id., section 9 at 4. 10 at 7–11. efforts in connection with the Study).

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(OMB).330 As part of this process, the considered these findings and prohibit or restrict a consumer from Bureau prepared an outline of proposals recommendations in preparing this entering into a voluntary arbitration under consideration and the alternatives proposal and addresses certain specific agreement with a covered person after a considered (SBREFA Outline), which issues that concerned the Panel below. dispute has arisen. Finally, Section the Bureau posted on its Web site for 1028(d) provides that, notwithstanding C. Additional Stakeholder Outreach review by the small financial any other provision of law, any institutions participating in the panel At the same time that the Bureau regulation prescribed by the Bureau process, as well as the general public.331 conducted the SBREFA Panel, it met under section 1028(b) shall apply, Working with stakeholders and the with other stakeholders to discuss the consistent with the terms of the agencies, the Bureau identified 18 Small SBREFA Outline and the impacts regulation, to any agreement between a Entity Representatives (SERs) to provide analysis discussed in that outline. The consumer and a covered person entered input to the SBREFA Panel on the Bureau convened several roundtable into after the end of the 180-day period proposals under consideration. With meetings with a variety of industry beginning on the effective date of the respect to some markets, the relevant representatives—including national regulation, as established by the Bureau. industry trade associations reported trade associations for depository banks As is discussed below in Part VI, the significant difficulty in identifying any and non-bank providers—and consumer Bureau finds that its proposals relating small financial services companies that advocates. Bureau staff also presented to pre-dispute arbitration agreements would be impacted by the approach an overview at a public meeting of the fulfill all these statutory requirements described in the Bureau’s SBREFA Bureau’s Consumer Advisory Board and are in the public interest, for the Outline. (CAB) and solicited feedback from the protection of consumers, and consistent Prior to formally meeting with the CAB on the proposals under with the Bureau’s Study.333 SERs, the Bureau held conference calls consideration. The Bureau expects to to introduce the SERs to the materials meet with Indian tribes and engage in B. Sections 1022(b) and (c) and to answer their questions. The consultation pursuant to its Policy for Section 1022(b)(1) of the Dodd-Frank SBREFA Panel then conducted a full- Consultation with Tribal Governments Act authorizes the Bureau to prescribe day outreach meeting with the small after the release of this notice of rules ‘‘as may be necessary or entity representatives in October 2015 proposed rulemaking. The Bureau appropriate to enable the Bureau to in Washington, DC. The SBREFA Panel specifically solicits comment on this administer and carry out the purposes gathered information from the SERs at proposal from Tribal governments. and objectives of the Federal consumer the meeting. Following the meeting, V. Legal Authority financial laws, and to prevent evasions nine SERs submitted written comments thereof.’’ Among other statutes, Title X to the Bureau. The SBREFA Panel then As discussed more fully below, there of the Dodd-Frank Act is a Federal made findings and recommendations are two components to this proposal: A consumer financial law.334 Accordingly, regarding the potential compliance costs proposal to prohibit providers from the in proposing this rulemaking, the and other impacts of the proposed rule use of arbitration agreements to block Bureau is proposing to exercise its on those entities. Those findings and class actions (as set forth in proposed authority under Dodd-Frank Act section recommendations are set forth in the § 1040.4(a)) and a proposal to require 1022(b) to prescribe rules under Title X Small Business Review Panel Report, the submission to the Bureau of certain that carry out the purposes and which is being made part of the arbitral records (as set forth in proposed objectives and prevent evasion of those administrative record in this § 1040.4(b). The Bureau is issuing the laws. Section 1022(b)(2) of the Dodd- rulemaking.332 The Bureau has carefully first component of its proposal pursuant Frank Act prescribes certain standards to its authority under section 1028(b) of for rulemaking that the Bureau must 330 The Small Business Regulatory Enforcement the Dodd-Frank Act and is issuing the follow in exercising its authority under Fairness Act of 1996 (SBREFA), as amended by second component of its pursuant to its section 1022(b)(1).335 section 1100G(a) of the Dodd-Frank Act, requires authority under that section and under the Bureau to convene a Small Business Review Dodd-Frank section 1022(c)(1) Panel before proposing a rule that may have a sections 1022(b) and (c). provides that, to support its rulemaking substantial economic impact on a significant A. Section 1028 and other functions, the Bureau shall number of small entities. See 5 U.S.C. 609(d). monitor for risks to consumers in the 331 Bur. Of Consumer Fin. Prot., Outline of Section 1028(b) of the Dodd-Frank Proposals under Consideration for the SBREFA offering or provision of consumer Act authorizes the Bureau to issue financial products or services, including process (Oct. 7, 2015), available at http:// regulations that would ‘‘prohibit or files.consumerfinance.gov/f/201510_cfpb_small- developments in markets for such business-review-panel-packet-explaining-the- impose conditions or limitations on the products or services. The Bureau may proposal-under-consideration.pdf.; Bur. Of use of an agreement between a covered Consumer Fin. Prot., Press Release, CFPB Considers make public such information obtained person and a consumer for a consumer by the Bureau under this section as is Proposal to Ban Arbitration Clauses that Allow financial product or service providing Companies to Avoid Accountability to Their in the public interest.336 Moreover, Customers (Oct. 7, 2015), available at http:// for arbitration of any future dispute section 1022(c)(4) of the Act provides www.consumerfinance.gov/newsroom/cfpb- between the parties,’’ if doing so is ‘‘in considers-proposal-to-ban-arbitration-clauses-that- that, in conducting such monitoring or the public interest and for the protection assessments, the Bureau shall have the allow-companies-to-avoid-accountability-to-their- of consumers.’’ Section 1028(b) also customers/. The Bureau also gathered feedback on authority to gather information from the SBREFA Outline from other stakeholders and requires that ‘‘[t]he findings in such rule time to time regarding the organization, members of the public, and from the Bureau’s shall be consistent with the Study.’’ Consumer Advisory Board (CAB). See http:// Section 1028(c) further instructs that 333 See infra Part VI. www.consumerfinance.gov/advisory-groups/ the Bureau’s authority under section advisory-groups-meeting-details/ Video of the 334 See Dodd-Frank section 1002(14) (defining Bureau’s October 2015 presentation to the CAB is 1028(b) may not be construed to ‘‘Federal consumer financial law’’ to include the available at https://www.youtube.com/ provisions of Title X of the Dodd-Frank Act). watch?v=V11Xbp9z2KQ. Agreements (2015), available at http:// 335 See Section 1022(b)(2) Analysis, infra Part 332 Bur. Of Consumer Fin. Prot., U.S. Small Bus. files.consumerfinance.gov/f/documents/ V.B. (discussing the Bureau’s standards for Admin. & Office of Mgmt. & Budget, Final Report CFPB_SBREFA_Panel_Report_on_Pre- rulemaking under section 1022(b)(2) of the Dodd- of the Small Business Review Panel on CFPB’s Dispute_Arbitration_Agreements_FINAL.pdf Frank Act). Potential Rulemaking on Pre-Dispute Arbitration (hereinafter SBREFA Panel Report). 336 Dodd-Frank section 1022(c)(3)(B).

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business conduct, markets, and parallels language in the Securities Act required to exercise its expertise to activities of covered persons and service and the Exchange Act, which, for over determine what each standard requires providers. The Bureau proposes 80 years, have authorized the SEC to because both terms are ambiguous. In § 1040.4(b) pursuant to the Bureau’s adopt certain regulations or take certain doing so, and as described in more authority under Dodd-Frank section actions if doing so is ‘‘in the public detail below, the Bureau would look, 1022(c), as well as its authority under interest and for the protection of using its expertise, to the purposes and Dodd-Frank section 1028(b). investors.’’ 337 The SEC has routinely objectives of Title X to inform the applied the Exchange Act language ‘‘public interest’’ prong,340 while relying VI. The Bureau’s Preliminary Findings without delineating separate tests or on its expertise in consumer protection That the Proposal is in the Public definitions for the two phrases.338 There to define the ‘‘consumer protection’’ Interest and for the Protection of is an underlying logic to such an prong. Consumers approach since investors make up a Under this approach the Bureau In this section, the Bureau sets forth substantial portion of ‘‘the public’’ believes that ‘‘for the protection of how it interprets the requirements of whose interests the SEC is charged with consumers’’ in the context of section Dodd-Frank section 1028(b) and why it advancing. This is even more true for 1028 should be read to focus preliminarily finds that the proposed section 1028, since nearly every member specifically on the effects of a regulation rule (as set out more fully in proposed of the public is a consumer. in promoting compliance with laws § 1040.4 and the Section-by-Section Furthermore, in exercising its roles and applicable to consumer financial Analysis thereto) would be in the public responsibilities as the Consumer products and services and avoiding or interest and for the protection of Financial Protection Bureau, the Bureau preventing harm to the consumers who consumers. The Bureau also identifies ordinarily approaches the idea of use or seek to use those products. In below why it believes that its proposal consumer protection holistically in contrast, under this approach the would be consistent with the Study. accordance with the broad range of Bureau would read section 1028(b)’s ‘‘in This section first explains the Bureau’s factors it generally considers under Title the public interest’’ prong, consistent interpretation of the legal standard, then X of Dodd-Frank, which as discussed with the purposes and objectives of discusses its application to the class further below include systemic impacts Title X, to require consideration of the proposal (proposed § 1040.4(a)) and the and other public concerns. Therefore, if entire range of impacts on consumers monitoring proposal (proposed the Bureau were to treat the standard as and impacts on other elements of the § 1040.4(b)). a single, unitary test, the Bureau’s public. These interests encompass not A. Relevant Legal Standard analysis would encompass the public just the elements of consumer interest, as defined by the purposes and protection described above, but also As discussed above in Part V, Dodd- objectives of the Bureau and informed secondary impacts on consumers such Frank section 1028(b) authorizes the by the Bureau’s particular expertise in as effects on pricing, accessibility, and Bureau to ‘‘prohibit or impose the protection of consumers. the availability of innovative products, conditions or limitations on the use of’’ The Bureau believes, however, that as well as impacts on providers, a pre-dispute arbitration agreement treating the two phrases as separate tests markets, the rule of law and between covered persons and may ensure a fuller consideration of all accountability, and other general consumers if the Bureau finds that relevant factors. This approach would systemic considerations.341 The Bureau doing so ‘‘is in the public interest and also be consistent with canons of is proposing to adopt this interpretation, for the protection of consumers.’’ This construction that counsel in favor of giving the two phrases independent requirement can be read as either a giving the two statutory phrases discrete meaning.342 single integrated standard or as two meaning notwithstanding the fact that The Bureau’s interpretations of each separate tests (that a rule be both ‘‘in the the two phrases in section 1028(b)—‘‘in phrase standing alone are informed by public interest’’ and ‘‘for the protection the public interest’’ and ‘‘for the several considerations. As noted above, of consumers’’), and the Bureau must protection of consumers’’—are for instance, the Bureau would look to exercise its expertise to determine inherently interrelated for the reasons the purposes and objectives of Title X to which reading best effectuates the discussed above.339 Under this inform the ‘‘public interest’’ prong. The purposes of the statute. As explained framework, the Bureau would be Bureau’s starting point in defining the below, the Bureau is proposing to public interest is therefore section interpret the two phrases as related but 337 See, e.g., Securities Act of 1933, Public Law 1021(a) of the Act, which describes the conceptually distinct. The Bureau 73 22, section 3(b)(1) (1933) 15 U.S.C 77c(b)(1); Bureau’s purpose as follows: ‘‘The invites comment on this proposed Securities Exchange Act of 1934, Public Law 73 Bureau shall seek to implement and, interpretation, and specifically on 291, section 12(k)(1) (1934) 15 U.S.C. 78(k)(l). 338 where applicable, enforce Federal whether ‘‘in the public interest’’ and Under the Exchange Act, the SEC has often found that its actions are ‘‘for the protection of ‘‘for the protection of consumers’’ investors and in the public interest’’ without 340 This approach is also consistent with should be interpreted as having delineating separate standards or definitions for the precedent holding that the statutory criterion of independent meanings or as a single two phrases. See, e.g., In re: Bravo Enterprises Ltd., ‘‘public interest’’ should be interpreted in light of integrated standard. SE.C. Release No. 75775, Admin. Proc. No. 3–16292 the purposes of the statute in which the standard at 6 (Aug. 27, 2015) (applying ‘‘the ‘public interest’ is embedded. See Nat’l Ass’n for Advancement of The Dodd-Frank section 1028(b) and ‘protection of investors’ standards’’ in light ‘‘of Colored People v. FPC, 425 U.S. 662, 669 (1976). statutory standard parallels the standard their breadth [and] supported by the structure of the 341 Treating consumer protection and public set forth in Dodd-Frank section 921(b), Exchange Act and Section 12(k)(1)’s legislative interest as two separate but overlapping criteria is which authorizes the SEC to ‘‘prohibit history’’). See also SEC Release No. 5627 (Oct. 14, consistent with the FCC’s approach to a similar 1975) (‘‘Whether particular disclosure requirements statutory requirement. See Verizon v. FCC, 770 F.3d or impose conditions or limitations on are necessary to permit the Commission to 961, 964 (D.C. Cir. 2014). the use of’’ a pre-dispute arbitration discharge its obligations under the Securities Act 342 The Bureau believes that findings sufficient to agreement between investment advisers and the Securities Exchange Act or are necessary or meet the two tests explained here would also be and their customers or clients if the SEC appropriate in the public interest or for the sufficient to meet a unitary interpretation of the protection of investors involves a balancing of phrase ‘‘in the public interest and for the protection finds that doing so ‘‘is in the public competing factors.’’). of consumers,’’ because any set of findings that interest and for the protection of 339 See Hibbs v. Winn, 542 U.S. 88, 101 (2004); meets each of two independent criteria would investors.’’ That language in turn Bailey v. United States, 516 U.S. 137, 146 (1995). necessarily meet a single test combining them.

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consumer financial law consistently for economy, and the promotion of the rule protection of consumers’’ as it is used in the purpose of ensuring that all of law and accountability.345 section 1028 as not in and of itself consumers have access to markets for With respect to ‘‘the protection of requiring the Bureau to consider more consumer financial products and consumers,’’ as explained above, the general or systemic concerns with services and that markets for consumer Bureau ordinarily considers its roles respect to the functioning of the markets financial products and services are fair, and responsibilities as the Consumer for consumer financial products or transparent, and competitive.’’ 343 [Financial] Protection Bureau to services or the broader economy,347 Similarly, section 1022 of the Act encompass attention to the full range of which the Bureau will consider under authorizes the Bureau to prescribe rules considerations relevant under Title X the public interest prong. to ‘‘carry out the purposes and without separately delineating some as As discussed above, the Bureau objectives of the Federal consumer ‘‘in the public interest’’ and others as provisionally believes that giving financial laws and to prevent evasions ‘‘for the protection of consumers.’’ separate consideration to the two prongs thereof’’ and provides that in doing so However, given that section 1028(b) best ensures that the purpose of the the Bureau shall consider ‘‘the potential pairs ‘‘the protection of consumers’’ statute is effectuated. This proposed benefits and costs’’ of a rule both ‘‘to with the ‘‘public interest,’’ the latter of interpretation would prevent the Bureau consumers and covered persons, which the Bureau interprets to include from acting solely based on more diffuse including the potential reduction of the full range of considerations public interest benefits, absent a access by consumers to consumer encompassed in Title X, the Bureau meaningful direct impact on consumer financial products or services.’’ Section believes, based on its expertise, that ‘‘for protection as described above. Likewise, 1022 also directs the Bureau to consult the protection of consumers’’ should be the proposed interpretation would prevent the Bureau from issuing with the appropriate Federal prudential read more narrowly. Specifically the arbitration regulations that would regulators or other Federal agencies Bureau believes ‘‘for the protection of undermine the public interest as ‘‘regarding consistency with prudential, consumers’’ should be read to focus on defined by the full range of factors market, or systemic objectives the effects of a regulation in promoting compliance with laws applicable to discussed above, despite some administered by such agencies,’’ and to advancement of the protection of respond in the course of rulemaking to consumer financial products and services, and avoiding or preventing consumers. any written objections filed by such The Bureau invites comment on its agencies.344 The Bureau interprets these harm to consumers that may result from violations of those laws or other proposed interpretation of section purposes and requirements to reflect a consumer rights. 1028(b). The Bureau specifically invites recognition and expectation that the The Bureau therefore proposes to comment on whether ‘‘in the public administration of consumer financial interpret the phrase ‘‘for the protection interest’’ and ‘‘for the protection of protection laws is integrated with the of consumers’’ in section 1028—which consumers’’ should be interpreted as advancement of a range of other public relates specifically to arbitration having independent meaning and, if so, goals such as fair competition, agreements—to condition any regulation whether the Bureau’s proposed innovation, financial stability, the rule on a finding that such regulation would interpretation of each effectuates the of law, and transparency. serve to deter and redress violations of purpose of this provision. The Bureau Accordingly, the Bureau proposes to the rights of consumers who are using also invites comments on whether a interpret the phrase ‘‘in the public or seek to use a consumer financial single, unitary standard would lead to a interest’’ to condition any regulation on product or service. The focus under this substantially different interpretation or a finding that such regulation serves the prong of the test, as the Bureau is application.348 public good based on an inquiry into the proposing to interpret it, would be B. Preliminary Factual Findings From regulation’s implications for the exclusively on impacts on the level of the Study and the Bureau’s Further Bureau’s purposes and objectives. This compliance with relevant laws, Analysis inquiry would require the Bureau to including deterring violations of those consider benefits and costs to laws, and on consumers’ ability to The Study provides a factual consumers and firms, including the obtain redress or relief. This would not predicate for assessing whether more direct consumer protection factors include consideration of other benefits particular proposals would be in the noted above, and general or systemic or costs or more general or systemic public interest and for the protection of concerns with respect to the functioning concerns with respect to the functioning consumers. This Part sets forth the of markets for consumer financial of markets for consumer financial preliminary factual findings that the products or services, the broader products or services or the broader Bureau has drawn from the Study and economy. For instance, a regulation from the Bureau’s additional analysis of 343 Section 1021(b) goes on to authorize the would be ‘‘for the protection of arbitration agreements and their role in Bureau to exercise its authorities for the purposes consumers’’ if it adopted direct the resolution of disputes involving of ensuring that, with respect to consumer financial requirements or augmented the impact consumer financial products and products and services: (1) Consumers are provided services. The Bureau emphasizes that with timely and understandable information to of existing requirements to ensure that make responsible decisions about financial consumers receive ‘‘timely and each of these findings is preliminary transactions; (2) consumers are protected from understandable information’’ in the unfair, deceptive, or abusive acts and practices and 347 See Whitman v. Am. Trucking Ass’ns, Inc., from discrimination; (3) outdated, unnecessary, or course of financial decision making, or 531 U.S. 457, 465 (2001). unduly burdensome regulations are regularly to guard them from ‘‘unfair, deceptive, 348 As noted above, if the Bureau were to treat the identified and addressed in order to reduce or abusive acts and practices and from standard as a single, unitary test, it would involve unwarranted regulatory burdens; (4) Federal discrimination.’’ 346 The Bureau the same considerations as described above, while consumer financial law is enforced consistently, proposes to interpret the phrase ‘‘for the allowing for a more flexible balancing of the various without regard to the status of a person as a considerations. The Bureau accordingly believes depository institution, in order to promote fair that findings sufficient to meet the two tests competition; and (5) markets for consumer financial 345 The Bureau uses its expertise to balance explained here would also be sufficient to meet a products and services operate transparently and competing interests, including how much weight to unitary test, because any set of findings that meets efficiently to facilitate access and innovation. assign each policy factor or outcome. each of two independent criteria would necessarily 344 Dodd-Frank sections 1022(b)(2)(B) and (C). 346 Dodd-Frank section 1021(b)(1) and (2). meet a more flexible single test combining them.

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and subject to further consideration in arbitration may obtain substantial Individual Dispute Resolution Is light of the comments received and the individual awards—the average Insufficient In Enforcing Laws Bureau’s ongoing analysis. The Bureau recovery by the 32 consumers who won Applicable to Consumer Financial invites comments on all aspects of the judgments on their affirmative claims Products and Services and Contracts discussion of the factual findings that was nearly $5,400.350 follows. At the same time, the Study showed Whatever the relative merits of The Bureau preliminarily concludes, that a large percentage of the relatively individual proceedings pursuant to an consistent with the Study and based on small number of AAA individual arbitration agreement compared to its experience and expertise, that: (1) arbitration cases are initiated by the individual litigation, the Bureau The evidence is inconclusive on consumer financial product or service preliminarily concludes, based upon the whether individual arbitration companies or jointly by companies and results of the Study, that individual conducted during the Study period is consumers in an effort to resolve debt dispute resolution mechanisms are an superior or inferior to individual disputes. The Study also showed that insufficient means of ensuring that litigation in terms of remediating companies prevail more frequently on consumer financial protection laws and consumer harm; (2) individual dispute their claims than consumers 351 and that consumer financial contracts are resolution is insufficient as the sole companies are almost always enforced. mechanism available to consumers to represented by attorneys. Finally, the The Study showed that consumers enforce contracts and the laws Study showed that consumers prevailed rarely pursue individual claims against applicable to consumer financial and were awarded payment of their their companies, based on its survey of products and services; (3) class actions attorney’s fees by companies in 14.4 the frequency of consumer claims, provide a more effective means of percent of the 146 disputes resolved by collectively across venues, in Federal securing relief for large numbers of arbitrators in which attorneys courts, small claims courts, and consumers affected by common legally represented consumers, while arbitration. First, the Study showed that questionable practices and for changing companies prevailed and were awarded consumer-filed Federal court lawsuits companies’ potentially harmful payment of their attorney’s fees by are quite rare compared to the total behaviors; (4) arbitration agreements consumers in 14.1 percent of 341 number of consumers of financial block many class action claims that are disputes resolved by arbitrators.352 products and services. As noted above, filed and discourage the filing of others; Arbitration procedures are privately from 2010 to 2012, the Study showed and (5) public enforcement does not determined and can pose risks to that only 3,462 individual cases were obviate the need for a private class consumers. For example, until it was filed in Federal court concerning the action mechanism. effectively shut down by the Minnesota five product markets studied during the A Comparison of the Relative Fairness Attorney General, NAF was the period, or 1,154 per year.354 Second, the and Efficiency of Individual Arbitration predominant administrator for certain Study showed that relatively few and Individual Litigation Is types of arbitrations. As set out in Part consumers file claims against Inconclusive II.C above, NAF stopped conducting companies in small claims courts even consumer arbitrations in response to The benefits and drawbacks of though most arbitration agreements allegations that its ownership structure contain carve-outs permitting such court arbitration as a means of resolving gave rise to an institutional conflict of consumer disputes have long been claims. In particular, as noted above, the interest. The Study showed isolated Study estimated that, in the contested. The Bureau does not believe instances of arbitration agreements that, based on the evidence currently jurisdictions that the Bureau studied, containing provisions that, on their face, which cover approximately 85 million available to the Bureau, it can determine raise significant concerns about fairness whether the mechanisms for the people, there were only 870 small to consumers similar to those raised by arbitration of individual disputes claims disputes in 2012 filed by an NAF, such as an agreement designating between consumers and providers of individual against any of the 10 largest a tribal administrator that does not consumer financial products and credit card issuers, several of which are appear to exist and agreements services that existed during the Study also among the largest banks in the specifying NAF as a provider even period are more or less fair or efficient though NAF no longer handles in resolving these disputes than leaving 114, 123 (S.D. 2011) (designation of NAF as consumer finance arbitration, making it these disputes to the courts.349 administrator was ancillary and arbitration could difficult for consumers to resolve their proceed before a substitute). On the issue of tribal The Bureau believes that the claims.353 administrators, see Jackson v. Payday Financial, predominant administrator of consumer LLC, 764 F.3d 765 (7th Cir. 2014) (refusing to arbitration agreements is the AAA, compel arbitration because tribal arbitration 350 See id., section 5 at 41. which has adopted standards of conduct procedure was ‘‘illusory’’). 351 Id., section 5 at 39, 43. The Study did not 354 Study, supra note 2, section 6 at 27. As noted that govern the handling of disputes suggest why companies prevail more often than above, the Study did not include data on individual involving consumer financial products consumers. While some stakeholders have cases in State courts due to database limitations. and services. The Study further showed suggested that arbitrators are biased—citing, for One industry publication reports that litigation in that these disputes proceed relatively example, that companies are repeat players or often court involving three consumer protection statutes the party effectively chooses the arbitrator—other occurs at a rate on the order of about 1,000 cases expeditiously, the cost to consumers of stakeholders and research suggests that companies per month. WebRecon, LLC, Out Like a Lion . . . this mechanism is modest, and at least prevail more often than consumers because of a Debt Collection Litigation & CFPB Complaint some consumers proceed without an difference in the relative merits of such cases. Statistics, Dec 2015 & Year in Review, available at attorney. The Study also showed that 352 Study, supra note 2, section 5 at 79–80. Note http://webrecon.com/out-like-a-lion-debt-collection- that the number of attorney’s fee requests was not litigation-cfpb-complaint-statistics-dec-2015-year- those consumers who do prevail in recorded. in-review/ (some cases included in this analysis 353 Id., section 2 at 35. On the issue of NAF, see would not be covered by the class proposal). 349 See Study, supra note 2, section 6 at 2–5 Wert v. ManorCare of Carlisle PA, LLC, 124 A.2d Relatedly, some critics of the Study contend that (explaining why ‘‘[c]omparing frequency, processes, 1248, 1250 (Pa. 2015) (affirming denial of motion the number of Federal court individual cases is low or outcomes across litigation and arbitration is to compel arbitration after finding arbitration because Federal court litigation is complex and especially treacherous’’). The Bureau did not study agreement provision that named NAF as consumers need an attorney to proceed. Whatever and is not evaluating post-dispute agreements to administrator as ‘‘integral and non-severable’’); but the reason, even fewer consumers pursue claims in arbitrate between consumers and companies. see Wright v. GGNSC Holdings LLC, 808 N.W.2d arbitration. See Study, supra note 2, section 5 at 19.

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United States.355 Extrapolating those believes that the relatively low numbers involving products and services that results to the population of the United of formal individual claims may be would be covered by the proposed rule States suggests that, at most, a few explained, at least in part, by the fact often involve small amounts. When thousand cases at most are filed per year that legal harms are often difficult for claims are for small amounts, there may in small claims court by consumers consumers to detect without the not be significant incentives to pursue concerning consumer financial products assistance of an attorney. For example, them on an individual basis. As one or services. some harms, by their nature, such as prominent jurist has noted, ‘‘Only a A similarly small number of discrimination or non-disclosure of fees, lunatic or a fanatic sues for $30.’’ 361 In consumers file consumer financial can only be discovered and proved by other words, it is impractical for the claims in arbitration. The Study shows reference to how a company treats many typical consumer to incur the time and that from the beginning of 2010 to the individuals or by reference to expense of bringing a formal claim over end of 2012 consumers filed 1,234 information possessed only by the a relatively small amount of money, individual arbitrations with the AAA, or company, not the consumer.359 even without a lawyer. Congress and the about 400 per year across the six Individual dispute resolution requires a Federal courts developed procedures for markets studied.356 Given that the AAA consumer to recognize his or her own class litigation in part because ‘‘the was the predominant administrator right to seek redress for any harm the amounts at stake for individuals may be identified in the arbitration agreements consumer has suffered or otherwise to so small that separate suits would be studied, the Bureau believes that this seek a dispensation from the company. impracticable.’’ 362 Indeed, the Supreme represents substantially all consumer The Bureau also believes that the Court has explained that: finance arbitration disputes that were relatively low number of formally filed [t]he policy at the very core of the class filed during the Study period. Similarly, individual claims may be explained by action mechanism is to overcome the JAMS (the second largest provider of the low monetary value of the claims problem that small recoveries do not provide consumer finance arbitration 357) has that are often at issue.360 Claims the incentive for any individual to bring a reported to Bureau staff that it handled solo action prosecuting his or her own rights. about 115 consumer finance arbitrations Chase Co., Inc., 2010 Annual Report, at 36) and in A class action solves this problem by aggregating the relatively paltry potential in 2015. the Overdraft MDL settlements, 29 million consumers with checking accounts were eligible for recoveries into something worth someone’s Collectively, as set out in the Study, relief. Study, supra note 2, section 8 at 40. (usually an attorney’s) labor.363 the number of all individual claims filed 359 For example, proving a claim of lending The Study’s survey of consumers in by consumers in individual arbitration, discrimination in violation of ECOA typically individual litigation in Federal court, or requires a showing of disparate treatment or the credit card market reflects this small claims court is relatively low in disparate impact, which require comparative proof dynamic. Very few consumers said they that members of a protected group were treated or the markets analyzed in the Study would pursue a legal claim if they could impacted worse than members of another group. not get what they believed were compared to the hundreds of millions of U.S. Dep’t of Housing & Urban Dev., Policy consumers of various types of financial Statement on Discrimination in Lending, 59 FR unjustified or unexplained fees reversed products and services.358 The Bureau 18266, 18268 (Apr. 15, 1994). Evidence of overt by contacting a company’s customer discrimination can also prove a claim of service department.364 discrimination under ECOA but such proof is very Even when consumers are inclined to 355 The figure of 870 claims includes all cases in rare and thus such claims are typically proven which an individual sued a credit card issuer, through showing disparate treatment or impact. See pursue individual claims, finding without regard to whether the claim itself was Cherry v. Amoco Oil Co., 490 F. Supp. 1026, 1030 attorneys to represent them can be consumer financial in nature. As the Study noted, (N.D. Ga. 1980). Systemic overcharges may also be challenging. Attorney’s fees for an the number of claims brought by consumers that difficult to resolve on an individual basis. See, e.g., individual claim can easily exceed were consumer financial in nature was likely much Stipulation and Agreement of Settlement at 30, In expected individual recovery.365 A lower. Additionally, the Study cross-referenced its re Currency Conversion Fee Multidistrict Litigation, sample of small claims court filings with estimated MDL 1409 (S.D.N.Y. July 20, 2006) (noting that the annual volume for credit card direct mail using data plaintiffs class allegations that the network and 361 Carnegie v. Household Int’l, Inc., 376 F.3d from a commercial provider. The volume numbers bank defendants ‘‘inter alia . . . have conspired, 656, 661 (7th Cir. 2004). showed that issuers collectively had a significant have market power, and/or have engaged in 362 1966 Adv. Comm. Notes, 28 U.S.C. App. 161. presence in each jurisdiction, at least from a Embedding, otherwise concealed and/or not 363 Amchem Prod., 521 U.S. at 617 (citing Mace marketing perspective. See Study, supra note 2, adequately disclosed the pricing and nature of their v. Van Ru Credit Corp., 109 F.3d 338, 344 (7th Cir. appendix Q at 113–14. Foreign Transaction procedures; and, as a result, 1997)). 356 See id. and section 5 at 19. Of the 1,234 holders of Credit Cards and Debit Cards have been 364 Just 2.1 percent of respondents said that they consumer-initiated arbitrations, 565 involved overcharged and are threatened with future harm.’’). would have sought legal advice or would have sued affirmative claims only by the consumer with no 360 One indicator of the relative size of consumer with or without an attorney for unrecognized fees dispute of alleged debt; another 539 consumer injuries in consumer finance cases is the amount of on a credit card statement. Study, supra note 2, filings involved a combination of an affirmative relief provided by financial institutions in section 3 at 17–18. Similarly, many financial consumer claim and disputed debt. Id., section 5 at connection with complaints submitted through the services companies opt not to pursue small claims 31. This equates to 1,104 filings (out of 1,234), or Bureau’s complaint process. In 2015, approximately against consumers; for example, these providers do 368 per year, in which the consumer asserted an 6 percent of company responses to complaints for not actively collect on small debts because it is not affirmative claim at all. Id. In 737 claims filed by which the company reported providing monetary worth their time and expense given the small either party (or just 124 consumer filings), the only relief (approximately 9,730 complaints) were closed amounts at issue and their low likelihood of action taken by the consumer was to dispute the ‘‘with monetary relief’’ for a median amount of $134 recovery. alleged debt. Id. Another 175 were mutually filed provided per consumer complaint. See Bureau of 365 For instance, in the Study’s analysis of by consumers and companies. Id., section 5 at 19. Consumer Fin. Prot., Consumer Response Annual individual arbitrations, the average and median 357 Id., section 4 at 2. Report (2016) available at http:// recoveries by consumers winning awards on their 358 For instance, at the end of 2015, there were files.consumerfinance.gov/f/ affirmative claims were $5,505 and $2,578, 600 million consumer credit card accounts, based 201604_cfpb_consumer-response-annual-report- respectively. Study, supra note 2, section 5 at 39. on the total number of loans outstanding from 2015.pdf. The Bureau’s complaint process and By way of comparison (attorney’s fees data limited Experian & Oliver Wyman Market Intelligence informal dispute resolution mechanisms at other to successful affirmative consumer claims was not Reports. Experian & Oliver Wyman, 2015 Q4 agencies do not adjudicate claims; instead, they reported in the Study), the average and median Experian—Oliver Wyman Market Intelligence provide an avenue through which a consumer can consumer attorney’s fees awards were $8,148 and Report: Bank Cards Report, at 1–2 (2015) and complain to a provider. Complaints submitted to $4,800, respectively, across cases involving Experian & Oliver Wyman, 2015 Q4 Experian— the Bureau benefit the public and the financial judgments favoring consumers involving affirmative Oliver Wyman Market Intelligence Report: Retail marketplace by informing the Bureau’s work; relief or disputed debt relief. Id., section 5 at 79. Lines, at 1–2 (2015). In the market for consumer however, the Bureau’s complaint system is not a Note that the Study did not address the number of deposits, one of the top checking account issuers substitute for consumers’ rights to bring formal cases in which attorney’s fees were requested by the serviced 30 million customer accounts (JPMorgan disputes, and relief is not guaranteed. consumer. Id.

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consumer must pay his or her attorney reversal of the practice, in order to experience it is quite common for in advance or as the work is performed preserve the customer relationship.367 financial institutions (especially the unless the attorney is willing to take a But, as already noted, many consumers larger ones that interact with the case on contingency—a fee arrangement may not be aware that a company is greatest number of consumers) to where an attorney is paid as a behaving in a particular way, let alone maintain profitability scores on each percentage of recovery, if any—or rely that the company’s conduct is unlawful. customer and to cabin the discretion of on an award of defendant-paid Thus, an informal dispute resolution customer service representatives to attorney’s fees, which are available system is unlikely to provide relief to all make adjustments on behalf of under many consumer financial consumers who are adversely affected complaining consumers based on such statutes. Attorneys for consumers often by a particular practice. Indeed, the scores.370 are unwilling to rely on either Bureau has observed that most of its The example of overdraft reordering, contingency-based fees or statutory enforcement actions deliver relief to which was included in the Study’s attorney’s fees because in each instance consumers who have not received it discussion of the Overdraft MDL, the attorney’s fee is only available if the already through informal dispute provides an example of the limitations consumer prevails on his or her claim resolution. of informal dispute resolution and the (which always is at least somewhat Moreover, even where consumers do important role of class litigation in more uncertain). Consumers may receive free make complaints informally, the effectively resolving consumers’ or reduced-fee legal services from legal outcome of these disputes may be disputes.371 In the cases included in the services organizations, but these unrelated to the underlying merits of the MDL, certain customers lodged informal organizations frequently are unable to claim.368 Nothing requires a company to complaints with banks about the provide assistance to many consumers resolve a dispute in a particular overdraft fees. The subsequent litigation because of the high demand for their consumer’s favor, to award complete revealed that banks had been reordering services and limited resources.366 relief to that consumer, to decide the transactions from chronological order to For all of these reasons, the Bureau same dispute in the same way for all an order based on highest to lowest preliminarily finds that the relatively consumers, or to reimburse consumers amount to maximize the number of small number of arbitration, small who had not raised their dispute to a overdraft fees. As far as the Bureau is claims, and Federal court cases reflects company. Regardless of the merits of or aware, these informal complaints, while the insufficiency of individual dispute similarities between the complaints, the resulting in some refunds to the resolution mechanisms alone to enforce company retains discretion to decide relatively small number of consumers effectively the law for all consumers of how to resolve them. For example, if who complained, produced no changes a particular provider, including Federal two consumers bring the same dispute in the bank practices in dispute. consumer protection laws and consumer to a company, the company might Ultimately, after taking into account the finance contracts. resolve the dispute in favor of a relief that consumers had obtained Some stakeholders claim that the low consumer who is a source of significant informally, 29 million bank customers total volume of individual claims, in profit while it might reach a different received cash relief in court settlements litigation or arbitration, found by the resolution for a less profitable because they did not receive relief Study is attributable not to inherent 369 consumer. Indeed, in the Bureau’s through internal dispute resolution deficiencies in the individual dispute processes.372 resolution systems but rather to the 367 This is true, of course, only to the extent that success of informal dispute resolution consumers have a choice of financial service critique (explaining that the process undertaken by mechanisms in resolving consumers’ providers. The Bureau notes that consumers do not have such a choice in some important consumer one bank in 2014 ‘‘resulted in its refunding 94 complaints. On this theory, the cases financial markets, including in markets where percent of wire transfer fees that customers that actually are litigated or arbitrated servicing or debt collection is outsourced by a complained about at its San Antonio office and 75 are outliers—consumer disputes in creditor and the consumer typically does not have percent of wire transfer fees that customers complained about at its Brownsville office. During which the consumer either bypassed the the ability to choose a different servicer or debt collector. that same period, the bank responded to complaints informal dispute resolution system or 368 Commentators have advised that concerns about inactive account fees by making refunds 74 the system somehow failed to produce other than whether a violation occurred should be percent of the time in San Antonio but only 56 a resolution. The Bureau does not find considered when resolving complaints. See, e.g., percent of the time in Houston.’’). The study does this argument persuasive. Claes Fornell & Birger Wernerfelt, Defensive not provide information on how many of the bank’s Marketing Strategy by Customer Complaint customers complained or why some customers were The Bureau understands that when an Management: A Theoretical Analysis, 24 J. of successful in receiving refunds while others were individual consumer complains about a Marketing Res. 337, 339 (1987) (‘‘[W]e show that by not. particular charge or other practice, it is attracting and resolving complaints, the firm can 370 See, e.g., Rick Brooks, Banks and Others Base often in the financial institution’s defend against competitive advertising and lower Their Service On Their Most-Profitable Customers, interest to provide the individual with the cost of offensive marketing without losing Wall St. J. (Jan. 7, 1999), available at http:// market share.’’); Mike George, Cosmo Graham & www.wsj.com/articles/SB915601737138299000 a response explaining that charge and, Linda Lennard, Complaint Handling: Principles and (explaining how some banks will treat profitable in some cases, a full or partial refund or Best Practice at 6 (2007) (discussing research that customers differently from unprofitable ones and shows that customers who complain are more likely citing examples of banks using systems to routinely allow customer service representatives to deny fee 366 There is a large unmet need for legal services to re-purchase the good or service than those who refund and other requests from unprofitable for low-income individuals who want legal help in do not and noting that additional research that consumer cases. By one estimate, roughly 130,000 shows that good complaints culture and processes customers while granting those from profitable consumers (for all goods, not just financial products may well lead to improved financial performance), customers). or services) were turned away because the legal aid available at https://www2.le.ac.uk/departments/ 371 Study, supra note 2, section 8 at 39–46. service providers serving low-income individuals law/research/cces/documents/Complainthandling- 372 In total, 18 banks paid $1 billion in settlement _ did not have enough staff or capacity to help. See PrinciplesandBestPractice-April2007 000.pdf. relief to over 29 million consumers. Study, supra Legal Services Corp., Documenting the Justice Gap 369 One study showed that one bank refunded the note 2, section 8 at 43–46 (explaining how the In America, at 7 (2007), available at http:// same fee at varying rates depending on the branch settlements were distributed). These settlement www.lsc.gov/sites/default/files/LSC/images/ location that a consumer visited. Jason S. Johnston figures were net of any payments made to justicegap.pdf. See also Helynn Stephens, Price of & Todd Zywicki, The Consumer Financial consumers via informal dispute resolution; an Pro Bono Representations: Examining Lawyers’ Protection Bureau’s Arbitration Study: A Summary expert witness calculated the sum of fees Duties and Responsibilities, 71 Def. Counsel J. 71 And Critique (Mercatus Center 2015), http:// attributable to the overdraft reordering practice and (2004) (‘‘Legal services programs are able to assist mercatus.org/publication/consumer-financial- subtracted all refunds paid to complaining less than a fifth of those in need.’’). protection-bureau-arbitration-study-summary- Continued

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Thus, while informal dispute In the five-year period studied, 419 relief), whereas injunctive relief lasts for resolution systems may provide some Federal consumer finance class actions years or may be permanent. relief to some consumers—and while reached final class settlements. These The Bureau further preliminarily some stakeholders have argued that settlements involved, conservatively, finds that, based on its experience and arbitration agreements may even about 160 million consumers and about expertise, class action settlements also enhance the incentives that companies $2.7 billion in gross relief of which, benefit consumers not included in a have to resolve those informal disputes after subtracting fees and costs, $2.2 particular class settlement because, as a that do arise on a case-by-case basis— billion was available to be paid to result of a class settlement, companies the Bureau preliminarily finds that consumers in cash relief or in-kind frequently change their practices in these systems alone are inadequate relief.374 Further, as set out in the ways that benefit consumers who are mechanisms to resolve potential Study, nearly 24 million class members not members of the class. In resolving a violations of the law that broadly apply in 137 settlements received automatic class action, many companies stop to many or all customers of a particular distributions of class settlements, potentially illegal practices either as company for a given product or service. meaning they received payments part of the settlement or because the The Bureau’s experience and without having to file claims.375 In the class action itself informed them of a expertise includes fielding consumer five years studied, at least 34 million potential violation of law and of the risk complaints, supervising a vast array of consumers received $1.1 billion in of future liability if they continued the markets for consumer financial products actual or guaranteed payments.376 In conduct in question. Any consumer and services, and enforcing Federal addition to the monetary relief awarded impacted by that practice—whether or consumer financial laws. Based on this in class settlements, consumers also not the consumer is in a particular experience and expertise, the Bureau received non-monetary relief from those class—would benefit from an enterprise- believes that even though systemic settlements. Specifically, the Study wide change. For example, if a class factors may discourage individual showed that there were 53 settlements settlement only involved consumers consumers from filing small claims, the covering 106 million class members that who had previously purchased a ability of consumers to pursue these mandated behavioral relief that required product, a change in conduct by the claims is important. Based on its changes in the settling companies’ company might benefit consumers who experience and expertise, the Bureau business practices. The Bureau were not included in the class preliminarily finds that small claims preliminarily finds, based on its settlement but who purchase the can reflect significant aggregate harms experience and expertise—including its product or service in the future. when the potentially illegal practices review and monitoring of these One example of this appears to have affect many consumers, and, more settlements and its enforcement of occurred with respect to overdraft generally, the market for consumer Federal consumer financial law through practices. In Gutierrez v. Wells Fargo, financial products and services. For both litigation and supervisory the court ruled that certain Wells Fargo example, a single improper overdraft fee actions—that behavioral relief could be, overdraft practices were illegal.377 may only ‘‘cost’’ a consumer $35, but if when provided, at least as important for Although that judgment was limited to that fee is charged to tens of thousands consumers as monetary relief. Indeed, a California class of Wells consumers, of consumers, it can have a substantial prospective relief can provide more Wells thereafter appears to have also impact on both the consumers on whom relief to affected consumers, and for a changed its overdraft practices in other such fees are imposed and the profits of longer period, than retrospective relief jurisdictions in the United States.378 the company retaining the fees.373 When because a settlement period is limited Similarly, the Bureau bases this all or most providers engage in a similar (and provides a fixed amount of cash preliminary finding on its practice, the market for that product or understanding of the important benefits service is significantly impacted. 374 The number of consumers (160 million) obtaining relief in class settlements excludes a 377 The original bench trial awarded ‘‘a certified Class Actions Provide a More Effective single settlement that involved a class of 190 class of California depositors’’ both cash and Means of Securing Significant million consumers. Study, supra note 2, section 8 injunctive relief based on violations of California Consumer Relief and Changing at 15. Section 8 of the Study, on Federal class action law. Gutierrez v. Wells Fargo Bank, N.A., 730 F. settlements, covered a wider range of products than Supp. 2d 1080, 1082 (N.D. Cal. 2010). The Ninth Companies’ Potentially Illegal Behavior the analysis of individual arbitrations in Section 5 Circuit reversed part of the judgment on the basis The Bureau preliminarily finds, based of the Study, which was limited to credit cards, that the some parts of California law—as applied to checking/debit cards, payday and similar loans, overdraft reordering practices—were preempted by on the results of the Study and its general purpose reloadable prepaid cards, private the National Bank Act, and remanded to the district further analysis, that the class action student loans, and auto purchase loans. Id., section court for it to determine if relief could still be procedure provides an important 5 at 17–18. If the class settlement results were granted under the parts of California law that were mechanism to remedy consumer harm. narrowed to the six product markets covered in not preempted. 704 F.3d 712, 730 (9th Cir. 2012). Section 5, the Study would have identified $1.8 Upon remand, the district court reinstated the The Study showed that class action billion in total relief ($1.79 billion in cash and $9.4 judgment, including restitution and injunctive settlements are a more effective means million of in-kind relief), or $360 million per year, relief. 944 F. Supp. 2d 819 (N.D. Cal. 2013). The through which large numbers of covering 78.8 million total class members, or 15.8 Ninth Circuit upheld parts of the reinstated consumers are able to obtain monetary million members per year. judgment, permitting a judgment against Wells and 375 and injunctive relief in a single case. Id., section 8 at 27. upholding the award of restitution, but vacating for 376 As noted above, see supra note 369 and the grant of injunctive relief as overly broad. 589 accompanying text, researchers have calculated Fed. Appx. 824 (9th Cir. Oct. 29, 2014), cert. consumers. The net amount was the baseline from that, on average, each consumer that received denied,—S.Ct.—, 2016 WL 1278632 (Apr. 4, 2016). which settlement payments were negotiated. See monetary relief during the period studied received 378 See Danielle Douglas-Gabriel, Big banks have id., section 8 at 45 n.61 & 46 n.63. $32. Because the settlements providing data on been gaming your overdraft fees to charge you more 373 For example, in Gutierrez v. Wells Fargo Bank, payments (a figure defined in the Study, supra note money, Wash. Post Wonkblog (July 17, 2014), N.A., the court explained that the defendant bank’s 2, section 8 at 4–5 n.9, to include relief provided https://www.washingtonpost.com/news/wonk/wp/ own documents established that it stood to make by automatic distributions or actually claimed by 2014/07/17/wells-fargo-to-make-changes-to-protect- $40 million more per year from overdraft fees by class members in claims made processes) to class customers-from-overdraft-fees/ (‘‘Half of the reordering transaction high-to-low rather than members did not overlap completely with the country’s big banks play this game, but one has chronologically. See Gutierrez v. Wells Fargo Bank, settlements providing data on the number of class decided to stop: Wells Fargo. Starting in August, the N.A., 730 F. Supp. 2d 1080, 1097 (N.D. Cal. 2010). members receiving payments, this calculation is bank will process customers’ checks in the order in For further procedural history for Gutierrez, see incorrect. Nonetheless, the Bureau believes that it which they are received, as it already does with infra note 377. is a roughly accurate approximation. purchases and ATM withdrawals.’’).

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gained by consumers through behavioral Thus, the Bureau preliminarily finds agreements that explicitly permitted changes companies agree to make that that the concerns raised by stakeholders class arbitration. The combined effect of benefit both existing customers and regarding the predominance of these provisions is to enable companies future customers. This is, for example, individual outcomes in cases filed as that adopt arbitration agreements why the Bureau frequently tries to putative class cases are not substantial effectively to bar all class proceedings, secure such behavioral relief from enough for the Bureau to find that the whether in litigation or arbitration, to companies through its own enforcement class proposal would be ineffective in which the agreement applies. actions. Although the value of these providing consumer relief. As set out above in Part II.C, the behavioral changes (and those, not For these reasons, the Bureau public filings of some companies considered behavioral relief in the preliminarily finds that the class action confirm that the effect—indeed, often Study, where companies simply agree to mechanism is a more effective means of the purpose—of such provisions is to comply with the law going forward) are providing relief to consumers for allow companies to shield themselves typically not quantified in case records, violations of law or contract affecting from class liability.383 Some have stated, the Bureau believes their value to groups of consumers than other both to the Bureau and in public consumers are significant.379 mechanisms available to consumers, statements (such as those made by small The Bureau has considered such as individual formal adjudication entity representatives in the SBREFA stakeholder arguments that class actions (either through judicial or arbitral fora) Panel hearing on arbitration), that are not effective at securing relief and or informal efforts to resolve disputes. companies adopt arbitration agreements behavior changes for large numbers of for the purpose of blocking private class consumers because the Study showed Arbitration Agreements Block Some action filings. Some trade association that about three-fifths of cases filed as Class Action Claims and Suppress the stakeholders have further argued that seeking class treatment are resolved Filing of Others the class action waiver is integral to through voluntary individual The Bureau preliminarily finds, based offering individual arbitration: They see settlements (or an outcome consistent upon the results of the Study, that little point in permitting individuals to with a voluntary individual arbitration agreements have the effect of bring arbitrations if other similarly settlement).380 The Bureau believes, blocking a significant portion of class situated consumers will simply join a however, that the best measure of the action claims that are filed and of class action in any case. effectiveness of class actions for all suppressing the filing of others. The Study showed that defendants are consumers is the absolute relief they As noted above in Part III, the Study not reluctant to invoke arbitration provide, and not the proportion of showed that arbitration agreements are agreements to block putative class putative class cases that result in widespread in consumer financial actions and were successful in many individual settlements or potential markets and hundreds of millions of cases. The Study recorded nearly 100 individual settlements. The fact that consumers use consumer financial Federal and State class action filings many cases filed as putative class cases products or services that are subject to that were dismissed or stayed because do not result in class relief does not arbitration agreements. Arbitration companies invoked arbitration change the significance of that relief in agreements give companies that offer or agreements by filing a motion to compel the cases that do provide it. Moreover, provide consumer financial products arbitration and citing an arbitration when a named plaintiff agrees in a and services the contractual right to agreement in support.384 The Study putative class action to an individual block the filing of class actions in both further indicates that companies were at settlement, by rule it occurs before court and arbitration. When a plaintiff least 10 times more likely to move to certification of a class, and thus does files a class action in court regarding a stay or dismiss a case filed as a class not prevent other consumers from claim that is subject to a valid and action on the basis of an arbitration resolving similar claims, including by applicable arbitration agreement, a agreement than non-class cases.385 In filing their own class actions. The defendant has the ability to request that other words, companies used arbitration Bureau believes that, beyond the named the court dismiss or stay the litigation agreements far more frequently to block plaintiff, an individual settlement of a in favor of arbitration. If the court grants class actions than to move individual class case does not bind other such a dismissal or stay in favor of court cases to arbitration. The Bureau consumers or affect their right to pursue arbitration, the class case could, in preliminarily finds that the above data their claims; in this sense they are no principle, be refiled as a class combined indicate that the primary worse off than if the individually settled arbitration.382 However, the Study reason many companies include case had never been filed at all. showed that, depending on the market, arbitration agreements in their contracts Accordingly, the Bureau believes it between 85 to 100 percent of the is to discourage the filing of class more appropriate to evaluate class contracts with arbitration agreements actions and block those that are filed. actions based on the magnitude of relief the Bureau reviewed expressly While companies might perceive other that these cases, collectively (including precluded an arbitration proceeding on the many that do result in class a class basis. The Study did not identify 383 See supra note 90. 384 settlements) deliver to consumers.381 any contracts with arbitration Section 6 of the Study identified two sources of data on motions to compel arbitration. First, the Study identified 562 Federal and State putative 379 As is discussed below in the Section an individual basis indicates that they were class action filings in six products markets from 1022(b)(2) Analysis, the Study uses ‘‘behavioral unlikely to result in class certification. The Bureau 2010 to 2012, and in 94 of these cases, defendants relief’’ to refer to class settlements which contained is not aware of evidence to support this assertion. filed motions to compel arbitration; 46 of these a commitment by a defendant to alter its behavior Cases settle on an individual basis for a variety of motions were granted, and the rest were denied or prospectively, for example by promising to change reasons and, as noted, whether and why they are still pending at the time the Study was published. business practices in the future or implementing resolved does not alter the value of aggregate relief See Study, supra note 2, section 6 at 58. Further, new compliance programs. The Bureau did not awarded in cases that settle on a classwide basis. the Study identified at least 50 more putative class include a defendant’s agreement to just comply 382 In class arbitration, a class representative cases pertaining to consumer financial products or with the law, without more, as behavioral relief brings an arbitration on behalf of many individual, services (including more than the initial six markets (Study, supra note 2, appendix S at 135). similarly-situated plaintiffs. The Study identified studied) that were dismissed pursuant to a motion 380 Study, supra note 2, section 6 at 37. only two class arbitrations filed before the AAA to compel arbitration that cited the Concepcion 381 Stakeholders similarly assert that class actions from 2010 to 2012. Study, supra note 2, section 5 case. Id., section 6 at 58–59. are ineffective because the fact most are resolved on at 86. 385 Id., section 6 at 57–58.

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benefits of maintaining arbitration appear to have taken the opportunity to file class action cases after market agreements for individual disputes, for file arbitrations before the AAA against participants included arbitration many, those benefits seem ancillary to the same settling defendants.391 agreements in their consumer their ability to limit class actions. Although the case study is just one contracts.393 The analysis of cases in the Study example, the Bureau has little reason to Public Enforcement Is Not a Sufficient further supports the Bureau’s believe consumers in similar cases Means To Enforce Consumer Protection preliminary finding that arbitration would refile in arbitration. Laws and Consumer Finance Contracts agreements are frequently used to In addition to blocking class actions prevent class actions from proceeding. that are actually filed, the Bureau The Bureau preliminarily concludes, While the Study reports that motions to preliminarily finds that arbitration based upon the results of the Study and compel arbitration were filed in only agreements inhibit a number of putative its own experience and expertise, that 16.7 percent of class actions filed from class action claims from being filed at public enforcement is not itself a 2010 to 2012, the Bureau was unable to all for several reasons. Plaintiffs and sufficient means to enforce consumer determine in what percentage of class their attorneys may choose not to file protection laws and consumer finance action cases analyzed defendants had such claims because arbitration contracts. arbitration agreements and were in a agreements substantially lower the Most consumer protection statutes position to invoke an arbitration possibility of classwide relief. Given provide explicitly for private as well as agreement.386 However, in a sample of that and the fact that attorneys incur public enforcement mechanisms. For class action cases against credit card costs in preparing and litigating a case some laws, only public enforcement is companies known to have arbitration (and consumers rarely pay these costs available because lawmakers sometimes agreements, motions to compel up front in a class action) attorneys may decide that certain factors favor arbitration were filed 65 percent of the decline to take such cases at all if they allowing only government enforcement. time and, when filed, they were calculate that they will incur costs with For other laws, lawmakers decide there successful 61.5 percent of the time.387 little chance of recouping them. Not should be both types of enforcement— The Bureau further preliminarily surprisingly, when a consumer or a public and private. On several finds that when courts grant a motion to lawyer considers whether to file a class occasions, Congress expressly dismiss class claims based on action, the existence of an arbitration recognized the role class actions can arbitration agreements, the large number agreement that, if invoked, would have in effectuating Federal consumer of consumers who would have effectively eliminate the possibility for a financial protection statutes. As constituted the putative class are successful class claim likely discourages described in Part II, for instance, unlikely to pursue the claims on an many of these suits from being filed at Congress amended TILA in 1974 to limit individual basis and are even less likely all. While it is difficult to measure the damages in class cases to the lesser of to pursue them in class arbitration. For full scope of claims that are never filed $100,000 or 1 percent of the creditor’s instance, for the 46 class cases because of arbitration agreements, net worth. In reports and floor debates identified in the Study in which a stakeholders that surveyed attorneys concerning the 1974 TILA amendments, motion to compel arbitration was found that they frequently turn away the Senate reasoned that the damages granted, there was only an indication of cases—both individual and class—when cap it imposed would balance the 12 subsequent arbitration filings in the arbitration agreements were present.392 objectives of providing adequate court dockets or the AAA Case Data, In some markets, consumers could not deterrence while appropriately limiting only two of which the Study determined awards (because it viewed potential were filed as putative class 391 As the Preliminary Results make clear, at most TILA class damages as too high).394 Two arbitrations.388 More broadly, the three out of 3,605 individuals filed claims before years later, when the 1976 TILA the AAA against the same defendants. It is not clear overall volume of AAA consumer-filed from the records provided to the Bureau whether amendments increased the cap to the claims—just over 400 individual cases these three consumers pressed the same claims in lesser of $500,000 or 1 percent of the per year—suggests that individual arbitration that formed the basis of the class creditor’s net worth, the primary basis arbitration is not the destination for any settlement. Preliminary Results, supra note 2, at 104 for the increase was the need to significant number of putative class n.225. adequately deter large creditors.395 392 In response to the Bureau’s Request for members. The case study of opt-outs Information in connection with the Study, one from settlements in the Preliminary consumer group commenter submitted a 2012 393 See, e.g., Ross v. American Express Co., 35 Results of the Study further survey conducted of 350 consumer attorneys. See F.Supp.3d 407, 433 (S.D.N.Y. 2014) (reviewing standing of credit card holders claiming injury from demonstrates this.389 It reviewed Nat’l Ass’n of Consumer Advocates, Consumer Attorneys Report: Arbitration clauses are inclusion of pre-dispute arbitration agreements and Federal and State class action everywhere, consequently causing consumer claims noting that ‘‘loss of the services of class action settlements that involved 13 million to disappear, at 5 (2012), available at http:// lawyers to monitor and challenge Issuing Bank class members eligible for $350 million www.consumeradvocates.org/sites/default/files/ behavior and the loss of the opportunity to go to court’’ were a prospective injury for standing in relief from defendants that used NACA2012BMASurveyFinalRedacted.pdf (hereinafter NACA Survey). Over 80 percent of purposes). arbitration agreements in their those attorneys reported turning down at least one 394 Class Actions Under the Truth in Lending Act, consumer contracts, all naming the case they believed to be meritorious because the 83 Yale L.J. 1410, 1429 (1974) (‘‘Two major AAA as the arbitration administrator. presence of an arbitration agreement would make concerns were expressed by the Senate in its report In these settlements, 3,605 of the 13 filing the case futile and of those, the median and floor debates on this amendment. First, the number of cases each attorney turned away was Senate took note of the trend away from class million class members chose to opt out t=10. Id. at 5. The NACA survey indicates that actions after [Ratner v. Chemical Bank New York of receiving cash relief.390 Nevertheless, consumer attorneys believe that the presence of Trust Co., 329 F. Supp. 270 (S.D.N.Y. 1971)] and just three out of these 3,605 individuals arbitration agreements often inhibit them from the need for potential class action liability to filing complaints, including class actions, on behalf encourage voluntary creditor compliance. The of consumers. The Bureau notes that this survey has Senate considered individual actions an insufficient 386 Id., section 6 at 56. methodological limits. The survey does not purport deterrent to large creditors, and so imposed a 387 Id., section 6 at 61. to indicate the total number of cases turned away $100,000 or one percent of net worth ceiling to 388 See id., section 6 at 57–58. in aggregate. And the survey does not examine provide sufficient deterrence without financially 389 See Preliminary Results, supra note 2, whether a case that was turned down by a single destroying the creditor.’’). appendix A at 102–04. attorney was subsequently filed by another 395 S. Rept. 94–590, Consumer Leasing Act of 390 See id. at 104. attorney. 1976, at 8 (‘‘The recommended $500,000 limit,

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The market for consumer finance settlements of less than $10 million, impose certain burdens on providers. products and services is vast, there was no overlapping public These burdens would be chiefly in the encompassing trillions of dollars of enforcement action 82 percent of the form of increased compliance costs to assets and revenue and tens if not time.399 Even where there was overlap, prevent violations of consumer financial hundreds of thousands of companies. private class actions tended to precede laws enforceable by class actions, As discussed further in the Section public enforcement actions, roughly including the costs of forgoing 1022(b)(2) Analysis, this proposal alone two-thirds of the time. potentially profitable (but also would cover about 50,000 firms. And Finally, the Bureau notes that as a potentially illegal) business practices this proposal would leave unaffected general matter public authorities cannot that may increase class action exposure, the single largest consumer financial enforce private contracts or violations of and in the increased costs to litigate market—the mortgage market—because the common law affecting consumers. class actions themselves, including, in Congress expressly prohibited most For those types of claims, private class some cases, providing relief to a class. arbitration agreements in that market in actions are not just complementary but The Bureau also recognizes that the Dodd-Frank Act.396 often the only likely means by which providers may pass through some of In contrast, the resources of public consumers can enforce their rights. those costs to consumers, thereby enforcement agencies are limited. For C. The Bureau Preliminarily Finds That increasing prices. Those impacts are example, the Bureau enforces over 20 the Class Proposal Is in the Public delineated and, where possible, separate Federal consumer financial Interest and for the Protection of quantified in the Bureau’s Section protection laws with respect to every Consumers 1022(b)(2) Analysis below and, with depository institution with assets of regard in particular to burdens on small more than $10 billion and all non- The prior section articulated the financial services providers, discussed depository institutions. Yet the Bureau Bureau’s preliminary findings that further below in the Section-by-Section individual dispute resolution has about 1,500 employees, only some Analysis to proposed § 1040.4(a) and in mechanisms are an insufficient means of whom work in its Division of the initial Regulatory Flexibility of enforcing consumer financial laws Supervision, Enforcement, and Fair Analysis (IRFA). and contracts; public enforcement Lending, which supervises for After reviewing the considerations compliance and enforces violations of cannot be relied upon to fully and effectively enforce all of these laws and that would support a potential finding these laws.397 Furthermore, the Bureau that the class proposal would be for the is the only federal agency exclusively private contracts; and class actions, when not blocked by arbitration protection of consumers and in the focused on enforcing these laws. Other public interest, this section considers, financial regulators, including Federal agreements, provide a valuable complement to public enforcement and under the legal standard established by prudential regulators and State agencies, section 1028, costs to providers as well have authority to supervise and enforce a means of providing substantial relief to consumers. In light of the Study, the as other potentially countervailing other laws with respect to the entities considerations, such as the potential within their jurisdictions, but they face Bureau’s experience and expertise, and the Bureau’s analysis and findings as impacts on innovation in the market for resource constraints as well. Further, consumer financial products and those other regulators often have many discussed above, the Bureau preliminarily finds that precluding services. In light of all these different mandates, only part of which considerations, the Bureau preliminarily is consumer protection. By authorizing providers from blocking consumer class actions through the use of arbitration finds that that standard is satisfied. private enforcement of the consumer agreements would better enable The Bureau seeks comments on its financial statutes, Congress and the consumers to enforce their rights under preliminary finding set forth below— states have allowed for more Federal and State consumer protection that the class proposal would be in the comprehensive enforcement of these laws and the common law and obtain public interest and for the protection of statutory schemes. consumers. The Study showed private class redress when their rights are violated. actions complement public enforcement Allowing consumers to seek relief in Enhancing Compliance With the Law rather than duplicate it. In 88 percent of class actions, in turn, would strengthen and Improving Consumer Remuneration the public enforcement actions the the incentives for companies to avoid and Company Accountability Is for the Bureau identified, the Bureau did not potentially illegal activities and reduce Protection of Consumers the likelihood that consumers would be find an overlapping private class Under the status quo, arbitration action.398 Similarly, in 68 percent of the subject to such practices in the first instance. The Bureau preliminarily agreements obstruct effective private class actions the Bureau enforcement of the law through class identified, the Bureau did not find an finds that both of these outcomes resulting from allowing consumers to proceedings. This harms consumers in overlapping public enforcement action. two ways: It makes consumers both Moreover, in a sample of class action seek class action relief would be in the public interest and for the protection of more likely to be subject to potentially illegal conduct because of coupled with the 1 percent formula, provides, we consumers. believe, a workable structure for private The analysis below discusses the underinvestment in compliance enforcement. Small businesses are protected by the bases for these findings in the reverse activities and deliberate risk-taking by 1 percent measure, while a potential half million order, beginning with a discussion of companies and makes consumers less dollar recovery ought to act as a significant the protection of consumers and then likely to be able to obtain meaningful deterrent to even the largest creditor.’’); see also H. Rep. 95–1315, Electronic Fund Transfer Act (1978) addressing the public interest. As relief when violations do occur. The at 15. discussed further below, the Bureau Bureau preliminarily finds that the class 396 Dodd-Frank section 1414. recognizes that creating these incentives proposal, by changing the status quo, 397 Bureau of Consumer Fin. Prot., Semi-Annual and causing companies to choose creating incentives for greater Report of the CFPB, at 131 (2015), available at between increased risk mitigation and compliance, and restoring an important http://files.consumerfinance.gov/f/201511_cfpb_ semi-annual-report-fall-2015.pdf (noting that CFPB enhanced exposure to liability would means of relief and accountability, had 1,529 staff as of September 30, 2015). would be for the protection of 398 Study, supra note 2, section 9 at 4. 399 Id. consumers.

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To the extent that laws cannot be markets for consumer financial products (FACTA),404 FCRA,405 FDCPA,406 and effectively enforced, the Bureau believes and services. The Bureau has analyzed the TCPA.407 that companies may be more likely to a variety of evidence that, in its view, Relatedly, where there is class action take legal risks, i.e., to engage in indicates that companies invest in exposure, companies and their potentially unlawful business practices, compliance to avoid activities that representatives will seek to focus more because they know that any potential could increase their exposure to class attention and resources on general costs from exposure to putative class actions. proactive compliance monitoring and action filings have been reduced if not management. The Bureau has seen effectively eliminated. Due to this First, the Bureau is aware that evidence of this motivation in various reduction in legal exposure (and thus a companies monitor class litigation law and compliance firm alerts. For reduction in risk), companies have less relevant to the products and services example, one such alert, posted shortly of an incentive to invest in compliance that they offer so that they can mitigate after the Bureau released its SBREFA management in general, such as by their liability by changing their conduct Outline, noted that the Bureau was investing in employee training with before being sued themselves. This considering proposals to prevent respect to compliance matters or by effect is evident from the proliferation of carefully monitoring changes in the law public materials—such as compliance 404 See, e.g., Arent Fox LLP, Unlucky Numbers: bulletins, law firm alerts, and Ensuring Compliance with the Fair and Accurate and making appropriate changes in their Credit Transactions Act (Nov. 18, 2011) (explaining conduct. conferences—where legal and allegations in one class action and noting that As discussed in the Section 1022(b)(2) compliance experts routinely and ‘‘ensuring proactive compliance with FACTA is Analysis, economic theory supports the systematically advise companies about crucial because a large number of non-compliant receipts may be printed before the problem is Bureau’s belief that the availability of relevant developments in class action brought to a company’s attention.’’); Jones Day, If class actions affects compliance litigation,402 for instance claims Your Business Accepts Credit Cards, You Need to incentives. The standard economic pertaining to EFTA,403 the Fair and Read This (Sept. 2007) (‘‘If your company has not model of deterrence holds that been sued for a FACTA violation, you still need to Accurate Credit Transactions Act act. . . . If any potential violation is noted, correct individuals who benefit from engaging it immediately. Also, to avoid future unknown in particular actions that violate the law 402 A brief search by the Bureau has uncovered liability, monitor the decisions related to FACTA to will instead comply with the law when dozens of alerts advising companies to halt conduct determine whether there are any changes regarding the statute’s interpretation. With that, your or review practices in light of a class action filed the expected cost from violation, i.e., company will be able to immediately correct any the expected amount of the cost in their industry that may impact their businesses. ‘new’ violations found to exist under the law. If discounted by the probability of being A selection of these alerts is set forth in the next your company has been sued, act immediately to subject to that cost, exceeds the several footnotes and all are on file with the Bureau. come into compliance with FACTA.’’). expected benefit. Consistent with that See, e.g., Jones Day, The Future of Mandatory 405 See, e.g., K&L Gates LLP, Beyond Credit Consumer Arbitration Clauses (Nov. 13, 2015) Reporting: the Extension of Potential Class Action 400 401 model, Congress and the courts (‘‘Companies that are subject to the CFPB’s Liability to Employers under the Fair Credit have long recognized that deterrence is oversight should take steps now to ensure their Reporting Act (Apr. 7, 2014) (‘‘In light of FCRA’s one of the primary objectives of class compliance with all applicable consumer financial damages provisions and the recent initiation of services laws and to prepare for the CFPB’s putative class actions against large national actions. companies, business entities which collect impending rulemaking [on arbitration]. These steps The preliminary finding that class background information for prospective or current action liability deters potentially illegal could help to diminish . . . risks that would result employees should stay abreast of the requirements conduct and encourages investments in from the CFPB’s anticipated placement of of FCRA and related state law, and should be substantial limitations on the use of arbitration proactive in developing sound and logical practices compliance is confirmed by the clauses’’); Ballard Spahr LLP, Seventh Circuit Green to comply with FCRA’s provisions.’’). Bureau’s own experience and its Lights Data Breach Class Action Against Neiman 406 See, e.g., K&L Gates LLP, You Had Me at observations about the behavior of firms Marcus (July 28, 2015) (noting in response to a ‘‘Hello’’ Letter: Second Circuit Concludes That a and the effects of class actions in recent data breach class action that its attorneys RESPA Transfer-of-Servicing Letter Can Be a ‘‘regularly advise financial institutions on Communication in Connection with Collection of a Debt (Sept. 22, 2015) (‘‘[M]ortgage servicers would 400 See, e.g., supra note 394; H. Rept. 94–589, compliance with data security and privacy issues’’); Bryan Cave LLP, Plaintiffs Seek Class Status for do well to ensure they are paying close attention Equal Credit Opportunity Act Amendments of 1976, when reviewing such letters for FDCPA Alleged Card Processing ‘‘Junk Fee’’ Scheme (Nov. at 14 (Jan. 21, 1976). compliance’’ in order to avoid class action liability). 401 5, 2015) (‘‘[P]rocessors and merchant acquirers See, e.g., Reiter v. Sonotone Corp., 442 U.S. 407 See, e.g., DLA Piper, Ninth Circuit Approves 330, 344 (1979) (noting that antitrust class actions should revisit their form agreements and billing Provisional Class Action Certification in TCPA ‘‘provide a significant supplement to the limited practices to ensure they are free of provisions that Class Action, Defines ‘‘Prior Express Consent’’ (Nov. resources available to the Department of Justice for a court might consider against public policy, and 19, 2012) (‘‘Meyer [a class action] seems to make enforcing the antitrust laws and deterring that all fees payable by a merchant are clearly clear that creditors and debt collectors must verify violations’’); Hughes v. Kore of Indiana Enter., 731 identified in the application, the main agreement, that debtors provided their cell phone numbers and F.3d 672, 677–78 (7th Cir. 2013) (Posner, J.) (‘‘A or a schedule to the agreement.’’); Jenner & Block that the numbers were provided at the time of the class action, like litigation in general, has a LLP, Civil Litigation Outlook for 2016 (Feb. 1, 2016) transactions related to the debts before contact is deterrent as well as a compensatory objective. . . . (‘‘Given such developments, 2016 will bring a made using an automated or predictive dialer. For The compensatory function of the class action has strong and continued focus on privacy protections cell phone numbers provided later by debtors, it is no significance in this case. But if [defendant’s] net imperative that creditors and debt collectors make and data breach prevention both in the class action worth is indeed only $1 million . . . the damages clear to the owners of those numbers that they may sought by the class, and, probably more important, context and otherwise.’’); Bryan E. Hopkins, Legal be contacted at these numbers for purposes of debt the attorney’s fee that the court will award if the Risk Management for In-House Counsel & Managers collection.’’); Mayer Brown LLP, Seventh Circuit class prevails, will make the suit a wake-up call for 49–52 (2013) (noting a variety of compliance Holds That Companies Are Liable Under Telephone [defendant] and so have a deterrent effect on future activities companies should consider in product Consumer Protection Act for Placing Automated violations of the Electronic Fund Transfer Act by design in order to mitigate class action exposure). Calls to Reassigned Numbers (May 16, 2012) [the defendant] and others.’’); deHaas v. Empire 403 See, e.g., Bracewell LLP, Bankers Beware: (‘‘[C]ompanies must ensure that the actual Petroleum Co., 435 F.2d 1223, 1231 (10th Cir. 1970) ATM Fee Class Action Suits on the Rise (Oct. 5, recipients of automated calls have consented to (‘‘Since [class action rules] allow many small claims 2010) (noting dozens of class action cases regarding receiving them, and take steps to update their to be litigated in the same action, the overall size records when telephone numbers have been ATM machines and advising ATM operators ‘‘to of compensatory damages alone may constitute a reassigned to new subscribers. For example, the significant deterrent.’’); Globus v. Law Research make sure that their ATMs provide notice to Seventh Circuit [in a class action] noted that callers Service, Inc., 418 F.2d 1276, 1285 (2d Cir. 1969) consumers on both the machine and on the screen could avoid liability by doing a ‘reverse lookup to (‘‘Compensatory damages, especially when (with the opportunity for the customer to opt-out identify the current subscriber’ or by ‘hav[ing] a multiplied in a class action, have a potent deterrent before a fee is charged) if a fee will be charged for person make the first call’ to verify that the number effect.’’). providing the ATM service.’’). is ‘still assigned’ to the customer.’’).

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arbitration agreements from being used one or more firms in an industry led to reordering decreased from 37 percent to to block class actions. In light of these others changing their practices, 9 percent.414 proposals, the firm recommended presumably in an effort to avoid being A third example of companies several ‘‘Steps to Consider Taking sued themselves. For example, between responding to class actions by changing Now,’’ including, ‘‘Evaluate your 2003 and 2006, 11 auto lenders settled their practices to improve their consumer compliance management class action lawsuits alleging that the compliance with the law relates to system to identify and fill any gaps in lenders’ credit pricing policies had a foreign transaction fees and debit cards. processes and procedures that inure to disparate impact on minority borrowers In re Currency Conversion Fee Antitrust the detriment of consumers under under ECOA. In the settlements, the Litigation (MDL 1409) is a class action standards of unfair, deceptive, and lenders agreed to restrict interest rate proceeding in which plaintiffs alleged, abusive acts or practices, and that could markups to no more than 2.5 percentage in part, that banks that issued credit result in groups of consumers taking points. Following these settlements, a cards and debit cards violated the law action.’’ 408 Another recent alert relating markup cap of 2.5 percent became by not adequately disclosing foreign to electronic payments litigation noted standard across the industry even with transaction fees to consumers when they that firms could either improve their respect to companies outside the direct opened accounts.415 In the settlement, compliance efforts or adopt arbitration scope of the settlements.411 Use of caps two large banks agreed to list the rate agreements to limit their class action has continued even after the consent applicable to foreign transaction fees in exposure.409 Similarly, trade decrees that triggered them have their initial disclosures for personal associations routinely update their expired.412 checking accounts with debit cards.416 members about class litigation and As another example, since 2012, 18 A review of the market subsequent to encourage them to examine their banks have entered into class action the 2006 settlement indicates that this practices so as to minimize their class settlements as part of the Overdraft type of disclosure is now standard action exposure. For example, a 2015 MDL,413 in which plaintiffs challenged practice for debit card issuers across the alert from a credit union trade the adoption of a particular method of market, not merely by the two large association describes ‘‘a new potential ordering the processing of payment banks bound by the settlement.417 wave of overdraft-related suits . . . . transactions that increases substantially target[ing] institutions that base fees on the number of overdraft fees incurred by 414 See Pew Charitable Trusts, Checks and consumers compared with alternative Balances: 2015 Update, at 12, Figure 11 (May 2015), ‘available’ instead of ‘actual’ balance’’ available at http://www.pewtrusts.org/∼/media/ and advises credit unions to take five methods. Specifically, the litigation assets/2015/05/ compliance-related steps to mitigate challenged banks that commingled debit checks_and_balances_report_final.pdf. According potential class action liability.410 card transactions with checks and to a different 2012 study, community banks automated clearinghouse transactions predominantly posted items in an order intended to While the Bureau believes that such minimize overdrafts, such as low-to-high or check monitoring and attempts to anticipate that come in over the course of a day or transaction order. The Independent Community litigation affect the practices of and reordered the transactions to Banks of America (ICBA) Overdraft Payment companies that are exposed to class process them in descending order based Services Study at 40 (June 2012), available at on amount. Relative to chronological or https://www.icba.org/files/ICBASites/PDFs/2012 action liability, the impacts can be hard OverdraftStudyFinalReport.pdf. Only 8.8 percent of to document and quantify because a lowest-to-highest ordering, this community banks reordered transactions from high companies rarely publicize changes in practice typically produces more to low dollar amount. Id. at 42 & fig. 57. Most of their behavior, let alone publicly overdraft fees by exhausting funds in the community banks studied did not change their the account before the last several small posting order in the two year period their overdraft attribute those changes to risk- practices were reviewed. See id. at 42 (noting that mitigation decisions. The Bureau has, debits can be processed. In the years 82 percent of community banks had not changed however, identified instances where it since the litigation, the industry has the order in which they posted transactions during believes that class actions filed against largely abandoned this practice. the two years before the ICBA’s study). To the According to a 2015 study, from 2013 to extent that community banks changed their practices, in the two years preceding the 2012 408 See, e.g., Jones Day, The Future of Mandatory 2015, the percentage of large banks that study, 70.7 percent of those that changed their Consumer Arbitration Clauses, JonesDay.com (Nov. used commingled high-to-low- practices stopped high-to-low reordering. Id. 2015), available at http://www.jonesday.com/the- 415 Third Consol. Am. Class Action Compl., In Re future-of-mandatory-consumer-arbitration-clauses- 411 See F&I and Showroom, 2.5 Percent Markups Currency Conversion Fee Antitrust Litig., MDL 11-13-2015/. Becoming the Trend (Aug. 9, 2005), http://www.fi- Docket No. 1409 (S.D.N.Y., July 18, 2006) (alleging 409 Ballard Spahr LLP, The Next EFTA Class magazine.com/news/story/2005/08/2-5-markups- that general purpose and debit cardholders were Action Wave Has Started (Sept. 1, 2015), http:// becoming-the-trend.aspx; Chicago Automobile ‘‘charged hidden and embedded collusively set www.ballardspahr.com/alertspublications/ Trade Ass’n, Automotive News: 2.5 Percent prices, including a hidden, embedded and legalalerts/2015-09-01-the-next-efta-class-action- Becoming Standard Dealer Finance Markup (Nov. collusively set base currency conversion fee equal wave-has-started.aspx (‘‘We have counseled 22, 2010), http://www.cata.info/ to 1% of the amount of the foreign currency financial institutions and consumer businesses . . . automotive_news_25_becoming_standard_dealer_ transaction,’’ that ‘‘most member banks tack[ed] on on taking steps to mitigate the risk of claims by finance_markup/. The Bureau notes that a currency conversion fee of their own,’’ and that consumers (such as by adding an enforceable California’s adoption in 2006 of the Car Buyer’s Bill all of this was done in violation of ‘‘TILA, EFTA arbitration provision to the relevant agreement).’’); of Rights, which mandated a maximum 2.5 percent and the state consumer protection laws require[ing] see also Wiley Rein LLP, E-Commerce—The Next markup for loan terms of 60 months or less, may disclosure of such fees in, inter alia, cardholder Target of ‘Big Data’ Class Actions? (Jan. 5, 2016), also have influenced the adoption of this markup solicitations and account statements’’). http://www.wileyrein.com/newsroom-articles-E- limit. Cal. Dep’t of Motor Vehicles, Car Buyer’s Bill 416 Stip. & Agmt of Settlement, In re Currency Commerce-The-Next-Target-of-Big-Data-Class- of Rights, available at https://www.dmv.ca.gov/ Conversion Fee Antitrust Litig., MDL 1409, 27–30 Actions.html (noting that arbitration agreements can portal/dmv/?1dmy&urile=wcm:path:/ (S.D.N.Y. July 20, 2006). help to avoid class litigation and advising that ‘‘it dmv_content_en/dmv/pubs/brochures/fast_facts/ 417 In some instances, the dynamics of deterrence would also be advisable for e-commerce vendors to ffvr35. may be different. In another example from the In include in their privacy policy an arbitration clause 412 See e.g., Automotive News, Feds Eye Finance re Currency Conversion Fee class action litigation, establishing that any dispute would be adjudicated Reserve (Feb. 25, 2013), available at http://www. the defendants voluntarily halted the conduct at in individual arbitration (as opposed to class autonews.com/article/20130225/RETAIL07/ issue upon being sued. Karen Bruno, Foreign litigation or arbitration).’’). 302259964/feds-eye-finance-reserve (‘‘Most were transaction fees: Hidden credit card ‘currency 410 Credit Union Magazine, Minimize the Risk of settled by 2003, with the lenders agreeing to cap the conversion fees’ may be returned—if you file soon, Overdraft Fee Lawsuits, Credit Union Nat’l Ass’n finance reserve at two or three percentage points. CreditCards.com (May 23, 2007), http:// (June 26, 2015), available at http://news.cuna.org/ That cap became the industry standard.’’). www.creditcards.com/credit-card-news/foreign- articles/106373-minimize-the-risk-of-overdraft-fee- 413 See supra notes 311–313 & 371–372 and transaction-fee-1282.php (‘‘[I]n most cases the lawsuits. accompanying text. Continued

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These are a few examples of industry- in those individual markets—but is suffered by class members can be wide change in response to class actions substantial nonetheless and in most estimated using these settlement relief- that the Bureau believes support its markets represents a considerable to-total consumer harm ratios and the preliminary finding that exposure to increase.419 sum of cash settlement relief. Using the consumer financial class actions creates Furthermore, the Bureau average settlement-to-harm rate of 38 incentives that encourage companies to preliminarily finds that through such percent, and the total cash relief figure change potentially illegal practices and litigation consumers would be better of about $1 billion in the Overdraft MDL to invest more resources in compliance able to cause providers to cease settlements, an estimate of the total in order to avoid being sued.418 The engaging in unlawful or questionable value of harm suffered by consumers in cases help to illustrate the mechanisms, conduct prospectively than under a the settlements identified by the Bureau among others, by which the proposed system in which companies can use would be approximately $2.6 billion.421 class rule would deter potentially illegal arbitration agreements to block class More concretely, this figure estimates practices by many companies. The actions. Class actions brought against the total amount of additional or excess Bureau believes that the result would be particular providers can, by providing overdraft fees class members paid to the more legally compliant consumer behavioral relief into the future to settling banks during the class periods financial products and services that consumers, force more compliance because of the banks’ use of the high-to- would advance the protection of where the general increase in incentives low reordering method to calculate consumers. due to litigation risk are insufficient to overdraft fees. As discussed in more detail in the achieve that outcome. This sum—$2.6 billion—can also be Section 1022(b)(2) Analysis, the Bureau The Overdraft MDL also helps used as a basis for determining the does not believe it is possible to illustrate the potential ongoing value of potential future value of the cessation of quantify the benefits to consumers from such prospective relief. A recent study the high-to-low reordering practice. If the increased compliance incentives by an academic researcher based on the $2.6 billion is the total amount of excess attributable to the class proposal due in Overdraft MDL settlements offered rare overdraft fees class members paid part to obstacles to measuring the value data on the relationship between the during their respective class periods of deterrence directly in a systematic settlement relief offered to class because of the high-to-low reordering way. Nonetheless, the Bureau members compared to the sum total of practice, the same figure (converted to preliminarily finds that increasing injury suffered by class members that an annualized figure using the class compliance incentives would be for the has important implications for the value period) 422 may be used to estimate how protection of consumers. of prospective relief. The analysis much the same class members save The Bureau recognizes that some calculated that in the various every year in the future by no longer companies may decide to assume the settlements, the value of cash settlement being subject to high-to-low reordering resulting increased legal risk rather than relief offered to the class constituted practice for purposes of calculating investing more in ensuring compliance between 7 and 70 percent (or an average overdraft fees. The prospective benefits with the law and foregoing practices of 38 percent and a median of 40 to consumers as a whole are often even that are potentially illegal or even percent) of the total value of harm larger because companies frequently blatantly unlawful. Other companies suffered by class members from change their practices not just with may seek to mitigate their risk but overdraft reordering during the class regard to class members, but to their miscalibrate and underinvest or under period.420 The total value of injuries customer base as a whole, and other comply. To the extent that this happens, companies that were not sued may also the Bureau preliminarily finds that the 419 As is explained in the Section 1022(b)(2) preemptively change their practices. As class proposal would enable many more Analysis below, the Bureau calculates the future number of class actions by estimating that, in any 421 consumers to obtain redress for given market, the providers that currently use See id. at 786 & tbl. 3. The calculation is the violations than do so today, when arbitration agreements would face class litigation at total amount of relief the Study identified with the the same rate and same magnitude as the providers Overdraft MDL settlements ($1 billion), divided by companies can use arbitration .38 (the average ‘‘recovery rate’’ of the 15 Overdraft agreements to block class actions. As set that currently do not use arbitration agreements faced during the five-year period covered by the settlements identified by Fitzpatrick and Gilbert, out in the Bureau’s Section 1022(b)(2) Study. For all but one of the markets for which the which ranged from approximately 14 percent to 69 Analysis, the amount of additional Bureau makes an estimate, only one market—pawn percent). While Fitzpatrick and Gilbert’s analysis compensation consumers would be shops –was there no Federal class settlement in the separately identified the settlement to harm ratio for period studied, and the Bureau projects that each individual bank, the banks were anonymized expected to receive from class action consumers in these markets would receive no for purposes of their analysis and, therefore, cannot settlements in the Federal courts varies additional compensation from Federal class be matched to the specific class settlements set out by product and service—specifically, by settlements if the class proposal were adopted. in the Study. the prevalence of arbitration agreements Because it did not have the relevant data, the 422 Assuming the average class period was the 10- Bureau did not separate State class settlements by year class period of the largest settlement, the 18 markets or project additional compensation Overdraft MDL settlements collectively provide companies voluntarily began disclosing fees once attributable to future State class settlements. Where $260 million in prospective relief per year to those the suit was filed.’’). litigation actually occurs, there would also be class members identified in our case studies. This 418 Some stakeholders have suggested that even increased costs to providers in the form of estimate assumes that future overdraft fees absent class action exposure there already are attorney’s fees and related expenses. The Bureau generated from the high-to-low practice would have sufficient incentives for compliance and that class addresses these costs below. been comparable to the fees generated in the past. actions are too unpredictable to increase 420 Brian T. Fitzpatrick & Robert C. Gilbert, An This estimate does not take into account the compliance incentives. The Bureau is not, at this Empirical Look at Compensation in Consumer Class ongoing benefit to other consumers who were not point, persuaded by these arguments. The Bureau Actions, 11 N.Y.U. J. L. & Bus. 767, 785 (2015) 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 is the benefit to those consumers who bank companies have to comply with the law. However, recovered relative to the damage done to class with institutions that were not sued but voluntarily based on its experience and expertise and for the members.’’). Fitzpatrick worked with Gilbert, an stopped the overdraft reordering practice. Nor does reasons discussed herein, the Bureau believes that attorney involved in the Overdraft MDL this figure include any of the other settlements companies can (and in many cases should) do more settlements, to identify the total quantum of identified by the Bureau in Section 8 of the Study, to ensure that their conduct is compliant and that overdraft fees attributable to the practice of which did not contain the kind of information on the presence of class action exposure will affect reordering in settlements identified by the Study. the proportion of calculable harm to settlement companies’ incentives to comply. Id. relief.

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this one example shows, prospective the class proposal would be for the Finally, the Bureau believes that its relief—because it can continue in protection of consumers and in the preliminary finding that the class perpetuity—can have wide-ranging public interest in light of full proposal would have the effect of benefits for consumers over and above consideration of these and other achieving greater compliance with the the value of retrospective relief, and relevant factors. law implicates additional benefits can, through changing the behavior of First, as discussed extensively above, beyond those noted above with respect providers subject to a suit, benefit other the Bureau believes that its preliminary to the protection of individual customers of these providers who are finding that the class proposal would consumers and impacts on responsible not class members. protect consumers also contributes to a providers. Federal and State laws that For all of these reasons, the Bureau finding that the class proposal would be protect consumers were developed and believes that the class proposal would in the public interest. adopted because many companies, increase compliance and increase Second, the Bureau considers the unrestrained by a need to comply with redress for non-compliant behavior and impact the class proposal would have such laws, would engage in conduct thus would be for the protection of on leveling the playing field in markets that is profit-maximizing but that consumers. To the extent that the class for consumer financial products and lawmakers have determined disserves proposal would affect incentives (or services in its public interest analysis. the public good by distorting the lead to more prospective relief) and The Bureau preliminarily finds that the efficient functioning of these markets. enhance compliance, consumers seeking class proposal would create a more level These Federal and State laws, among to use particular consumer financial playing field between providers that other things, allow consumer financial products or services would more concentrate on compliance and markets to operate more transparently frequently receive the benefits of the providers that choose to adopt and to operate with less invidious statutory and common law regimes that arbitration agreements to insulate discrimination, and for consumers to legislatures and courts have themselves from being held to account make more informed choices in their implemented and developed to protect by the vast majority of their customers selection of financial products and them. Consumers would, for example, and, as the Study showed, from services. be more likely to receive the disclosures virtually any private liability. The Thus, the Bureau believes that by required by and compliant with TILA, Bureau believes this also supports a creating enhanced incentives and to benefit from the error-resolution determination that the class proposal remedial mechanisms to enforce procedures required by TILA and EFTA, would be in the public interest. compliance, the class proposal could and to avoid the unfair and abusive debt Specifically, the Bureau believes that improve the functioning of consumer collection practices proscribed by the companies that adopt arbitration financial markets as a whole. First, FDCPA and the discriminatory practices agreements to manage their liability may enhanced compliance would, over the proscribed by ECOA.423 In those States possess certain advantages over long term, create a more predictable, that provide for private enforcement of companies that instead make greater efficient, and robust regime. Second, the their fair competition law, consumers investments in compliance to manage Bureau also believes enhanced similarly would be less likely to be their liability, both in their ability to compliance and more effective remedies exposed to unfair or deceptive acts or minimize costs and to profit from the could also reduce the risk that consumer practices. Consumers also would be provision of potentially illegal confidence in these markets would more likely to receive the benefits of consumer financial products and erode over time as individuals, faced services. The Bureau does not expect their contract terms and less likely to be with the non-uniform application of the that eliminating the advantages enjoyed exposed to tortious conduct. law and left without effective remedies by companies with arbitration for unlawful conduct, may be less Enhancing Compliance With the Law agreements would necessarily shift willing to participate in certain sections and Improving Consumer Remuneration market share to companies that eschew of the consumer financial markets. For and Company Accountability Is in the arbitration agreements and instead focus all of these reasons, the Bureau believes Public Interest on up front compliance because the that promoting the rule of law—in the The Bureau also preliminarily finds future competitive balance between form of accountability under and that the class proposal would be in the companies would also depend on many transparent application of the law to public interest. This preliminary finding additional factors. It has thus not providers of consumer financial is based upon several considerations, counted the effects of this factor as a products or services—would be in the which are discussed below and include major element of the Section 1022(b)(2) public interest as well as for the the beneficial aspects for consumers Analysis. However, the Bureau believes protection of consumers. (who, as previously discussed, are part that eliminating this type of arbitrage as During both the SBREFA process and of the public whose interests are to be a potential source of competition would ongoing outreach with various 424 furthered), leveling the playing field for be in the public interest. stakeholders, some participants have providers, and enhancing the rule of suggested that the class proposal would 424 The Bureau recognizes, of course, that under law. Consistent with the legal standard, the current system companies without arbitration not be in the public interest because it the Bureau also considers concerns, agreements can level the playing field by adopting which have been raised by stakeholders such agreements. But the Bureau believes that the because of their potential impacts on consumers, as well, including the class proposal’s public interest would be served by a system in responsible providers, and broader systemic which a level playing field is achieved by bringing stability. S. Rept. 111–176, The Restoring American impacts on costs and financial access, all companies’ compliance incentives up to the Financial Stability Act of 2010, at 10 (Apr. 30, 2010) innovation, the potential of class actions level of those that face class action liability for non- (‘‘This fragmentation led to regulatory arbitrage to provide windfalls to plaintiffs, and compliance. The public interest would not be between federal regulators and the states, while the the availability of individual dispute served by a system in which the level playing field lack of any effective supervision on nondepositories is achieved by bringing compliance incentives led to a ‘race to the bottom’ in which the resolution, and preliminarily finds that down to the level of those companies that are institutions with the least effective consumer effectively immune from such liability. Indeed, regulation and enforcement attracted more 423 See generally Study, supra note 2, section 8 ‘‘races to the bottom’’ within the consumer financial business, putting pressure on regulated institutions at 13 & fig. 1 (noting the number of class settlements services markets were a significant concern to lower standards to compete effectively, ‘and on by frequency of claim type). prompting Congress to enact the Dodd-Frank Act their regulators to let them.’’).

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would: (1) Impose costs on providers does not alter the Bureau’s belief that it would advance the public interest. For that would be passed through to would be in the public interest (and for example, a major cause of the financial consumers; (2) reduce incentives for the protection of consumers) for the crisis was ‘‘innovation’’ in the mortgage innovation in markets for consumer class proposal to cause providers to market—innovation that led to the financial products and services; (3) incur these costs.426 introduction of a set of high-risk deliver windfalls to named plaintiffs Further, as noted in the Section products and underwriting practices.428 and class members; or (4) negatively 1022(b)(2) Analysis below, the Bureau Similarly, Congress enacted the CARD affect the means available to consumers believes that it is important given the Act in response to ‘‘innovation’’ in the to resolve individual disputes formally size of the markets at issue to evaluate credit card marketplace—such as the and informally. Participants in the cost predictions relative to the number practice of triggering interest rate hikes SBREFA process also asserted that the of accounts and consumers so as to based on ‘‘universal default’’—that class proposal would have properly assess the scale of the made the pricing of credit cards more disproportionate impacts on small predictions. Given hundreds of millions opaque and unpredictable for entities. After carefully considering of accounts across affected providers, consumers and distorted what was then these points and factoring them into its the hundreds or thousands of the second largest consumer credit analysis as discussed further below and competitors in most markets, and the market.429 in the discussion of small business numerical estimates of costs as specified Conversely, the Bureau notes that impact in the Section-by-Section below, the Bureau does not believe that some innovation is designed to mitigate Analysis to proposed § 1040.4(a), the the expenses due to the additional class risk. For example, many banks and Bureau preliminarily finds that the class settlements that would result from this credit unions are experimenting with proposal would on balance be in the proposed rule would result in a ‘‘safe’’ checking accounts (accounts that public interest.425 noticeable impact on access to do not allow consumers to overdraft) Costs to Providers and Pass-Through consumer financial products or these products are designed to reduce to Consumers. As discussed in the services.427 Similarly, the Bureau also overdraft risks to consumers. Similarly, Section 1022(b)(2) Analysis, the Bureau believes that the potential cost impacts some credit card issuers have recognizes that the class proposal would on small providers, and individual experimented with products with fewer impose three types of costs on providers more generally, are not as or no penalty fees as a means of providers: (1) Costs associated with large as some stakeholders have reducing risk to consumers. The Bureau increased compliance, including suggested based on the detailed analysis believes that to extent that the class compliance management costs and costs provided below that factors in proposal would affect positive of eschewing potentially illegal but likelihood of litigation, recovery rates, innovations of this type, it would tend profitable practices; (2) costs for legal and other considerations. to facilitate them. defense and retrospective and Innovation. Some stakeholders have The Bureau recognizes that there may prospective remediation; and (3) costs suggested that the proposal would be some innovation that is designed to associated with changing contracts. As disserve the public interest because it serve the needs of consumers but that further discussed in that section, the would discourage innovation. leverages new technologies or Bureau also recognizes that some According to this argument, providers approaches to consumer finance in ways portion of those costs could be passed would refrain from developing or that raise novel legal questions and, in through to consumers. The Bureau offering products and services that that sense, carry legal risk. The Bureau believes, however, that the fact that benefit consumers and are lawful—or believes that these innovators, in these costs would, at least in the first may withdraw existing, beneficial general, consider a variety of concerns instance, be incurred by providers or products from the market—due to when bringing their ideas to market. that some of the costs could be passed concerns that the products may pose But, even if at the margin, the effect of through to consumers does not alter its legal risk, for instance because they are the proposed rule would be to deter finding that the class proposal would be novel. The Bureau is not currently certain innovations from being in the public interest. persuaded that this would occur for launched, the Bureau believes that, on The Bureau believes that compliance, several reasons. balance, that would be a price worth litigation, and remediation costs First, the Bureau notes that some paying in order to achieve the benefits generally are a necessary component of innovation in consumer financial of the rule for the public and the broader private enforcement markets can disserve the interest of consumers. The Bureau believes that, in scheme, and that certain costs are vital consumers and the public and that general, it is a mark of a well- to uphold a system that vindicates deterring such innovation actually functioning regulatory regime when actions brought through the class entities must balance their desire to mechanism. The specific marginal costs 426 Some stakeholders have suggested that profit from innovation with the need to that would be attributable to the class providers would incur costs that produce no comply with laws designed to protect proposal are similarly justified. These benefits by engaging in compliance management consumers.430 The Bureau thus costs are justified to protect consumers activities that would not result in any changes in and produce the benefits discussed the providers’ behaviors. According to this view, providers would sustain an increase in compliance 428 See Fin. Crisis Inquiry Comm’n, The Financial above. The fact that some of these costs, costs without any actual change in behavior or Crisis Inquiry Report, at 104–05 (2011), available at described below, may be passed through added compliance by, for example, double or triple https://www.gpo.gov/fdsys/pkg/GPO-FCIC/pdf/ checking previous compliance efforts. However, the GPO-FCIC.pdf (discussing creation of a larger, new, subprime mortgage market, expanded use of high- 425 In the Section-by-Section Analysis to Bureau would not expect a firm to waste money risk products such as certain adjustable rate proposed § 1040.4(a), the Bureau specifically confirming that it already complies when it receives addresses certain concerns related to the class no benefit in exchange for that investment. In mortgages, and looser underwriting practices). proposal and its costs. That discussion is addition, as the examples cited above suggest, class 429 See Bureau of Consumer Fin Prot., CARD Act incorporated in this section 1028(b) analysis by actions can assist firms in locating areas where their Report, at 27, 74 (2013), available at http:// _ _ reference. The Bureau also in that discussion seeks compliance efforts may be insufficient and allow files.consumerfinance.gov/f/201309 cfpb card-act- comment whether it should exempt small entities them to focus their increased compliance efforts in report.pdf; 15 U.S.C. 1666i–i. from the proposed rule. The Bureau discusses areas where private actions are most likely. 430 See Dan Quan, Project Catalyst: We’re open to further potential alternatives below in the Bureau’s 427 As is noted below, the impacts might be innovative approaches to benefit consumers (Oct. IRFA. higher for some markets. 10, 2014), http://www.consumerfinance.gov/blog/

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preliminarily finds that the impact of With respect to the suggestion that the provision that led to a spike in class the class proposal on innovation class proposal would result in windfalls action litigation.435 supports rather than refutes a finding to entire classes, the Study showed that Individual Dispute Resolution. Some that the class proposal would be in the certification almost invariably occurs companies and industry trade public interest because it would coincident with a settlement and thus is associations have argued that, if the incentivize providers to reach the right not typically the force that drives class proposal were adopted, providers balance between innovation in the settlement. The Study further found that would likely remove their arbitration marketplace and consumer protection. not infrequently, settlements follow a agreements entirely and this would impair consumers’ ability to resolve Windfalls. Some stakeholders have decision by a court rejecting a their individual disputes. Other suggested that the class proposal would dispositive motion (e.g., a motion to companies have told the Bureau that allow named plaintiffs in putative class dismiss) filed by the defendants. actions to leverage the threat of a class they would keep their arbitration Moreover, the Bureau is not aware of agreements or that they remain action to obtain a windfall individual any evidence to suggest that companies recovery. Others go further and suggest undecided on what they would do. To routinely settle cases on a class basis for the extent that providers would remove that the class proposal would result in more than their expected value, i.e., windfall recoveries to entire classes on their arbitration agreements, the Bureau more than the exposure to the class has heard two reasons. First, that if the grounds that the certification of a discounted by an assessment of the class would induce providers to settle providers can no longer block class likelihood of success.432 As discussed in claims with little or no merit because of actions some stakeholders have stated the IRFA, the Bureau believes that the that the arbitration agreement serves no the litigation expenses and risk of purpose. Second, some stakeholders massive recoveries. Relatedly, some impacts on small providers are less have suggested that establishing and stakeholders have expressed concern severe than some stakeholders have maintaining a system to resolve disputes that small businesses are particularly argued, given that small providers are to in arbitration is costly and that vulnerable to this scenario and that they class actions and other considerations. providers might have no incentive to feel even greater pressure to settle cases In addition, Congress and the courts provide consumers with the benefits of upon class certification because the also continue to calibrate class action arbitration if they are also required to value of the claim may constitute a procedures to discourage frivolous incur increased costs in defending class substantial portion of the small 433 litigation. The Supreme Court, for actions. business’s net worth. example, has rendered a series of As for those asserting the first reason, The Bureau recognizes that there is decisions making clear that Rule 23 the Bureau believes that, to the extent some risk that the class proposal would ‘‘does not set forth a mere pleading these providers find that the arbitration enable some plaintiffs to file putative standard’’ and establishing a number of agreement provides no benefit to class actions and leverage the threat of requirements to subject putative class themselves or their consumers in class liability to obtain a more favorable claims to close scrutiny before individual disputes, then it is possible settlement than could have been proceeding on a class basis.434 Further, the agreement would not be maintained obtained in an action filed on an Congress has acted to limit frivolous under the class proposal. For such individual basis in the first instance. litigation through various steps providers, however, the Bureau believes However, the Study finds that for most including enactment of CAFA. the arbitration agreement has thus consumers the value of their individual Similarly, stakeholders successfully effectively been serving no function claim is too small to be worth pursuing lobbied Congress to remove an EFTA other than a class action waiver and individually, and the Bureau does not would have no impact on their believe that the ability to file a putative to consumers, as discussed in Section 1022(b)(2) individual dispute resolution processes. class action would materially change Analysis below. As for those asserting this second consumers’ interest in pursuing 432 See, e.g., In re Citigroup Inc. Sec. Litig., 965 reason, the Bureau is not persuaded for individual relief. The Section 1022(b)(2) F. Supp. 2d 369, 383 (S.D.N.Y. 2013) (noting that the reasons discussed here and in the Analysis quantifies the potential costs securities settlement was relatively low due to ‘‘the Section 1022(b)(2) Analysis. These firms from putative class actions not settled risk that the plaintiffs might not prevail was must already maintain two systems to significant’’); see also Wright, Miller & Kane, 7A on a class basis and finds those costs to Fed. Prac. & Proc. Civ. 1797.1, at 82–88 (3d ed.) the extent that most arbitration be relatively low.431 (identifying factors for district court’s determination agreements allow for litigation in small of the fairness of proposed relief for a class claims courts, and companies almost category/project-catalyst/ (‘‘Consumer-friendly settlement, including ‘‘the likelihood of the class never seek to compel other cases to being successful in the litigation’’ and ‘‘the amount innovation can drive down costs, improve arbitration when first filed in court. The transparency, and make people’s lives better. On proposed as compared to the amount that might be the other hand, new products can also pose recovered, less litigation costs, if the action went Bureau does not believe that, to the unexpected risks to consumers through dangers forward’’); Reynolds v. Beneficial Nat’l Bank, 288 extent there is a burden of maintaining such as hidden costs or confusing terms.’’). F.3d 277, 285 (7th Cir. 2002) (Posner, J.) (reversing arbitration agreements to resolve 431 The Study demonstrated that the number of order approving settlement agreement where the individual disputes, the availability of putative class cases resulting in individual ‘‘judge made no effort to translate his intuitions outcomes is itself quite low, showing each year an about the strength of the plaintiffs’ case, the range class actions would impact that burden average of100 putative class actions filed in Federal of possible damages, and the likely duration of the which exists regardless. Companies will courts and a sample of State courts relating to six litigation if it was not settled now into numbers that always have to defend and resolve significant markets were resolved in a manner that would permit a responsible evaluation of the individual disputes that their customers included an individual settlement or a potential reasonableness of the settlement’’). individual settlement. Study, supra note 2, section 433 Reiter, 442 U.S. at 345 (‘‘District courts must bring—whether in court or in 6 at 42, fig. 12; id., app. O at 106 tbl. 19 (covering be especially alert to identify frivolous claims settlements that represent nearly a fifth of the brought to extort nuisance settlements; they have 435 See, e.g., Kevin Bogardus, Banks lobby to population). As a matter of absolute impact, broad power and discretion vested in them by Fed. repeal ATM fee signs, The Hill (June 19, 2012), individual settlements in 100 cases per year (even Rule Civ. Proc. 23 with respect to matters involving available at http://thehill.com/business-a-lobbying/ when extrapolated to other markets and all State the certification and management of potentially 233393-bank-lobby-says-congress-should-repeal- courts) are not significant enough to pose a cumbersome or frivolous class actions.’’). atm-signs. Stakeholders are now undertaking substantial per-account cost to providers and thus 434 Wal-Mart Stores, Inc. v. Dukes, 564 U.S. 338, similar efforts with respect to other substantive are unlikely to result in a significant price increase 350 (2011). statutes.

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arbitration. In these individual disputes, D. The Bureau Finds That the company may choose an individual as companies will always incur defense Monitoring Proposal Is in the Public an arbitrator who conducts the costs and oftentimes settlement costs. Interest and for the Protection of arbitration according to his or her own While some companies may have to pay Consumers rules), arbitration agreements may fees to the arbitration administrators The class proposal would not prohibit contain provisions that could harm that they would not have to pay in covered entities from continuing to consumers, or the use of arbitration to court, the empirical evidence indicates include arbitration agreements in resolve consumer disputes may evolve that the absolute number of cases in consumer financial contracts generally; in other ways that the Bureau cannot which these fees are incurred is low providers would still be able to include foresee, particularly were the class proposal to be adopted. For these (and that the total fees in any one case them in consumer contracts and invoke reasons, the Bureau preliminarily finds are also low).436 Moreover, the costs of them to compel arbitration in court cases not filed in court as class actions. that the proposed rule requiring the up front fees would be offset against submission of arbitral documents would potential savings from arbitration’s In addition, the class proposal would not foreclose the possibility of class be in the public interest and for the streamlined discovery and other protection of consumers. processes, which some stakeholders arbitration so long as the consumer have argued are a substantial benefit to chooses arbitration as the forum in Overview of the Monitoring Proposal which he or she pursues the class all parties. Thus, the Bureau does not The Bureau is neither proposing to claims and the applicable arbitration see why the costs of resolving a few restrict the use of arbitration agreements agreement does not prohibit class with respect to individual arbitrations cases in arbitration, even if somewhat arbitration. Thus, the Bureau separately nor proposing to prescribe specific greater than resolving these cases in considers whether the other methods or standards for adjudicating litigation, would alone cause companies requirement of its proposal—that individual arbitrations. The Bureau is to withdraw an option that they often providers submit certain arbitral records instead proposing a system that would assert benefits both themselves and to the Bureau (proposed § 1040.4(b)), the allow it and, potentially the public, to consumers. monitoring proposal)—would be in the review certain arbitration materials. The public interest and for the protection of Nor is the Bureau persuaded that if Bureau expects that its proposed consumers. providers eliminated their arbitration requirements would bring greater agreements that doing so would affect As explained in Part VI.A, the evidence before the Bureau is transparency to the arbitration process their incentives to resolve disputes and allow for the Bureau and, informally. As previously noted, the inconclusive as to the relative efficacy and fairness of individual arbitration potentially, the public to monitor how Bureau recognizes that when an compared to individual litigation. Thus, arbitration evolves. individual consumer complains about a Specifically, the Bureau is proposing the Bureau is not proposing to prohibit a regime that would require providers to particular charge or other action, it is arbitration agreements entirely. The often in the financial institution’s Bureau remains concerned, however, submit five types of documents with interest to preserve the customer that the potential for consumer harm in respect to any individual arbitration relationship by providing the individual the use of arbitration agreements in the case (see proposed § 1040.4(b)(1)): (1) with a response explaining that charge resolution of individual disputes the initial claim (whether filed by a and, in some cases, a full or partial remains. Among these concerns is that consumer or by the provider) and any refund or reversal of the charge or arbitrations could be administered by counterclaim; (2) the pre-dispute action. That incentive would not be biased administrators (as was alleged in arbitration agreement filed with the affected by the elimination of arbitration the case of NAF), that harmful arbitrator or arbitration administrator; agreements. The Bureau is skeptical that arbitration provisions could be (3) the award, if any, issued by the the risk of individual; litigation is a enforced, or that individual arbitrations arbitrator or arbitration administrator; (4) any communications from the significant driver of companies’ could otherwise be conducted in an arbitrator or arbitration administrator decisions to resolve disputes informally unfair manner. with whom the claim was filed relating given how infrequently individual cases The Study showed that, in the to a refusal to administer or dismissal of are filed either in court or arbitration, markets covered by the Study, an a claim due to the provider’s failure to and the Bureau is also skeptical that if overwhelming majority of arbitration agreements specify AAA or JAMS as an pay required fees; and (5) any providers were subject to court litigation communications related to a but not arbitration that would administrator (or both) and both administrators have created consumer determination that an arbitration substantially change their assessment of arbitration protocols that contain agreement does not comply with the the risk and hence their willingness to procedural and substantive safeguards administrator’s fairness principles. provide an informal resolution. designed to ensure a fair process.437 Under the monitoring proposal, the Thus, the Bureau does not While the Bureau believes that these Bureau would publish on its Web site preliminarily find that individual safeguards currently apply to the vast the materials it receives in some form, dispute resolution (whether formal or majority of consumer finance with appropriate redaction or informal) is an adequate substitute for arbitrations that do occur, this could aggregation as warranted. group litigation that can provide many change. Administrators may change the The Bureau Believes That the consumers relief in a single proceeding. safeguards in ways that could harm Monitoring Proposal Would Have The Bureau seeks comments on its consumers, companies may (and Several Positive Outcomes for preliminary findings discussed above currently do) select other arbitrators or Consumers and the Public arbitration administrators that adopt that the class proposal would be in the different standards of conduct or The Bureau preliminarily finds that public interest and for the protection of operate with no standards at all (e.g., a the monitoring proposal would have consumers. several positive outcomes that, taken 437 Id., section 2 at 34–40; see generally id., into consideration with other relevant 436 See Study, supra note 2, section 5 at 75–76. section 4. factors including costs, would be in the

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public interest and for the protection of Bureau’s publication of materials it the monitoring proposal, the Bureau consumers. receives may deter some unfair would be better able to know whether First, the monitoring proposal would individual arbitrations because arbitral decisions are applying the laws be for the protection of consumers providers would have an interest in consistently on an ongoing basis and because it would allow the Bureau (and protecting their reputations and they whether any consumer protection issues if submissions are published, the themselves may be wary to retain an arise in those cases that warrant further public) to better understand arbitrations arbitrator or arbitration administrator action by the Bureau. that occur now and in the future and to that proceeds in an unfair manner. Second, by allowing the Bureau ensure that consumers’ rights are being Beyond shedding light on the access to documents about the conduct protected. The materials the Bureau operation of the arbitration system writ of arbitrations, the Bureau would be proposes to collect—similar to the AAA large, the proposed collection of able to learn of and assess consumer materials the Bureau reviewed in the documents also would enhance the allegations that providers have violated Study—would allow the Bureau to Bureau’s ability to monitor consumer the law and, more generally, determine continue to monitor how arbitrations finance markets for risks to consumers. whether arbitrations proceed in a fair and arbitration agreements evolve, and For example, the collection of claims and efficient manner. The Bureau allow it to see whether they evolve in and awards would provide the Bureau believes that creating a system of ways that harm consumers. with additional information about the accountability is an important part of The documents the Bureau proposes types of potential violations of any dispute resolution system. By to collect would provide the Bureau consumer finance or other laws alleged creating a mechanism through which with different insights. For example, in arbitration and whether any the Bureau can monitor whether the collection of arbitration claims would particular providers are facing repeat system is being abused, the Bureau can provide transparency regarding the claims or have engaged in potentially further the public interest in types of claims consumers and illegal practices. At the same time, the maintaining a functioning, fair, and providers are bringing to arbitration. collection of arbitration agreements and efficient arbitration system. Collecting claims would allow the correspondence regarding non-payment Third, the Bureau preliminarily finds Bureau to monitor the raw number of of fees or non-compliance with fairness that the monitoring proposal would be arbitrations, which has fluctuated over standards would enable the Bureau to in the public interest to the extent that time, from at least tens of thousands of identify providers that may have the Bureau publishes the materials it provider-filed arbitration claims per adopted one-sided agreements in an collects because publication would year before mid-2009, to just hundreds attempt to avoid liability altogether by further the Bureau’s goal of per year in the AAA set reviewed by the discouraging a consumer from seeking transparency in the financial markets. Bureau.438 Rapid changes in the number resolution of a claim in arbitration. The Bureau believes that publishing of claims might signal a return to large- Second, the monitoring proposal claims would provide transparency by scale debt collection arbitrations by would be for the protection of revealing to the public the types of companies and potential consumer consumers because it would allow the claims filed in arbitration and whether protection issues, as had occurred in the Bureau to take action against providers consumers or providers are filing the past with NAF (discussed above in Part that are engaging in potentially illegal claims. Publishing awards would II.C). actions that impede consumers’ ability provide transparency by revealing how The proposed collection of awards to bring claims against their providers. different arbitrators decide cases and would provide insights into the types of For example, if the Bureau became signaling to attorneys for consumers and claims that reach the point of aware that a particular company was providers which sorts of cases favor and adjudication and the way in which routinely not paying arbitration fees, it do not favor consumers, thereby arbitrators resolve these claims. could take action against that company potentially facilitating better pre- Collection of arbitration agreements in or refer its conduct to another regulator. arbitration case assessment and conjunction with the claims (and The Bureau intends to draw upon all of resolution of more disputes by informal awards) would allow the Bureau to its statutorily authorized tools to means.440 Publication may also help monitor the impact that particular address conduct that harms consumers develop a more general understanding clauses in arbitration agreements have that may occur in the future in among consumers of the facts and law on consumers and providers, the connection with providers’ use of at issue in consumer financial resolution of those claims, and how arbitration agreements. arbitrations. arbitration agreements evolve. Finally, The Bureau also preliminarily finds Further, consumers, public collection of correspondence regarding that the monitoring proposal would be enforcement agencies, and attorneys for non-payment of fees and non- in the public interest for all of the consumers and providers would be able compliance with due process principles reasons set forth above as to why it to review the records and identify would allow the Bureau insight into would be for the protection of whether and to what extent providers consumers and for the following 440 The Bureau already publishes certain fail to meet the arbitral administrators’ additional reasons. narratives and outcomes data concerning consumer complaints submitted with the Bureau. The Bureau standards. Those consumers that may be First, it would allow the Bureau to has explained that it publishes this material harmed by these providers’ non- better evaluate whether the Federal because it ‘‘believes that greater transparency of payment of fees or failure to adhere to consumer finance laws are being information does tend to improve customer service fairness principles would also benefit by enforced consistently. The public and identify patterns in the treatment of consumers, leading to stronger compliance mechanisms and having those instances reported to the interest analysis is informed by one of customer service. . . . In addition, disclosure of Bureau for potential further action. The the purposes of the Bureau, which is to consumer narratives will provide companies with Bureau believes that it is possible that ‘‘enforce Federal consumer financial greater insight into issues and challenges occurring the increased transparency arising from law consistently.’’ 439 Through the across their markets, which can supplement their own company-specific perspectives and lend more the monitoring proposal and the window into arbitrations provided by insight into appropriate practices.’’ Bureau of Consumer Fin. Prot., Disclosure of Consumer 438 See, e.g., Preliminary Results, supra note 2 at 439 See generally Dodd-Frank section 1021(b) Complaint Narrative Data, 80 FR 15572, 15576 60–62. (setting forth the Bureau’s purposes). (Mar. 24, 2015).

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trends that warrant further action However, the Bureau does not believe Part V, Dodd-Frank section 1022(b)(1) including, for example, when firms do that this concern would materialize authorizes the Bureau to prescribe rules not pay fees or violate administrators’ because the proposal would require the and issue orders and guidance, as may fairness rules. These groups routinely redaction of information that identifies be necessary or appropriate to enable use public databases, such as online consumers. the Bureau to administer and carry out court records, decision databases, and With respect to providers, the Bureau the purposes and objectives of the government complaint databases (e.g., does not believe that they should be Federal consumer financial laws, and to the Bureau’s complaint database, able to maintain secrecy around their prevent evasions thereof. Section various states’ arbitration disclosure disputes with customers (insofar as the 1022(c)(4) authorizes the Bureau to requirements, and the FTC’s Sentinel Bureau’s Consumer Response function monitor for risks to consumers in the database) today in conducting their publishes the names of providers). offering or provision of consumer work. Making awards public may also Furthermore, the Bureau notes that financial products or services, including generate public confidence in the expectations of privacy are reduced to developments in markets for such arbitrators selected for a specific case as the extent arbitration awards and other products or services. Dodd-Frank well as the arbitration system, at least documents containing parties’ names section 1028(b) states that the Bureau, for administrators whose awards tend to and other information are filed with a by regulation, may prohibit or impose demonstrate fairness and impartiality. court, such as in an effort to enforce an conditions or limitations on the use of In these ways, the monitoring award. Relatedly, the Bureau notes that an agreement between a covered person proposal would improve the ability of a AAA, which is the largest administrator and a consumer for a consumer broad range of stakeholders to of consumer arbitrations, maintains financial product or service providing understand whether markets for consumer rules that permit it to publish for arbitration of any future dispute consumer financial products and consumer awards, and thus providers between the parties, if the Bureau finds services are operating in a fair and are already on notice that arbitrations that such a prohibition or imposition of transparent manner. they are involved in might become conditions or limitations is in the public The Bureau believes that the public.442 interest and for the protection of compliance burden on providers of the The Bureau seeks comment on all consumers. Section 1028(b) further monitoring proposal would be aspects of its determination that the states that the findings in such rule shall sufficiently low that, especially given monitoring proposal would be in the be consistent with the study conducted the benefits of the proposal, it would public interest and for the protection of under Dodd-Frank section 1028(a). not be a significant factor weighing consumers. The Bureau also seeks against the proposal being in the public 1(b) Purpose 441 comment on whether consumers should interest. As discussed in greater be able to opt-out of the Bureau’s As part of its authority under Dodd- detail in the Section 1022(b)(2) Analysis publication of documents related to the Frank section 1028(b), the Bureau may below, the Bureau expects that, unless arbitrations in which they participate. prohibit or impose conditions or the use of arbitration changes limitations on the use of pre-dispute dramatically, the number of arbitrations VII. Section-by-Section Analysis arbitration agreements if the Bureau subject to this part of the monitoring The Bureau is proposing to create 12 finds that they are ‘‘in the public proposal would remain low. Most CFR part 1040, which would set forth interest and for the protection of providers would have no obligations regulations regarding arbitration consumers.’’ Proposed § 1040.1(b) under the monitoring proposal in any agreements. Below, the Bureau explains would state that the proposed rule’s given year because most providers do each of the proposed subsections and purpose is to further these objectives. not face even one consumer arbitration commentary thereto for proposed part Dodd-Frank section 1028(b) also in a year. In any event, the burden of 1040. requires the findings in any rule issued redacting and submitting materials under section 1028(b) to be consistent would be relatively minimal. Section 1040.1 Authority, Purpose, with the Study conducted under section The Bureau has also considered and Enforcement 1028(a), which directs the Bureau to whether the monitoring proposal, in The first section of proposed part study the use of pre-dispute arbitration making claims submitted in arbitration 1040 would set forth the Bureau’s agreements in connection with the and decisions resolving those claims authority for issuing the regulation and offering or providing of consumer transparent, would somehow adversely the regulation’s purpose. financial products or services. For the impact the arbitration process. While reasons described above in Part VI the there conceivably could be other 1(a) Authority Bureau believes the preliminary negative impacts on consumers’ Proposed § 1040.1(a) would state that findings in this proposed rule are engagement in the arbitration process the Bureau is issuing this proposed rule consistent with the Study. arising from adoption of the monitoring pursuant to the authority granted to it Section 1040.2 Definitions proposal, the key potential concern thus by Dodd-Frank sections 1022(b)(1), far identified by the Bureau would be 1022(c), and 1028(b). As described in In proposed § 1040.2, the Bureau the concern that consumers would be proposes to set forth certain terms used less likely to engage in arbitration 442 AAA, Consumer Arbitration Rules (amended in the regulation that the Bureau because they feared that submission and effective Sept. 1, 2014), R–43(c) (‘‘The AAA may believes it is appropriate to define. possible publication would cause choose to publish an award rendered under these Rules; however, the names of the parties and 2(a) Class Action information about them to be divulged. witnesses will be removed from awards that are published, unless a party agrees in writing to have The substantive provisions of 441 The Bureau preliminarily finds that none of its name included in the award.’’). The AAA also proposed § 1040.4(a)(1), discussed the remaining factors that it previously identified as provides public access to arbitration demands and below, concern class actions; thus, the being relevant to the public interest analysis under awards for all class arbitrations (including party Bureau is proposing to define ‘‘class section 1028 is relevant to the analysis whether the names). See AAA, Class Arbitration Case Docket monitoring proposal would be in the public interest (last visited May 1, 2016) https://www.adr.org/aaa/ action.’’ The Bureau believes that the but seeks comment on whether it should consider faces/services/disputeresolutionservices/ term class action is broadly understood additional or different criteria. casedocket. to mean a lawsuit in which one or more

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parties seek to proceed as a Throughout the proposed rule, the promote the objectives of the Dodd- representative of other similarly situated Bureau uses the term ‘‘provider’’ to refer Frank Act. class members pursuant to Rule 23 of to the entity to which the requirements The Bureau notes that proposed the Federal Rules of Civil Procedure or in the proposed rule would apply. For § 1040.4(a)(1), discussed below, would any State process analogous to Rule 23. example, proposed § 1040.4(a)(1), apply to providers with respect to pre- This term refers to cases in which one discussed below, would prohibit dispute arbitration agreements entered or more parties seek class treatment providers from seeking to rely in any into by other persons after the regardless of when class treatment is way on a pre-dispute arbitration compliance date, even if that other sought; it should not be limited to cases agreement entered into after the person is excluded for coverage by filed initially as class actions. The compliance date set forth in proposed proposed § 1040.3(b). For further Bureau intends ‘‘State process § 1040.5(a) (‘‘compliance date’’) with discussion of this issue, see the analogous to Rule 23’’ to refer to any respect to any aspect of a class action discussion of proposed comment 4–2, State process substantially similar to the that is related to any of the consumer below. various iterations of Rule 23 since its financial products or services covered The Bureau intends the phrase ‘‘that adoption. Proposed § 1040.2(a) would by proposed § 1040.3. engages in offering or providing any of adopt this definition of class action and Proposed § 1040.2(c) would define the consumer financial products or also clarify that this rule would apply to provider as a subset of the term covered services covered by § 1040.3(a)’’ to class actions filed in State court. The person. In doing so, proposed clarify that the proposed rule would Bureau seeks comment on whether the § 1040.2(c) would clarify that the apply to providers that use a pre-dispute proposed definition of class action proposed rule’s intended coverage arbitration agreement entered into with would be appropriate. The Bureau would be within the parameters of the a consumer for the products and services enumerated in proposed further seeks comment on whether the Bureau’s authority under Dodd-Frank § 1040.3(a). The Bureau also intends this Bureau should use ‘‘State process section 1028(b). Specifically, proposed phrase to convey that, even if an entity analogous to Rule 23’’ or an alternative § 1040.2(c) would define the term would be a provider under proposed formulation that may be broader or provider to mean (1) a person as defined § 1040.2(c) because it offers or provides narrower, and what types of cases by Dodd-Frank section 1002(19) that consumer financial products or services would be captured or excluded by such engages in offering or providing any of covered by proposed § 1040.3(a), it an alternative formulation. the consumer financial products or would not be a provider with respect to services covered by proposed 2(b) Consumer products and services that it may § 1040.3(a) to the extent that the person Dodd-Frank section 1028(b) provide that are not covered by is not excluded under proposed authorizes the Bureau to issue proposed § 1040.3(a). § 1040.3(b); or (2) an affiliate of a regulations concerning pre-dispute Proposed comment 2(c)–1 would provider as defined in proposed arbitration agreements between a further clarify this issue and explain § 1040.2(c)(1) when that affiliate would covered person and a ‘‘consumer.’’ that a provider as defined in proposed be acting as a service provider to the Dodd-Frank section 1002(4) defines the § 1040.2(c) that also engages in offering provider with which the service term consumer as an individual or an or providing products or services not provider is affiliated consistent with the agent, trustee, or representative acting covered by proposed § 1040.3(a) must meaning set forth in 12 U.S.C. on behalf of an individual. Proposed comply with this part only for the 5481(6)(B). The Bureau derives this § 1040.2(b) would borrow the definition products or services that it offers or formulation from the definition of of consumer from the Dodd-Frank Act provides that are covered by proposed covered person in Dodd-Frank section and state that a consumer is an § 1040.3(a). The proposed comment 1002(6), 12 U.SC. 5481(6)(B). individual or an agent, trustee, or would clarify that, where an entity representative acting on behalf of an The definition of the term ‘‘person’’ would be a provider because it offers or individual. The Bureau seeks comment includes the phrase ‘‘or other entity.’’ provides at least one covered product or on whether the proposed definition That term readily encompasses service, it need not comply with this would be appropriate and whether it governments and government entities. part with respect to all its products and should consider other definitions of the Even if the term were ambiguous, the services; it need comply only with term consumer. Bureau believes—based on its expertise respect to those that are covered by and experience with respect to 2(c) Provider proposed § 1040.3(a). consumer financial markets—that The Bureau seeks comment on the Dodd-Frank section 1028(b) interpreting it to encompass proposed definition of provider, authorizes the Bureau to issue governments and government entities including whether proposed comment regulations concerning pre-dispute would promote the consumer 2(c)–1 clarifies the scope of the term. arbitration agreements between a protection, fair competition, and other ‘‘covered person’’ and a consumer. objectives of the Dodd-Frank Act. The 2(d) Pre-Dispute Arbitration Agreement Dodd-Frank section 1002(6) defines the Bureau also believes that the terms Proposed § 1040.2(d) would define term ‘‘covered person’’ as any person ‘‘companies ’’ or ‘‘corporations’’ under the term pre-dispute arbitration that engages in offering or providing a the definition of ‘‘person,’’ on their face, agreement as an agreement between a consumer financial product or service cover all companies and corporations, provider and a consumer providing for and any affiliate of such a person if such including government-owned or arbitration of any future dispute affiliate acts as a service provider to that -affiliated companies and corporations. between the parties. The Bureau’s person. Section 1002(19) further defines And even if those terms were proposed definition of pre-dispute person to mean an individual, ambiguous, the Bureau believes—based arbitration agreement is based on Dodd- partnership, company, corporation, on its expertise and experience with Frank section 1028(b), which authorizes association (incorporated or respect to consumer financial markets— the Bureau to regulate the use of such unincorporated), trust, estate, that interpreting them to cover agreements. cooperative organization, or other government-owned or -affiliated The Bureau believes that the meaning entity. companies and corporations would of the term arbitration is widely

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understood. As such, the Bureau is not generally would provide a list of in Dodd-Frank section 1002(5)). proposing to define it. The Bureau seeks products and services that would be However, as discussed in the Section- comment, however, on whether the term covered by the proposed rule, while by-Section Analysis of proposed arbitration should be defined, and, if so, proposed § 1040.3(b) would provide § 1040.3(b)(5), Dodd-Frank sections how and why. The Bureau further notes limited exclusions. 1027 and 1029 (codified at 12 U.S.C. that, in the proposed definition of ‘‘pre- The Bureau is proposing to cover a 5517 and 5519) exclude certain dispute arbitration agreement,’’ the variety of consumer financial products activities by certain covered persons, phrase ‘‘providing for arbitration of any and services that the Bureau believes are such as the sale of nonfinancial goods future dispute between the parties’’ in or tied to the core consumer financial or services, including automobiles, from would include agreements between markets of lending money, storing the Bureau’s rulemaking authority in providers and consumers under which, money, and moving or exchanging certain circumstances.444 if one sues the other in court, either money—all markets covered in In exercising its authority under party can invoke the arbitration significant part in the Study. These section 1028, the Bureau is proposing to agreement to require that the dispute include, for example: (1) Most types of cover consumer financial products and proceed, if at all, in arbitration instead. consumer lending (such as making services in what it believes are core Proposed comment 2(d)–1 would state secured loans or unsecured loans or markets of lending money, storing that a pre-dispute arbitration agreement issuing credit cards), activities related to money, and moving or exchanging for a consumer financial product or that consumer lending (such as money. Accordingly, the Bureau is not, service includes any agreement between providing referrals, servicing, credit at this time, proposing to cover every a provider and a consumer providing for monitoring, debt relief, and debt type of consumer financial product or arbitration of any future disputes collection services, among others, as service as defined in Dodd-Frank between the parties, regardless of its well as the purchasing or acquiring of section 1002(5), particularly those form or structure. The proposed such consumer loans), and extending outside these three core areas, though comment would provide two illustrative and brokering those automobile leases the Bureau would continue to monitor examples: (1) A standalone pre-dispute that are consumer financial products or markets for consumer financial products arbitration agreement that applies to a services; (2) storing funds or other and services both those that would and product or service; and (2) a pre-dispute monetary value for consumers (such as would not be within the proposed scope arbitration agreement that is included providing deposit accounts); and (3) and may at a later time revisit the scope within, annexed to, incorporated into, providing consumer services related to of this proposed rule. or otherwise made a part of a larger the movement or conversion of money In addition, the Bureau is proposing agreement that governs the terms of the (such as certain types of payment coverage of core product markets in a provision of a product or service. This processing activities, transmitting and way that the Bureau believes would comment would help clarify that ‘‘pre- exchanging funds, and cashing checks). facilitate compliance because several dispute arbitration agreement’’ would Proposed § 1040.3(a) would describe terms in the proposed scope provisions not be limited to a standalone the products and services in these core are derived from existing, enumerated ‘‘agreement’’ but could be a provision consumer financial markets that would consumer financial protection statutes within an agreement for a consumer be covered by part 1040. Each implemented by the Bureau. In so financial product or service. component is discussed separately doing, the Bureau expects that the The Bureau is not aware of any below in the discussion of each coverage of proposed Part 1040 would Federal regulation that defines the term subsection of proposed § 1040.3(a).443 incorporate relevant future changes, if pre-dispute arbitration agreement but The Bureau notes that both banks and any, to the enumerated consumer seeks comment on whether the nonbanks may provide these products financial protection statutes and their proposed text—which restates the and services. As discussed above in implementing regulations and to relevant statutory provision—would connection with the definition of provisions of Title X of Dodd-Frank provide sufficient guidance as to when ‘‘provider’’ in proposed § 1040.2(c) and referenced in proposed § 1040.3(a). For an arbitration agreement is ‘‘pre- below in this section and in the example, changes that the Bureau has dispute.’’ This proposed definition of Bureau’s analysis under Dodd-Frank proposed regarding the definition of an pre-dispute arbitration agreement would section 1022(b)(2), a covered person account under Regulation E would, if not include a voluntary arbitration under the Dodd-Frank Act who engages adopted, affect the scope of proposed agreement between a consumer and a in offering or providing a product or § 1040.3(a)(6). covered person after a dispute has service described in proposed Specifically, the Bureau is proposing arisen. The Bureau seeks comment on § 1040.3(a) generally would be subject to in § 1040.3(a) that proposed part 1040 whether the Bureau should define or the proposed rule, except to the extent generally would apply to pre-dispute provide additional clarification an exclusion in proposed § 1040.3(b) arbitration agreements for the products regarding when an arbitration agreement applies to that person. or services listed in proposed is ‘‘pre-dispute.’’ 1040.3(a) Covered Products and § 1040.3(a) to the extent they are Section 1040.3 Coverage Services consumer financial products or services as defined by 12 U.S.C. 5481(5). As As discussed above, Dodd-Frank As set forth above, the Bureau’s section 1028(b) authorizes the Bureau to rulemaking authority under Dodd-Frank 444 However, as also discussed in greater detail in issue regulations concerning agreements section 1028(b) generally extends to the proposed § 1040.3(b)(5), even where the person between a covered person and a use of an agreement between a covered offering or providing a consumer financial product person and a consumer for a ‘‘consumer or service may be excluded from coverage under the consumer ‘‘for a consumer financial regulation, for instance because that party is an product or service’’ providing for financial product or service’’ (as defined automobile dealer extending a loan in arbitration of any future disputes that circumstances that exempt the automobile dealer may arise. Accordingly, proposed 443 Following that discussion, an illustrative set of from the rulemaking authority of the Bureau under examples of persons providing these products and Dodd-Frank section 1029, the rule would still apply § 1040.3 would set forth the products services is included in the introduction of the to providers of other consumer financial products and services to which proposed part Section-by-Section Analysis to proposed or services (such as servicers or debt collectors) in 1040 applies. Proposed § 1040.3(a) § 1040.3(b). connection with the same loan.

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proposed comment 3(a)–1 would 1002.2(l) by ‘‘refer[ring] applicants or Bureau expects that participants in the explain, that provision generally defines prospective applicants to creditors, or consumer credit market would have a two types of consumer financial select[ing] or offer[ing] to select significant body of experience and law products and services. The first type is creditors to whom requests for credit to draw upon to understand how the any financial product or service that is may be made’’ consistent with its proposed rule would apply to them, ‘‘offered or provided for use by meaning in 12 CFR 1002.2(l); (4) which would facilitate compliance with consumers primarily for personal, acquiring, purchasing, or selling an proposed part 1040. family, or household purposes.’’ The extension of consumer credit covered by As indicated in its SBREFA Outline, second type is a financial product or proposed § 1040.3(a)(1)(i); or (5) the Bureau had originally considered service that is delivered, offered, or servicing an extension of consumer covering consumer credit under either provided in connection with the first credit covered by proposed of two statutory schemes: TILA or ECOA type of consumer financial product or § 1040.3(a)(1)(i). and their implementing regulations.448 service. Upon further consideration, however, The Bureau seeks comment on all 1040.3(a)(1)(i) and (ii) the Bureau believes that using a single aspects of its proposed approach to Proposed § 1040.3(a)(1)(i) would definition would be simpler and thus it coverage in this proposed rulemaking. cover providing any ‘‘extension of proposes to use the Regulation B Specifically, the Bureau seeks comment credit’’ that is ‘‘consumer credit’’ as definitions under ECOA because they on whether any products or services defined by Regulation B, 12 CFR are more inclusive. For example, unlike that the Bureau has proposed to cover 1002.2.446 In addition, proposed TILA and its implementation regulation should not be covered, and whether any § 1040.3(a)(1)(ii) would cover acting as a (Regulation Z, 12 CFR 1026.2(17)(i)), types of consumer financial products or ‘‘creditor’’ as defined by 12 CFR ECOA and Regulation B do not include services that it has not proposed to 1002.2(l) by ‘‘regularly participat[ing] in a blanket exclusion for credit with four cover should be covered. The Bureau a credit decision’’ consistent with its or fewer installments and no finance further seeks comment on its approach meaning in 12 CFR 1002.2(l) concerning charge. Regulation B also explicitly to referencing terms in enumerated ‘‘consumer credit’’ as defined by 12 CFR addresses participating in credit consumer financial protection statutes 1002.2(h). Collectively, the coverage decisions, and as discussed below in the and Dodd-Frank sections (and their proposed in § 1040.3(a)(1)(i) and (ii) Section-by-Section Analysis to proposed respective implementing regulations) as would reach creditors both when they § 1040.3(a)(1)(iii), loan brokering. set forth in proposed § 1040.3, and the approve consumer credit transactions The Bureau further notes that in many fact that future changes to these terms and extend credit, as well as when they circumstances, merchants, retailers, and may affect the scope of the proposed participate in decisions leading to the other sellers of nonfinancial goods or rule. denial of applications for consumer services (hereafter, merchants) may act credit. ECOA has applied to these as creditors under ECOA in extending 1040.3(a)(1) activities since its enactment in the credit to consumers. While such The Bureau believes that the proposed 1970s, and the Bureau believes that extensions of consumer credit would be rule should apply to consumer credit entities are familiar with the application covered by proposed § 1040.3(a)(1), and related activities including of ECOA to their products and services. exemptions proposed in § 1040.3(b) may collecting on consumer credit. Regulation B, which implements ECOA, exclude the merchant itself from Specifically, proposed § 1040.3(a)(1) defines credit as ‘‘the right granted by a coverage. Those exemptions are would include in the coverage of creditor to an applicant to defer discussed in detail in the corresponding proposed part 1040 consumer lending payment of a debt, incur debt and defer part of the Section-by-Section Analysis under ECOA, 15 U.S.C. 1691 et seq., as its payment, or purchase property or further below. On the other hand, if a implemented by Regulation B, 12 CFR services and defer payment therefor.’’ 12 merchant creditor were not eligible for part 1002, and activities related to that CFR 1002.2(j).447 By proposing to cover any of these proposed exemptions with lending.445 extensions of consumer credit and respect to a particular extension of In particular, proposed § 1040.3(a)(1) participation in consumer credit consumer credit, then proposed Part would cover specific consumer lending decisions already covered by ECOA as 1040 generally would apply to the activities engaged in by persons acting implemented by Regulation B, the merchant with respect to such as ‘‘creditors’’ as defined by Regulation transactions. For example, the Bureau B, along with the related activities of 446 As noted in proposed comment 3(a)(1)(i)–1, believes merchant creditors significantly acquiring, purchasing, selling, or Regulation B defines ‘‘credit’’ by reference to engaged in extending consumer credit servicing such consumer credit. persons who meet the definition of ‘‘creditor’’ in Regulation B. 12 CFR 1002.2(l). Persons who do not with a finance charge often would be Proposed § 1040.3(a)(1) breaks these 449 regularly participate in credit decisions in the ineligible for these exemptions. covered consumer financial products or ordinary course of business, for example, are not services into the following five types: (1) creditors as defined by Regulation B. Id. In 1040.3(a)(1)(iii) Providing an ‘‘extension of credit’’ that addition, by proposing to cover only credit that is Proposed § 1040.3(a)(1)(iii) would is ‘‘consumer credit’’ as defined in ‘‘consumer credit’’ under Regulation B, the Bureau is making clear that the proposed rule would not cover persons who, as their primary Regulation B, 12 CFR 1002.2; (2) acting apply to business loans. as a ‘‘creditor’’ as defined by 12 CFR 447 See also 12 CFR 1002.2(q) (Regulation B 448 SBREFA Outline at 22. 1002.2(l) by ‘‘regularly participat[ing] in provision defining the terms ‘‘extend credit’’ and 449 Certain automobile dealers may still be a credit decision’’ consistent with its ‘‘extension of credit’’ as ‘‘the granting of credit in exempt, however, under proposed § 1040.3(b)(5) any form (including, but not limited to, credit when they are extending credit with a finance meaning in 12 CFR 1002.2(l) concerning granted in addition to any existing credit or credit charge in circumstances that exclude the ‘‘consumer credit’’ as defined by 12 CFR limit; credit granted pursuant to an open-end credit automobile dealer from the Bureau’s rulemaking 1002.2(h); (3) acting, as a person’s plan; the refinancing or other renewal of credit, authority under Dodd-Frank section 1029. In primary business activity, as a including the issuance of a new credit card in place addition, certain small entities may still be exempt of an expiring credit card or in substitution for an under proposed § 1040.3(b)(5) in certain other ‘‘creditor’’ as defined by 12 CFR existing credit card; the consolidation of two or circumstances, such as those specified in Dodd- more obligations; or the continuance of existing Frank section 1027(a)(2)(D). A merchant that is a 445 The related activity of debt collection would credit without any special effort to collect at or after government or government affiliate also could be be covered by proposed § 1040.3(a)(10). maturity’’). exempt under proposed § 1040.3(b)(2).

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business activity, act as ‘‘creditors’’ as § 1040.3(a)(1)(iv) would cover acquiring, consistent with the definition of that defined by Regulation B, 12 CFR purchasing, or selling an extension of activity in the Bureau’s larger 1002.2(l), by engaging in any one or consumer credit covered by proposed participant rulemaking for the more of the following activities covered § 1040.3(a)(1)(i). In addition, proposed automobile finance market codified at by Regulation B: referring consumers to § 1040.3(a)(1)(v) would cover servicing 12 CFR 1090.108. As the Bureau other ECOA creditors, or selecting or of an extension of consumer credit explained in that rulemaking, from the offering to select such other creditors covered by proposed § 1040.3(a)(1)(i). perspective of the consumer, many from whom the consumer may obtain With regard to servicing, the Bureau is automobile leases function similarly to ECOA credit. Regulation B comment not proposing a specific definition but, financing for automobile purchase 2(l)–2 describes examples of persons proposed comment 3(a)(1)(v)–1 would transactions and have a similar impact engaged in such activities.450 Regularly note other examples where the Bureau on the consumer and his or her well- engaging in these activities generally has defined servicing: For the being.456 Accordingly, proposed makes a person a creditor under postsecondary student loan market in 12 § 1040.3(a)(2) would extend coverage to Regulation B, 12 CFR 1002.2(l). Thus CFR 1090.106 and the mortgage market brokering or extending consumer proposed § 1040.3(a)(1)(iii) would only in Regulation X, 12 CFR 1024.2(b).455 automobile leases in either of two apply to persons who are regularly The Bureau invites comment on circumstances identified in 12 CFR engaging in these activities.451 proposed § 1040.3(a)(1) and related 1090.108, each of which applies only if In addition, in this proposed rule, the proposed commentary. In particular, the the initial term of the lease is at least 90 Bureau does not generally propose to Bureau requests comment on defining days: (1) The lease is the ‘‘functional cover activities of merchants to facilitate coverage in proposed § 1040.3(a)(1) by equivalent’’ of an automobile purchase payment for the merchants’ own reference to consumer lending activities finance arrangement and is on a ‘‘non- nonfinancial goods or services.452 carried out by ‘‘creditors’’ as defined by operating basis’’ within the meaning of Accordingly, proposed § 1040.3(a)(1)(iii) Regulation B, and the activities of Dodd-Frank section 1002(15)(A)(ii); or would only apply to persons providing acquiring, purchasing, selling, and (2) the lease qualifies as a ‘‘full-payout these types of referral or selection servicing extensions of consumer credit lease and a net lease’’ within the services as their primary business.453 as defined by Regulation B. The Bureau meaning of the Bureau’s Larger Thus, as proposed comment 3(a)(1)(iii)– also seeks comment on whether this Participant rulemaking for the auto 1 would clarify, a merchant whose proposed coverage should be expanded finance market, codified at 12 CFR primary business activity consists of the or reduced or whether there are any 1001.2(a).457 The Bureau seeks comment sale of nonfinancial goods or services alternative definitions the Bureau on the coverage of consumer automobile generally would not fall into this should consider in its proposed leasing in proposed § 1040.3(a)(2). category. Proposed § 1040.3(a)(1)(iii) coverage of consumer credit would not apply, for example, to a transactions and related activities. For 1040.3(a)(3) merchant that refers the consumer to a example, the Bureau requests comment The Bureau believes that the proposed creditor to help the consumer purchase on the ‘‘primary business’’ limitation in rule should cover debt relief services, the merchant’s own nonfinancial goods proposed § 1040.3(a)(1)(iii), including such as services that offer to renegotiate, and services.454 whether the term ‘‘primary business’’ settle, or modify the terms of a should be defined and if so, how, or consumer’s debt. Proposed 1040.3(a)(1)(iv) and (v) whether a different limitation should be § 1040.3(a)(3) would include in the Proposed § 1040.3(a)(1)(iv) and (v) used, such as an exclusion for referral coverage of proposed Part 1040 would cover certain specified types of or selection activities that are incidental providing services to assist a consumer consumer financial products or services to the sale of a nonfinancial good or with debt management or debt when offered or provided with respect service. In addition, the Bureau notes settlement, modifying the terms of any to consumer credit covered by proposed that a common activity performed by extension of consumer credit covered by § 1040.3(a)(1)(i). First, proposed creditors and consumer credit servicers proposed § 1040.3(a)(3)(i), or avoiding is furnishing information to a consumer foreclosure. With the exception of the 450 Regulation B comment 2(l)–2 states: ‘‘Referrals reporting agency, an activity that is reference to an extension of consumer to creditors. For certain purposes, the term creditor credit covered by proposed includes such persons as real estate brokers, covered by the Fair Credit Reporting Act automobile dealers, home builders, and home- (FCRA), 15 U.S.C. 1681s–2. The Bureau § 1040.3(a)(3)(i), these terms derive improvement contractors who do not participate in therefore requests comment on whether directly from the definition of this credit decisions but who only accept applications such furnishing, by any person covered consumer financial product or service in and refer applicants to creditors, or select or offer to select creditors to whom credit requests can be by proposed § 1040.3(a)(1), should also 456 made.’’ be separately identified as a covered An automobile pursuant to that regulation means any self-propelled vehicle primarily used for 451 The Bureau also has proposed a more specific product or service. personal, family, or household purposes for on-road exemption for activities that are provided only 1040.3(a)(2) transportation and does not include motor homes, occasionally. See proposed § 1040.3(b)(3) and the recreational vehicles, golf carts, and motor scooters. Section-by-Section Analysis thereto. The Bureau believes the proposed 12 CFR 1090.108(a). 452 As noted above, however, the proposed rule 457 The Bureau finalized a larger participant rule often would apply to merchant creditors engaged rule should cover brokering or extending consumer automobile leases, for auto financing in 2015. Defining Larger significantly in extending consumer credit with a Participants of the Automobile Financing Market finance charge. and Defining Certain Automobile Leasing Activity 453 Transmitting or payment processing in similar 455 12 CFR 1090.106 is the Bureau’s larger as a Financial Product or Service, 80 FR 37495 (Jun. circumstances also generally would not be covered participant rule for the postsecondary student loan 30, 2015). That rule provides greater detail on the by paragraphs (a)(7) and (8) of proposed § 1040.3, servicing market. As noted in the rule, ‘‘servicing Bureau’s approach to defining extending or as discussed in the Section-by-Section Analysis of loans’’ is a ‘‘consumer financial product or service’’ brokering automobile leasing in accordance with those provisions below. pursuant to the Dodd-Frank Act. See Defining the Bureau’s authority under the Dodd-Frank Act. 454 Of course, if the merchant regularly Larger Participants of the Student Loan Servicing Id. The provision at 12 CFR 1001.2(a)(1) covers participates in a consumer credit decision as a Market, 78 FR 73383, 73385 n.25 (Dec. 6, 2013) leases of an automobile where the lease ‘‘[q]ualifies creditor under Regulation B, proposed (citing 12 U.S.C. 5481(15)(A)(i) (defining ‘‘financial as a full-payout lease and a net lease, as provided § 1040.3(a)(1)(ii) could still apply to the merchant, product or service,’’ including ‘‘extending credit by 12 CFR 23.3(a), and has an initial term of not particularly in circumstances where no exemptions and servicing loans’’) and 12 U.S.C. 5481(5) less than 90 days, as provided by 12 CFR 23.11 in proposed § 1040.4(b) apply to the merchant. (defining ‘‘consumer financial product or service’’). . . . .’’.

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Dodd-Frank section include counseling on consumer credit which would facilitate compliance with 1002(15)(A)(viii)(II).458 The Bureau that would be covered by the proposed Part 1040 as proposed.465 notes that the term debt is broader than rule, including but not limited to credit Proposed § 1040.3(a)(4) therefore the credit the Bureau proposes to cover repair services that may also be subject would apply to consumer reporting in proposed § 1040.3(a)(1)(i). As a result, to the Credit Repair Organizations Act, agencies when providing such products as explained in proposed comment 15 U.S.C. 1679, et seq. The Bureau seeks or services directly to consumers, as 3(a)(3)–1, this proposed coverage would comment on whether proposed Part well as to other types of entities that reach debt relief services for all types of 1040 also should apply to credit deliver consumer reports or information from consumer reports directly to consumer debts, whether arising from counseling services, and if so, what consumers. For example, proposed secured or unsecured consumer credit types of services should be covered. transactions, or consumer debts that do § 1040.3(a)(4) would cover not only not arise from credit transactions. 1040.3(a)(4) credit monitoring services that monitor In its SBREFA Outline, the Bureau entries on a consumer’s consumer credit considered defining debt relief coverage The Bureau believes that the proposed report on an ongoing basis, but also a more narrowly by reference to the rule should apply to providing discrete service that transmits a definition of ‘‘debt relief services’’ consumers with consumer reports and consumer report as defined by the under the FTC’s Telemarketing Sales information specific to a consumer from FCRA, a credit score, or other Rule, 16 CFR part 310.459 However, in consumer reports, such as by providing information from a consumer report further considering this approach, the credit scores and credit monitoring. directly to a consumer. Such discrete Bureau has determined that definition Specifically, proposed § 1040.3(a)(4) services may be provided at the may be too narrow, as it does not would include in the scope of proposed consumer’s request or as required by expressly cover debt relief services for part 1040 providing directly to a law, such as via a notice of adverse secured credit products, such as consumer a consumer report as defined action on a consumer credit 466 mortgages, or for debts that do not arise by the FCRA, 15 U.S.C. 1681a(d), a application, in connection with a from credit transactions, such as tax credit score, or other information risk-based pricing notice generally required under Regulation V, 12 CFR debts, or debts in other contexts specific to a consumer from such a 1022.72, when a consumer receives (ranging from the health to the utilities consumer report, except when such sectors) which may or may not arise materially less favorable material terms consumer report is provided by a user for consumer credit based on the from credit transactions, depending on covered by 15 U.S.C. 1681m solely in 460 creditor’s use of a consumer report, or the facts or circumstances. The connection with an adverse action as Bureau believes the scope of coverage in in connection with transmission of defined in 15 U.S.C. 1681a(k) with proposed § 1040.3(a)(3) would be results of reinvestigation of a dispute respect to a product or service not appropriate because, as noted, debt from a consumer reporting agency to a covered by any of paragraphs (a)(1) 467 relief services are not only focused on consumer pursuant to the FCRA. through (3) or paragraphs (a)(5) through Proposed § 1040.3(a)(4) would not, credit transactions. Moreover, debt relief 462 services provided for other types of (10) of proposed § 1040.3. however, cover users of consumer debts can affect a consumer’s credit The FCRA, enacted in 1970, defines reports who provide those reports or report because the person to whom the which types of businesses are consumer information from them to consumers debt is owed may furnish information to reporting agencies. 15 U.S.C. 1681a(f). solely in connection with adverse action a consumer reporting agency,461 and by Consumer reporting agencies are the notices with respect to a product or extension, the consumer’s access to original sources of consumer reports as service that is not otherwise covered by credit can be affected. The Bureau seeks defined by the FCRA.463 In general, the proposed § 1040.3(a). For example, a user of a consumer report providing a comment on proposed § 1040.3(a)(3), consumer reporting agencies provide consumer with a copy of their credit including whether the Bureau should consumer reports to ‘‘users’’ of these consider alternatives, and if so, which report solely in connection with an reports within the meaning of the FCRA adverse action notice taken on an alternatives. who may in turn provide the consumer Another consumer financial product application for employment would not reports or information from them to be covered by proposed § 1040.3(a)(4). or service, which is listed in Dodd- consumers.464 The consumer reporting Frank section 1002(15)(A)(viii)(I), is agencies also provide consumer reports 465 To the extent a future Bureau regulation were providing credit counseling to a directly to consumers. The Bureau to further interpret the definition of consumer consumer. Credit counseling can believes that defining this scope of report under 15 U.S.C. 1681a(d), or other terms incorporated into that definition such as a coverage by reference to a statutorily- 458 12 U.S.C. 5481(15)(A)(viii)(II). For examples of consumer reporting agency, 15 U.S.C. 1681a(f), the the types of services that fall within this proposed defined type of underlying information, definition in the implementing regulation would be coverage, see the following Bureau enforcement a consumer report, would help used, in conjunction with the statute, to define this component of coverage of this proposed rule. actions: Complaint ¶ 4, CFPB v. Meracord, LLC, No. providers better understand which types 466 3:13–cv–05871 (W.D. Wash. Oct. 3, 2013); See, e.g., 15 U.S.C. 1681j(a) (FCRA provision Complaint ¶ 4, CFPB v. Global Client Solutions, No. of products and services are covered, granting consumer right to free annual disclosure 2:14-cv-06643 (C.D. Cal. Aug. 25, 2014); Complaint from consumer credit report file); 15 U.S.C. 1681g(a) (mandating consumer reporting agency ¶¶ 8–14, CFPB v. Orion Processing, LLC, No. 1:15– 462 In its SBREFA Outline (supra note 331, at 23), provide information from the consumer’s file to the cv–23070–MGC (S.D. Cal. Aug. 17, 2015). the Bureau indicated it was considering a proposal consumer upon request); 15 U.S.C. 1681g(f) 459 SBREFA Outline supra note 331, at 22. See 16 to cover credit monitoring services. The Bureau (mandating consumer reporting agency provide CFR 310.2(o) (covering services seeking debt relief believes that it is appropriate to propose covering consumer credit score to the consumer upon for consumers from ‘‘unsecured creditors or debt not only services that provide ‘‘monitoring’’ of request); and 15 U.S.C. 1681m(a) (FCRA provision collectors’’). consumer credit report information, but also that mandating that user of consumer report to provide 460 In addition, the Bureau is concerned that provide such information on a one-off basis. That adverse action notice that includes credit score, incorporating a term from a regulation that applies is, the nature and source of the underlying among other information). in the telemarketing context only may create information is what should define this scope of 467 See, e.g., 15 U.S.C. 1681i(a)(6) (FCRA confusion, and could reduce protection for coverage, and not the frequency with which the provision mandating consumer reporting agency to consumers obtaining debt relief services from information is provided to the consumer. provide the consumer with notice of results of providers not engaged in telemarketing. 463 15 U.S.C. 1681a(d). reinvestigation of disputed information in the 461 See 15 U.S.C. 1681s–2. 464 15 U.S.C. 1681m. consumer’s credit report file).

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The Bureau invites comment on credit unions are familiar with when a new interpretation in the future, that proposed § 1040.3(a)(4), including TISA applies to accounts that they may new definition or interpretation would whether the reference to a consumer offer. Accordingly, the Bureau believes apply to the use of that term in report as defined in the FCRA is that defining the accounts the Bureau proposed § 1040.3. Here, for example, appropriate and whether the coverage of proposes cover by reference to terms in any new definition of account that proposed § 1040.3(a)(4) should be TISA, and its implementing regulations, would include prepaid products would expanded or narrowed, and, if so, how. Regulation DD and 12 CFR part 707 be incorporated into proposed In particular, the Bureau requests would facilitate compliance with § 1040.3(a)(6). comment on whether the proposed rule proposed Part 1040. The Bureau invites The Bureau notes that EFTA also also should cover products and services comment on proposed § 1040.3(a)(5), regulates preauthorized electronic fund that provide or monitor information including its reference to TISA, whether transfers (PEFTs) and store gifts cards obtained from sources other than a the Bureau should reference other and gift certificates. The Bureau has not consumer report under the FCRA, for definitions of deposit or share accounts proposed to include those activities as example as part of a broader suite of beyond those also included in proposed covered products or services under identity theft prevention services, and if § 1040.3(a)(6) discussed below, and proposed § 1040.3(a)(6). The Bureau so, which such products or services whether this portion of the proposed notes that certain gift cards and gift should be covered and why. In addition, coverage should be expanded or certificates redeemable only at a single the Bureau requests comment on narrowed, and if so, how. store or affiliated group of merchants, whether proposed § 1040.3(a)(4) should while subject to Regulation E,471 are 1040.3(a)(6) apply to a broader range of services payment devices that merchants use to undertaken by consumer reporting In addition to coverage of deposit and help consumers pay for their own goods agencies as defined by the FCRA that share accounts as defined by (or within or services, which as noted above, the may have a bearing on the ability of the meaning set forth in) TISA in Bureau is not proposing to cover except consumers to participate in the credit proposed § 1040.3(a)(5), the Bureau in limited circumstances. In addition, market and the manner in which they believes the proposed rule should cover PEFTs, while not described as a separate do so. Such activities could include other accounts as well as remittance category of coverage, generally would be conducting investigations of transfers subject to EFTA, 15 U.S.C. covered when offered as part of a information in consumer reports that is 1693 et seq. EFTA applies, for example, covered product or service. For disputed by consumers, opting to nonbank providers of accounts and to example, the Bureau understands that consumers out of information sharing, many, but not necessarily all, of the PEFTs may be offered by creditors and placing a fraud alert on a consumer’s deposit and share accounts provided by servicers of consumer credit under credit report, or placing a security freeze depository institutions. Thus, proposed proposed § 1040.3(a)(1), providers of on a consumer’s credit report. § 1040.3(a)(6) would include in the TISA or EFTA accounts or remittance Finally, the Bureau requests comment coverage for proposed part 1040 transfers under paragraphs (a)(5) or (6) on whether the use of arbitration accounts and remittance transfers of proposed § 1040.3, funds transmitting agreements by consumer reporting subject to EFTA, including its services under proposed § 1040.3(a)(7), agencies in the provision of the implementing regulation, Regulation E, payment processing under proposed products and services described above 12 CFR part 1005. EFTA, first adopted § 1040.3(a)(8), or debt collection under may have an impact on the ability of in 1978, provides a basic framework proposed § 1040.3(a)(10). consumers to pursue or participate in establishing the rights, liabilities, and The Bureau invites comment on class actions asserting claims under responsibilities of participants in proposed § 1040.3(a)(6), including the FCRA against the consumers reporting electronic fund and remittance transfer reference to accounts or remittance agencies more generally, and if so, systems and creates rules specific to transfers subject to EFTA, as whether the proposed rule should consumer asset accounts and remittance implemented by Regulation E, and mitigate those impacts, and if so, how. transfers.469 The Bureau implements whether it should be expanded or EFTA in Regulation E. The Bureau narrowed. The Bureau also seeks 1040.3(a)(5) believes that defining this coverage by comment on whether the proposed rule The Bureau believes the proposed reference to accounts and remittance should cover other types of stored value rule should apply to deposit and share transfers subject to EFTA as products and services within the accounts. Proposed § 1040.3(a)(5) would implemented by Regulation E would meaning of Dodd-Frank Act section include in the coverage of proposed Part facilitate compliance with proposed part 1002(15)(A)(v), and if so, what these 1040 accounts subject to the Truth in 1040. products and services are, why they Savings Act (TISA), 12 U.S.C. 4301 et The Bureau notes that it has should be covered, and how they should seq., and its implementing regulations, separately proposed a rule to extend the be defined. 12 CFR part 707, which applies to credit definition of ‘‘account’’ to include unions, and Regulation DD, 12 CFR part ‘‘prepaid accounts.’’ 470 As noted above, 1040.3(a)(7) 1030, which applies to depository where this proposed rule references The Bureau believes that the proposed institutions. terms from another statute or its rule should apply to transmitting or TISA created uniform disclosure implementing regulations, to the extent exchanging funds. Proposed requirements for deposit and share that term is redefined or the subject of § 1040.3(a)(7) would include in the accounts.468 For banks, the Bureau’s coverage of proposed part 1040 Regulation DD implements TISA. For 469 See 15 U.S.C. 1693(b); 12 CFR 1005.2(b) transmitting or exchanging funds, (defining ‘‘account’’) and 12 CFR 1005.30(e) credit unions, the National Credit Union (defining ‘‘remittance transfer’’). except when integral to another product Administration implements TISA in its 470 Prepaid Accounts Under the Electronic Fund or service that is not covered by own regulations codified at 12 CFR part Transfer Act (Regulation E) and the Truth in proposed § 1040.3. Dodd-Frank section 707. TISA has existed since 1991 and Lending Act (Regulation Z), 79 FR 77101 (Dec. 23, 1002(29) defines transmitting or 2014) (hereinafter Prepaid NPRM). The Bureau the Bureau believes that banks and seeks comment on whether the products that would exchanging funds broadly to include be included in Regulation E by that proposed rule 468 12 U.S.C. 4301(b). should be included in proposed § 1040.3(a)(6). 471 See 12 CFR 1005.20(a).

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receiving currency, monetary value, or initiating a credit card or proposed § 1040.3(a)(8) would not apply payment instruments from a consumer transaction for a consumer, except when to accepting instructions directly from a for purposes of exchanging or the person accepting the data or consumer to pay for a nonfinancial good transmitting by any means, including, providing the product or service or service marketed by the person who among other things, wire, facsimile, accepting the data is selling or is accepting the instructions. As a result electronic transfer, the Internet, or marketing the nonfinancial good or of this proposed exception, proposed through bill payment services or service for which the payment, credit § 1040.3(a)(8) would not reach, for business that facilitate third-party card, or charge card transaction is being example, a sales agent, such as a travel transfers. made. Proposed comment 3(a)(8)–1 agent, who accepts an instruction from For example, a business that provides would clarify that the definitions of the a consumer to pay for a nonfinancial consumers with domestic money terms credit card and charge card in good or service that is marketed by the transfers generally would be covered by Regulation Z, 12 CFR 1026.2(a)(15), agent on behalf of a third party that proposed § 1040.3(a)(7). As noted above, apply to the use of these terms in provides the nonfinancial good or however, proposed § 1040.3(a)(7) would proposed § 1040.3(a)(8). service. not apply to transmitting or exchanging The coverage of proposed funds where that activity is integral to § 1040.3(a)(8) would not include all The Bureau further notes that certain a non-covered product or service. Thus, types of payment and financial data forms of payment processing also would proposed § 1040.3(a)(7) generally would processing, but rather only those types be covered by other provisions of not apply, for example, to a real estate that involve accepting financial or proposed § 1040.3(a). For example, settlement agent, an attorney, or a trust banking data directly from the consumer proposed § 1040.3(a)(1)(v) (servicing of company or other custodian for initiating a payment, credit card, or consumer credit), § 1040.3(a)(3) (debt transmitting funds from an escrow or charge card transaction. An entity relief services), § 1040.3(a)(5) (deposit trust account that are an integral part of would be covered, for example, by and share accounts), § 1040.3(a)(6) real estate settlement services or legal providing the consumer with a mobile (consumer asset accounts and services. By contrast, a merchant who phone application (or app, for short) remittance transfers), § 1040.3(a)(7) offers a domestic money transfer service that accepts this data from the consumer (transmitting or exchanging funds), or as a stand-alone product to consumers and transmits it to a merchant, a § 1040.3(a)(10) (debt collection) could would be covered by proposed creditor, or others. An entity also would involve certain forms of payment § 1040.3(a)(7). In addition, the Bureau be covered by itself accepting the data processing, whether or not those forms believes that mobile wireless third-party from the consumer at a storefront or also would be covered by proposed billing services that engage in kiosk, by electronic means on the § 1040.3(a)(8). transmitting funds would be covered by Internet or by email, or by telephone. The Bureau seeks comment on proposed § 1040.3(a)(7), as the Bureau For example, a wireless, wireline, or proposed § 1040.3(a)(8), including on understands that such services would cable provider that allows consumers to whether it should adopt a broader, not typically be integral to the provision initiate payments to third parties narrower, or different definition of of wireless telecommunications through its billing platform would be covered payment and financial data services. covered by proposed § 1040.3(a)(8). The Bureau seeks comment on The Bureau notes that the breadth of processing and, if so, why and how it proposed § 1040.3(a)(7), including proposed § 1040.3(a)(8) would be should do so. For example, the Bureau whether the Bureau should consider limited in several ways. First, the seeks comment on whether proposed alternatives in defining these terms, and coverage of proposed § 1040.3(a)(8) § 1040.3(a)(8) should include an if so, particular definitions or changes would not include merchants, retailers, exclusion like the exclusion in proposed the Bureau should consider and why. or sellers of nonfinancial goods or § 1040.3(a)(7) for products or services For example, the Bureau seeks comment services when they are providing that are integral to another product or on whether the Bureau should define payment processing services directly service not covered by proposed the limitation on this coverage by and exclusively for purpose of initiating § 1040.3, and if so, what examples of reference to funds transmitting or payments instructions by the consumer such products or services should be exchanging that is necessary or essential to pay such persons for the purchase of, excluded and why. or to complete a commercial transaction to a non-covered product or service, 1040.3(a)(9) rather than by reference to such for, such nonfinancial goods or services. activities that are integral to the non- Those types of payment processing The Bureau believes that the proposed covered product or service. services are excluded from the type of rule should apply to cashing checks for financial product or service identified in 1040.3(a)(8) consumers as well as to associated Dodd-Frank section 1002(15)(A)(vii)(I). consumer check collection and The Bureau believes that the proposed As a result, they would not be a consumer check guaranty services. rule should cover certain types of consumer financial product or service Proposed § 1040.3(a)(9) would include payment and financial data processing. pursuant to 12 U.S.C. 5481(5), which is in the coverage of proposed Part 1040 Proposed § 1040.3(a)(8) therefore would a statutory limitation on the coverage of check cashing, check collection, or include in the coverage of proposed Part proposed § 1040.3(a). For the sake of check guaranty services, which are 1040 any product or service in which clarity, proposed § 1040.3(a)(8) would types of consumer financial product or the provider or the provider’s product or state that it would not apply to service identified in Dodd-Frank section service accepts financial or banking data accepting instructions directly from a directly from a consumer for the 1002(15)(A)(vi). The Bureau seeks consumer to pay for a nonfinancial good comment on proposed § 1040.3(a)(9), purpose of initiating a payment by a or service sold by the person who is including on whether the Bureau should consumer via a payment instrument as accepting the instructions. In addition, defined 15 U.S.C. 5481(18) 472 or consider alternatives in defining this scope of coverage, and if so, particular money order, traveler’s check, electronic 472 Dodd-Frank section 1002(18) defines a instrument, or other instrument, payment of funds, definitions or changes the Bureau ‘‘payment instrument’’ as ‘‘a check, draft, warrant, or monetary value (other than currency).’’ should consider and why.

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1040.3(a)(10) covered by proposed § 1040.3(a)(1)(i), an other words, although hospitals, The Bureau believes that the proposed affiliate of such person, or a person doctors, and other service providers rule should apply to debt collection acting on behalf of such person or extending incidental ECOA consumer activities arising from products covered affiliate; and (3) a debt collector as credit would not be subject to the by paragraphs (a)(1) through (9) of defined by the FDCPA, 15 U.S.C. requirements of § 1040.4 to the extent 1692a(6). The coverage of each of these proposed § 1040.3(b)(5) would exclude proposed § 1040.3. Dodd-Frank section types of entities engaged in debt them from coverage because the Bureau 1002(15)(A)(x) identifies debt collection collection is discussed separately below. lacks authority over them under Dodd- as a type of consumer financial product Frank section 1027 or they would be or service that is separate from, but 1040.3(a)(10)(i) and (ii) excluded under another provision of related to, other types of consumer Proposed § 1040.3(a)(10)(i) would proposed § 1040.3(b), an acquirer or financial products or services. In the apply to collection by a person offering purchaser of such consumer credit proposed rule, the Bureau is similarly or providing the covered product or generally would be subject to proposed proposing to include a separate service giving rise to the debt being § 1040.4.476 provision specifying the coverage of collected, an affiliate of such person,474 The Bureau believes that many activities relating to debt collection in or a person acting on behalf of such activities involved in collection of debts proposed § 1040.3(a)(10). In addition to person or affiliate. This coverage would arising from extensions of consumer collections on consumer credit as include, for example, collection by a credit would also constitute servicing defined under ECOA, other products creditor extending consumer credit. The under proposed § 1040.3(a)(1)(v). and services covered by proposed Bureau notes, however, that as with However, the Bureau is proposing the § 1040.3(a) may lead to collections; if proposed § 1040.3(a)(1) discussed coverage of collection activities by any any of these collection activities were above, proposed § 1040.3(a)(10)(i) other person acting on behalf of the not separately covered, collectors in would not extend coverage to collection provider or affiliate in § 1040.3(a)(10)(i) these cases could seek to invoke directly by a merchant of debt arising and (ii) to confirm that collection arbitration agreements. Yet the Study from credit it extends for the purchase activity by a such other persons would showed that FDCPA class actions were of its nonfinancial goods or services in be covered even when such other the most common type of class actions circumstances where the merchant is persons do not meet the definition of a filed across six significant markets and exempt under proposed § 1040.3(b). debt collector under the FDCPA (see that debt collection class settlements Similarly, collection directly by proposed § 1040.3(a)(10)(iii) discussed were by far the most common type of governments or government affiliates on below) because they are not collecting class action settlement in all of credit they extend would be exempt in on an account obtained in default.477 By consumer finance,473 which in turn the circumstances described in proposing coverage of debt collection by suggests that debt collection is an proposed § 1040.3(b). such other persons, the Bureau also activity in which it is especially In addition, proposed seeks to confirm that collection activity important to allow for private § 1040.3(a)(10)(ii) would cover would be covered even in contexts in enforcement, including class actions, to collection activities by an acquirer or which industry may sometimes guarantee the consumer protections purchaser of an extension of consumer differentiate between the terms afforded by the FDCPA, among other credit covered by proposed servicing and debt collection. For applicable laws. Moreover, particularly § 1040.3(a)(1), an affiliate of such example, in some contexts ‘‘servicing’’ in light of the fact that collectors often person, or a person acting on behalf of may be used in the industry to refer to bring suit against consumers and the such person or affiliate. This coverage history discussed above in Part II of would reach such persons even when the client or customer to defer the payment of a bill, numerous claims being filed by debt proposed § 1040.3(b) would exclude the this deferral of debt is credit for purposes of the collectors against consumers in an original creditor from coverage. For regulation, even though there is no finance charge arbitral forum where there were serious example, such collection activities by and no agreement for payment in installments.’’). 476 The Bureau also explained in its Debt fairness concerns, the Bureau believes acquirers or purchasers would be Collection Larger Participant Rulemaking, in that application of the proposed rule to covered even when the original creditor, analyzing what type of transactions are ‘‘credit’’ collection activities may be one of the such as a government or merchant, under the Dodd-Frank Act, that ‘‘[i]n some most important components of the rule. would be excluded from coverage in situations, a medical provider may grant the right circumstances described in proposed to defer payment after the medical service is Specifically, proposed § 1040.3(a)(10) rendered. In those circumstances, the transaction would apply the requirements of § 1040.3(b). As a result, collection by an might involve an extension of credit.’’ Defining proposed Part 1040 to collecting debt acquirer or purchaser of an extension of Larger Participants of the Consumer Debt Collection that arises from any of the consumer merchant consumer credit covered by Market, 77 FR 65775, 65779 (Oct. 31, 2012). Other Regulation B, such as medical credit, regulatory guidance in the past has indicated that financial products or services covered ‘‘a health care provider is a creditor [under ECOA] by any of paragraphs (a)(1) through (9) would be covered by proposed if it regularly bills patients after the completion of of proposed § 1040.3. For clarity, § 1040.3(a)(10)(ii), even in services, including for the remainder of medical proposed § 1040.3(a)(10) would identify circumstances where proposed fees not reimbursed by insurance. Similarly, health care providers who regularly allow patients to set the specific types of entities that the § 1040.3(b)(5) would exclude the 475 up payment plans after services have been rendered Bureau understands typically are medical creditor from coverage. In are creditors.’’ See Steven Toporoff, The ‘‘Red engaged in collecting these debts: (1) A Flags’’ Rule: What Health Care Providers Need to person offering or providing the product 474 As proposed comment 3(a)(10)–2 would Know, Modern Medicine Network (Jan. 11, 2010) clarify, Dodd-Frank section 1002(1) defines the term (commentary by attorney at FTC), available at or service giving rise to the debt being affiliate as ‘‘any person that controls, is controlled http://www.modernmedicine.com/modern- collected, an affiliate of such person, or by, or is under common control with another medicine/news/modernmedicine/modern-medicine- a person acting on behalf of such person person.’’ 12 U.S.C. 5481(1). feature-articles/red-flags-rule-what-healthcare- (last or affiliate; (2) a purchaser or acquirer 475 ECOA credit includes incidental credit visited May 1, 2016). The Bureau is not interpreting pursuant to Regulation B and the commentary ECOA or Regulation B here. of an extension of consumer credit specifically notes that hospitals and doctors can 477 See 15 U.S.C. 1692a(6)(F)(iii) (defining a debt provide such incidental credit. See 12 CFR collector to exclude a person collecting on an 473 Study, supra note 2, section 6 at 19 and 1002.3(c), comment 1 (‘‘If a service provider (such account ‘‘not in default at the time it was section 8 at 12. as a hospital, doctor, lawyer, or merchant) allows obtained’’).

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activities involving seeking and has substantial experience with existing language in that pre-dispute arbitration processing payments on a debt from a contours of coverage under the FDCPA agreement.480 consumer who is not in default, while and ECOA. As discussed above, Proposed comment 3(a)(10)–1 would ‘‘collections’’ may sometimes be used by proposed § 1040.3(a)(10)(iv) would further clarify that collecting debt by industry to refer to post-default apply proposed Part 1040 to purchasers persons listed in § 1040.3(a)(1) would be activities.478 Both types of collection of consumer credit extended by persons covered with respect to the consumer activity would be covered under the over whom the Bureau lacks authority financial products or services identified proposed rule. under Dodd-Frank section 1027 or 1029 in those provisions, but not for other 1040.3(a)(10)(iii) or who are otherwise exempt under types of credit or debt they may collect, proposed § 1040.3(b). Similarly, such as business credit. As discussed above, some debt proposed § 1040.3(a)(10)(iii) would The Bureau seeks comment on its collection activities are carried out by proposed debt collection coverage. For persons hired by the owner of a debt to apply to FDCPA debt collectors when collecting on this type of credit as well example, the Bureau requests comment collect the debt. The FDCPA generally on whether furnishing information to a as other debts arising from products or considers such persons to be debt consumer reporting agency covered by services covered by proposed collectors subject to its statutory the FCRA, 15 U.S.C. 1681s–2, by any § 1040.3(a)(1) through (9) provided by requirements and prohibitions designed person covered by proposed to deter abusive practices. Allegations of persons over whom the Bureau lacks § 1040.3(a)(10) should also be separately violation of the FDCPA by debt authority under Dodd-Frank section identified as a covered product or collectors also were among the most 1027 or 1029 or who are otherwise service. The Bureau also seeks comment common type of consumer claim exempt under proposed § 1040.3(b) . on whether there are any persons who identified in the Study, whether in class The Bureau recognizes that FDCPA neither provide a product or service actions, individual arbitration, or debt collectors do not typically become covered by any of paragraphs (a)(1) individual litigation. Proposed party to agreements with consumers for through (9) of proposed § 1040.3 nor are § 1040.3(a)(10)(iii) therefore would the provision of debt collection services; an FDCPA debt collector nonetheless include in the coverage of proposed part they instead collect on debt incurred engage in debt collection on such 1040 collecting debt by a debt collector pursuant to contracts between products or services, and if so, whether as defined by the FDCPA, 15 U.S.C. consumers and creditors or other proposed § 1040.3(a)(10) should be 1692a(6),479 when the debt arises from providers. There are, however, a number expanded to cover such persons, and if any consumer financial products and of ways in which the proposed rule so, why and how. Similarly, the Bureau services described in proposed would regulate or otherwise affect the requests comment on whether debt § 1040.3(a)(1) through (9). conduct of debt collectors. First, to the collectors as defined in the FDCPA As discussed above, the Bureau would include anyone not already believes it is important to cover extent that the debt collector is collecting on a debt arising from an covered by § 1040.3(a)(1)(i) and (ii), and collection on all of the consumer if not, whether the proposed rule should financial products and services covered extension of consumer credit covered by proposed § 1040.3(a)(1), any pre-dispute simply clarify that debt collectors as by the rule, since all of these products defined in the FDCPA are covered under can generate fees that, if not paid, that arbitration agreement for that product or service that is entered into after the date proposed § 1040.3(a)(1)(i) and (ii), as lead to collection activities by debt applicable, rather than separately stating set forth in proposed § 1040.5(a) already collectors as defined in the FDCPA. Of their coverage under proposed would be required under proposed course, one of the most common types § 1040.3(a)(10)(iii). of debt collected by FDCPA debt § 1040.4(a)(2) to contain a provision that collectors arises from consumer credit expressly prohibits anyone, including 1040.3(b) Exclusions From Coverage transactions. Accordingly, proposed the debt collector, from invoking it in Proposed § 1040.3(b) would identify § 1040.3(a)(10)(iii) would extend response to a class action. Second, the set of conditions under which coverage, for example, to collection by independent of the above-described certain persons would be excluded from a third-party FDCPA debt collector contractual restriction, under proposed the coverage of proposed part 1040 acting on behalf of the persons § 1040.4(a)(1), discussed below, the debt when providing a specified product or extending credit who are ECOA collector would be prohibited from service covered by proposed § 1040.3(a). creditors and thus subject to proposed invoking a pre-dispute arbitration The Bureau further notes that certain § 1040.3(a)(1)(i) or their successors and agreement in a class action dispute additional limitations are inherent in assigns who are subject to proposed concerning such collection activities. If proposed § 1040.3(a). These limitations § 1040.3(a)(1)(iv). The Bureau believes a pre-dispute arbitration agreement is arise not only from the terms chosen for that proposed § 1040.3(a)(10)’s the basis for an individual arbitration proposed § 1040.3(a) in general, but also references to these existing regulatory filed by or against the debt collector from the fact that in a number of places regimes would facilitate compliance, related to its collection activities that proposed § 1040.3(a) references terms since the Bureau expects that industry are covered by the proposal, then the from other enumerated consumer debt collector also would be required to financial protection statutes and their 478 See FTC, The Structure and Practices of the submit to the Bureau the records implementing regulations. For example, Debt Buying Industry, at n.57 (2013) (‘‘Creditors consider consumers who are late in paying as being specified in proposed § 1040.4(b). a transaction is ‘‘credit’’ as defined by ‘delinquent’ on their debts. Creditors may continue Finally, to the extent that a collector Regulation B implementing ECOA only to collect on delinquent debts, but after a period of becomes party to a contract with if there is a ‘‘right’’ to defer payment.481 time creditors consider consumers to be in ‘default’ individual consumers in the course of These limitations would be on their debts.’’). incorporated into the coverage of 479 To the extent a future Bureau regulation were settling debts, such as a payment plan to implement the definition of debt collector under agreement, and that contract includes a 15 U.S.C. 1692a(6), the definition in the pre-dispute arbitration agreement, then 480 See proposed comment 4–1. implementing regulation would be used, in proposed § 1040.4(a)(2) would require 481 See Regulation B comment 2(j)–1 (‘‘Under conjunction with the statute, to define this Regulation B, a transaction is credit if there is a component of coverage of this proposed rule. the collector to include the prescribed right to defer payment of a debt . . . .’’).

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proposed part 1040, regardless of example, that such a regulation, if authorize FINRA rules, authorized the whether they are explicitly mentioned adopted, could overlap with the original version of this rule in 1992.486 in the text of the regulation or the Bureau’s proposed rule here, which The Bureau also notes that claims in commentary of the proposed rule. would apply to postsecondary FINRA arbitration between customers As discussed above, if an exclusion in education institutions that are and broker-dealers are filed with proposed § 1040.3(b) does not apply to significantly engaged in provide FINRA,487 which is overseen by the a person that offers or provides a financing directly to consumers with a SEC, and all awards between customers product or service described in finance charge.483 and broker-dealers under FINRA rules proposed § 1040.3(a), that person would must be made public.488 Proposed meet the definition of a provider in 1040.3(b)(1) comment 3(b)(1)–1 would clarify that proposed § 1040.2(c) and would be Proposed § 1040.3(b)(1) would § 1040.3(b)(1)’s reference to rules subject to the proposed rule. Even if an exclude from the coverage of proposed authorized by the SEC would include exclusion in proposed § 1040.3(b) part 1040 broker-dealers to the extent those promulgated by FINRA and applies person offering or providing a they are providing any products and approved by the SEC, as described product or service, however, that person services covered by proposed above, in order that products and may still be covered by part 1040 when § 1040.3(a) that are also subject to services covered by those FINRA rules providing a different product or service specified rules promulgated or would be excluded from the coverage of described in proposed § 1040.3(a) if an authorized by the SEC prohibiting the proposed part 1040. exemption in proposed § 1040.3(b) does use of pre-dispute arbitration The Bureau invites comment on not apply to that product or service. agreements in class litigation and proposed § 1040.3(b)(1) and comment For illustrative purposes, the Bureau providing for making arbitral awards 3(b)(1)–1, including whether such an notes that persons offering or providing public. The term broker-dealer generally exclusion from proposed part 1040 is consumer financial products or services refers to persons engaged in the appropriate and whether it should be covered by proposed § 1040.3(a) business of effecting securities expanded or narrowed, and if so, how. described above may include, without transactions for the account of others or In particular, the Bureau seeks comment limitation, banks, credit unions, credit buying and selling securities for their on the extent to which any other person card issuers, certain automobile lenders, own account.484 Broker-dealers may who is acting in an SEC-regulated auto title lenders, small-dollar or provide products that are described in capacity, such as an investment adviser, payday lenders, private student lenders, proposed § 1040(a). For example, may also be providing a consumer payment advance companies, other broker-dealers may extend credit to financial product or service that would installment and open-end lenders, loan allow customers to purchase securities. be subject to proposed § 1040.3.489 For originators and other entities that Securities credit is subject to ECOA as example, the Bureau seeks comment on arrange for consumer loans, providers of recognized in Regulation B, 12 CFR whether the proposed rule should certain automobile leases, loan 1002.3(b). The Bureau proposes to include an exclusion for such persons to servicers, debt settlement firms, exclude such persons from coverage to the extent they are subject to any SEC foreclosure rescue firms, certain credit the extent providing products and rule (which does not currently exist, but service/repair organizations, providers services described in proposed which the SEC could adopt in the of consumer credit reports and credit § 1040.3(a) because they are already future, for example, under Dodd-Frank scores, credit monitoring service covered by existing regulations that section 921) that is functionally providers, debt collectors, debt buyers, limit the application of pre-dispute equivalent to the proposed rule. check cashing providers, remittance arbitration agreements to class litigation The CFTC has a regulation requiring transfer providers, domestic money and provide for making arbitral awards that pre-dispute arbitration agreements in customer agreements for products transfer or currency exchange service public. and services regulated by the CFTC be providers, and certain payment As discussed above, since 1992, voluntary, such that the customer processors.482 FINRA, a self-regulatory organization receives a specified disclosure before The Bureau requests comment on the overseen by the SEC, has required pre- being asked to sign the pre-dispute exclusions proposed in § 1040.4(b), and dispute arbitration agreements adopted arbitration agreement, is not required to also on whether the proposed rule by broker-dealers to include language sign the pre-dispute arbitration should include other exclusions. For disclaiming the application of the agreement as a condition of receiving example, as discussed below in the arbitration agreement to class actions the product or service, and is only Section-by-Section Analysis to proposed filed in court.485 The SEC, which must subject to the pre-dispute arbitration § 1040.4(b), the Bureau requests agreement if he or she separately signs comment on whether the proposed rule 483 See Press Release, U.S. Dept. of Ed., U.S. should include an exclusion for certain Department of Education Takes Further Steps to Protect Students from Predatory Higher Education certified or putative class case. FINRA Rule small entities. In addition, the Bureau Institutions (Mar. 11, 2016) (describing negotiated 12204(d). requests comment on how the proposed rulemaking agenda for 2015–16 as including a 486 SEC approving release for amendments to rule should interact with potential potential regulation addressing mandatory NASD Code of Arbitration Procedure and Rules of regulations, discussed above, that may arbitration agreements used by higher education Fair Practice, Exchange Act Rel. No. 31371, 1992 institutions), available at http://www.ed.gov/news/ WL 324491 (Oct. 28, 1992). be promulgated by the U.S. Department press-releases/us-department-education-takes- 487 FINRA Rule 12302(a) (providing that claimant of Education. The Bureau notes, for further-steps-protect-students-predatory-higher- must file an initial claim with the Director of the education-institutions (last visited May 1, 2016). FINRA Office of Dispute Resolution). 482 The Bureau discusses the examples as well as 484 See 15 U.S.C. 78c(4)–(5) (defining the terms 488 FINRA Rule 12904(h) (‘‘All awards shall be other types of entities that may be covered in broker and dealer under the Securities Exchange made publicly available.’’). certain circumstances above in the Section-by- Act). 489 See Dodd-Frank section 1002(21) (defining Section Analysis to proposed § 1040.3. In addition, 485 FINRA Rule 2268(f). FINRA, formerly the person regulated by the SEC). See also Dodd-Frank as part of its broader administration of the National Association of Securities Dealers, also section 1027(i)(1) (providing that Dodd-Frank Act enumerated consumer financial protection statutes serves as an arbitral administrator for disputes Title X provisions may not be construed as altering, and Title X of the Dodd-Frank Act, the Bureau concerning broker-dealers and its rules further amending, or affecting the authority of the SEC and continues to analyze the nature of products or prohibit broker-dealers from enforcing an that the Bureau has no authority to enforce Title X services tied to virtual currencies. arbitration agreement against a member of a with respect to a person regulated by the SEC).

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it, among other requirements.490 The 1040.3(b)(2) provided directly by the Federal Bureau has considered whether to Proposed § 1040.3(b)(2) would government and its affiliates, proposed propose excluding from coverage any exclude from the coverage of proposed § 1040.3(b)(2)(i) would not exempt consumer financial products and Part 1040 governments and their nongovernmental entities that provide services covered by proposed affiliates, as defined by 12 U.S.C. covered products or services on behalf § 1040.3(a) that are subject to the CFTC 5481(1), to the extent providing of the Federal government or its 491 regulation. That regulation, however, products and services directly to affiliates, such as a student loan does not ensure consumers have access consumers in circumstances specified in servicer. Proposed comment 3(b)(2)–1 to private remedies in class actions and proposed § 1040.3(b)(2)(i) or (ii). This would reiterate this point, with respect does not provide for transparency of proposed exclusion would not apply to to the exclusions in proposed arbitral awards. The Bureau believes an entity that is neither a government § 1040.3(b)(2), and also would note that that this proposed rule can provide nor an affiliate of a government but the definition of affiliate in Dodd-Frank important consumer protections for provides services to a government or an section 1002(1) would apply to the use providers that might also be subject to affiliate of a government.495 of the term in proposed § 1040.3(b)(2). the CFTC’s regulation. The Bureau also The Bureau believes that private Proposed § 1040.3(b)(2)(ii) would believes that complying with both rules enforcement of consumer protection exclude from coverage any State, local, would not be unduly burdensome for laws, when provided for by statute, is an or tribal government, and any affiliate of any affected providers, given the limited important companion to regulation, a State, local, or tribal government, to nature of the CFTC rule. The Bureau supervision over, and enforcement the extent it is providing consumer therefore is not proposing an exemption against private providers by financial products and services covered for those persons. governments at the local, State, and by § 1040.3(a) directly to consumers Under the proposed rule, any product Federal levels. The Bureau believes, who reside in the government’s or service that is subject to both the however, that financial products and territorial jurisdiction. The Bureau Bureau’s proposed rule and the CFTC services provided by governments and believes that such governments and 492 rule would therefore need to meet their affiliates directly to consumers their affiliates are persons pursuant to the requirements of both rules. For who reside within territorial jurisdiction Dodd-Frank section 1002(19) and that a example, any pre-dispute arbitration of the governments should generally not number of such governments and their agreement would need to be both satisfy be covered by proposed part 1040 given affiliates may provide financial products the CFTC requirements to ensure the the unique position that governments and services that could otherwise be contract is voluntary and contain the are in with respect to products and covered by proposed § 1040.3(a). In provision mandated by proposed services the governments and their circumstances where proposed 493 § 1040.4(a)(2). The Bureau seeks affiliates themselves provide directly to § 1040.3(b)(2)(ii) would apply, the comment on which types of products their own constituents. Bureau believes that governments and and services might be subject to both its Specifically, proposed their affiliates are uniquely accountable proposed rule and the existing CFTC § 1040.3(b)(2)(i) would exclude from through the democratic process to rule, on the incidence of potentially- coverage any products and services consumers for products and services the classable disputes over these products covered by proposed § 1040.3(a) when governments and their affiliates provide or services, on the compatibility of its provided directly by the Federal directly to consumers who reside within proposed rule with the existing CFTC government and its affiliates. In their territorial jurisdiction. The Bureau rule, and on whether the Bureau should circumstances where proposed additionally believes that the exempt consumer financial products § 1040.3(b)(2)(i) would apply, the democratic process may compel and services that are subject to the CFTC Bureau believes that the Federal governments and their affiliates to treat rule or more broadly activities that are government and its affiliates are consumers who reside within the subject to the jurisdiction of the CFTC uniquely accountable through the government’s territorial jurisdictions under the Commodity Exchange Act.494 democratic process to consumers to fairly with respect to dispute resolution whom the Federal government and its over the products and services the 490 17 CFR 166.5. affiliates directly provide products and governments and affiliates provide 491 See SBREFA Outline supra note 331, at 23. services. The Bureau additionally directly to those consumers. For these 492 The Bureau understands that foreign currency reasons, the Bureau proposes to exempt spot transactions are not covered by the CFTC rule. believes that the democratic process See 17 CFR 166.5(a)(ii) (applying CFTC rule to may compel the Federal government from coverage of part 1040 products and ‘‘retail fore[ign ]ex[change]’’); but see 7 U.S.C. and its affiliates to treat consumers services provided directly by 2(c)(2)(B)(i)(I) (Commodity Exchange Act covering fairly with respect to dispute resolution governments and their affiliates to retail foreign exchange contracts that provide for consumers who reside within the ‘‘future delivery’’) & CFTC and SEC, Further over the products and services they Definition of ‘‘Swap,’’ ‘‘Security-Based Swap,’’ and provide directly to consumers. For these territorial jurisdiction of these ‘‘Security-Based Swap Agreement’’; Mixed Swaps; reasons, the Bureau proposes to exempt governments. Security-Based Swap Agreement Recordkeeping; from coverage of part 1040 products and By limiting this exclusion to services Final Rule, 77 FR 48208, 48256 (Aug. 13, 2012) provided ‘‘directly’’ by these services provided directly by the (‘‘The CEA generally does not confer regulatory governments and their affiliates, the jurisdiction on the CFTC with respect to spot Federal governmental and its affiliates proposal would make clear that transactions.’’). to consumers. By limiting this 493 proposed § 1040.3(b)(2)(ii) would not If a provider offers products or services that exemption to products and services are covered by the proposed rule, such as consumer exclude from the coverage of part 1040 credit, and others that are not, the provider would nongovernmental entities that provide be permitted to use contract language that is the Commodity Exchange Act.’’); see also Dodd- tailored to this circumstance. See proposed Frank section 1027(j)(1) (providing that the Bureau covered products or services on behalf § 1040.4(a)(2)(ii). shall have no authority to exercise any power to of State, local, or tribal governments or 494 See Dodd-Frank section 1002(20) (defining enforce this title with respect to a person regulated their affiliates, such as a bank that ‘‘person regulated by the [CFTC]’’ as ‘‘any person by the CFTC). issues a payroll card account for State, that is registered, or required by statute or 495 Dodd-Frank section 1002(1) defines the term regulation to be registered, with the [CFTC], but affiliate as ‘‘any person that controls, is controlled local, or tribal government employees or only to the extent that the activities of such person by, or is under common control with another a private debt collector that collects on are subject to the jurisdiction of the [CFTC] under person.’’ 12 U.S.C. 5481(1). consumer credit extended by a State,

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local, or tribal government. This examples also indicates that this cover only certain consumer financial proposed exemption also would not exemption would not apply to services products and services, and if so, which extend to State, local, or tribal provided by persons who are not products and services. governments or their affiliates providing affiliates of governments. For example, 1040.3(b)(3) products or services to consumers who so-called ‘‘public utilities’’ would not be reside outside the territorial jurisdiction exempt unless they control, are The Bureau proposes in § 1040.3(b)(3) of the government. The Bureau believes controlled by, or are under common an exemption for a person in relation to that the democratic process and its control with a government or its any product or service listed in a accountability mechanisms are not affiliates. The Bureau requests comment paragraph under proposed § 1040.3(a) generally as strong in protecting on these proposed examples, and on that the person and any affiliates consumers who do not reside in the whether other examples should be collectively offer or provide to no more territory of the government that is itself, included. than 25 consumers in the current or via a government affiliate, providing The Bureau further notes that the calendar year and that it and any products or services directly to them. proposed rule would not cover any affiliates have not provided to more For example, because such consumers government utility, or other affiliates of than 25 consumers in the preceding do not reside in the government’s governments such as schools, when calendar year.499 For example, a person territorial jurisdiction, they are not eligible for other exemptions in who, together with its affiliates, likely to be eligible to vote in elections proposed § 1040.3(b). For example, a provides a covered product or service to to select representatives in that government would be exempt when 26 or more consumers in the current government or on ballot initiatives or providing consumer credit for its own calendar year or in the previous other matters that would bind that services if the government does this calendar year would not be eligible for government or its affiliates.496 below the frequency specified in this proposed exemption and generally Accordingly, proposed comment proposed § 1040.3(b)(3), or if the credit would be required to comply with all 1040.3(b)(2)-2 would provide examples does not include a finance charge, in applicable provisions of the proposed of consumer financial products and which case the exemption in proposed rule starting with the 26th consumer to services that are offered or provided by § 1040.3(b)(5) may apply. whom the product or service is offered State, local, or tribal governments or The Bureau seeks comment on the or provided in the calendar year. their affiliates directly to consumers exclusions in proposed § 1040.3(b)(2), The Bureau believes that a threshold who reside in the government’s including on the use of the terms of the type described above (based upon territorial jurisdiction. These would ‘‘government,’’ ‘‘affiliate,’’ ‘‘resides,’’ provision of a product or service to only include the following: (1) A bank that is and ‘‘territorial jurisdiction’’ in 25 or fewer persons annually) may be an affiliate of a State government proposed § 1040.3(b)(2)(i) and (ii), and, appropriate to exclude covered products providing a student loan or deposit if clarifications are needed in general or and services from coverage when they account directly to a resident of the for specific types of governments or are not offered or provided on a regular State; and (2) a utility that is an affiliate governmental affiliates, what those basis for several reasons. First, the of a State or municipal government should be. The Bureau specifically Bureau believes that services and providing credit or payment processing solicits comment on the exclusions in products offered or provided to only 25 services directly to a consumer who proposed § 1040.3(b)(2) from tribal or fewer consumers per year are resides in the State or municipality to governments under its Policy for unlikely to cause harms that are eligible allow a consumer to purchase energy Consultation with Tribal for redress in class actions under the from an energy supplier that is not an Governments.497 The Bureau also ‘‘numerosity’’ requirement of Federal affiliate of the same State or municipal requests comment on whether a Rule 23 governing class actions or State government. Proposed comment 3(b)(2)- government affiliate created by a analogues, as discussed above in Part II. 2 would provide examples of consumer government but which does not qualify Second, when covered products or financial products and services that are as an ‘‘arm’’ of the government should services are offered or provided so offered or provided by State, local, or be covered by this proposed infrequently, the likelihood of an tribal governments or their affiliates exemption.498 In particular, the Bureau individual claim in arbitration also is directly to consumers who do not reside requests comment on whether the especially low. Therefore, the Bureau in the government’s territorial proposed exemption should be believes that applying the proposed rule jurisdiction. These would include the narrowed so that it does not apply to a to persons who engage in so little following: (1) A bank that is an affiliate government affiliate that is not an ‘‘arm’’ activity involving a covered product or of a State government providing a of the government. Finally, the Bureau service is unlikely to have a significant student loan to a student who resides in requests comment on whether the impact on consumers. Third, the Bureau another State; and (2) a tribal governments or government affiliates believes that excluding covered government affiliate providing a short- described in proposed § 1040.3(b)(2) products and services that entities offer term loan to a consumer who does not should be excluded from coverage or provide so infrequently would relieve reside in the tribal government’s entirely, and on whether the exclusions these entities of the burden of complying with the proposed rule for territorial jurisdiction and completes the as proposed should be expanded to those products and services. transaction via Internet. These examples cover additional actors or narrowed to The Bureau is aware that some of the are illustrative, and non-exhaustive. The 497 terms in statutes or their implementing use of the term ‘‘affiliated’’ in these Bureau of Consumer Fin. Prot., Policy for Consultation with Tribal Governments, (Apr. 22, regulations referenced in proposed 2013), available at http://files.consumerfinance.gov/ § 1040.3(a) have their own exclusions 496 In its SBREFA Outline (supra note 331, at 23), f/201304_cfpb_consultations.pdf. the Bureau indicated it was considering a proposal 498 See, e.g., Pele v. Pennsylvania Higher Educ. for persons who do not regularly engage to exempt governments providing certain services Assistance Authority, 628 Fed. Appx. 870, 873 (4th to consumers outside their jurisdiction. As noted Cir. 2015) (holding that student loan servicing 499 As proposed comment 3(b)(3)–1 would make here, the Bureau is concerned that democratic agency created by the state of Pennsylvania was not clarify, Dodd-Frank section 1002(1) defines the term accountability is not sufficient to ensure consumer an arm of the state and thus was not exempt from affiliate as ‘‘any person that controls, is controlled protections in those circumstances, and therefore is the coverage of the Fair Credit Reporting Act) by, or is under common control with another not proposing such an exemption. (petition for certiorari pending). person.’’ 12 U.S.C. 5481(1).

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in covered activity. Except for the are offered or provided, or incorporate and associated debt collection activities definition of remittance transfer in other elements. The Bureau also seeks by the merchants in three Regulation E subpart B, which is comment on the proposal to base the circumstances, set forth in incorporated into proposed exclusion on total activities in the subparagraphs (i), (ii), and (iii) of § 1040.3(a)(6),500 the terms referenced current and preceding calendar years. section 1027(a)(2)(B) respectively. do not specify a particular numeric Finally, the Bureau seeks comment on Subparagraph (i) relates to certain threshold.501 whether to adopt a or other circumstances where the merchant, For purposes of this rule, the Bureau transition mechanism for entities when retailer, or other seller ‘‘assigns, sells, or believes that a single uniform numerical they first cross the 25-consumer otherwise conveys’’ a debt to a third threshold may facilitate compliance and threshold. party. Subparagraph (ii) relates to reduce complexity, particularly given 1040.3(b)(4) certain circumstances where the amount that application of the proposed rule of credit extended significantly exceeds would not just affect consumers’ ability Merchants, retailers, and other sellers the value of a good or service. to bring class claims under specific of nonfinancial goods and services Subparagraph (iii), as clarified by Dodd- Federal consumer financial laws, but generally may be subject to the Frank section 1027(a)(2)(C), relates to also other types of State and Federal law proposed rule when acting as creditors certain circumstances where a merchant claims. The proposed 25-consumer as defined by Regulation B when they creditor is engaged significantly in threshold also would be generally extend consumer credit or participate in providing consumer financial products consistent with the threshold for consumer credit decisions, or when they and services and imposes a finance ‘‘regularly extend[ing] consumer credit’’ engage in collection on or sale of these charge. consumer credit accounts, unless they under 12 CFR 1026.2(a)(17)(v), which Proposed § 1040.3(b)(4) would applies certain TILA disclosure are excluded from the Bureau’s rulemaking authority under Dodd-Frank provide an exemption from coverage requirements to persons making more under Part 1040 to merchants, retailers, than 25 non-mortgage credit section 1027(a)(2). Section 1027(a)(2)(A) generally excludes these activities by a and other sellers of nonfinancial goods transactions in a year. The Bureau or services extending consumer credit as emphasizes that it is proposing this merchant, retailer, or other seller of nonfinancial goods or services to the described in section 1027(a)(2)(A)(i) uniform standard in the unique context when only the first of these three of this proposed rule, and that it expects extent that person extends credit directly to a consumer exclusively for circumstances described above is to continue to interpret thresholds the purchase of a nonfinancial good or present and the second and third of under the enumerated consumer service directly from that person. these circumstances is not present. If the financial protection statutes and their Section 1027(a)(2) also states, however, Bureau did not adopt this proposed implementing regulations according to that the general exclusion in section exemption, then merchants extending their specific language, contexts, and 1027(a)(2)(A) is limited by credit subject to ECOA by allowing purposes. The Bureau further notes that subparagraphs (B) and (C) of section consumers to defer payment for goods basing an exemption on the level of 1027(a)(2).502 As a result, in several or services—even without imposing a activity in the current and preceding circumstances described in finance charge—would themselves be calendar year is consistent with the subparagraphs (B) and (C) of section covered by the proposed rule to the threshold under 12 CFR 1027(a)(2) (outlined below), the extent they were to sell, assign, or 1026.2(a)(17)(v). proposed rule generally would apply to otherwise convey that credit account, The Bureau seeks comment on this merchants, retailers, and other sellers of when not in delinquency or default, to proposed exclusion from coverage, nonfinancial goods or services a third party consistent with Dodd- including whether the proposed providing extensions of consumer credit Frank section 1027(a)(2)(B)(i). Such sale, uniform numerical threshold for covered by proposed § 1040.3(a) that is assignment, or conveyance could occur, excluding persons who do not regularly of the type described in section for example, in certain types of engage in providing a covered product 1027(a)(2)(A) (described above). In commercial borrowing engaged in by or service is warranted and if not, what proposed § 1040.3(b)(4), the Bureau merchants, such as factoring, or alternatives should be considered. For proposes one exception to this general collateralized lines of credit under example, the Bureau seeks comment on rule, for engaging in assignment, sale, or which the merchant assigns its interest whether the threshold should be higher other conveyance of a certain type of in its receivables. However, under the or lower, determined by aggregating the consumer credit as described below. proposed exemption, such merchants number of times all covered products To explain this proposed exemption, would not be covered by Part 1040 in it is necessary to describe further the this context unless the amount of credit 500 The definition of remittance transfer in Regulation E is limited to transactions conducted by limitations on the merchant creditor they extended significantly exceeds the a remittance transfer provider in the normal course exclusion in Dodd-Frank section value of the good or service or they of its business. 12 CFR 1005.30(f)(1); see also 1027(a)(2). As noted above, there are a engage significantly in extending credit Regulation E comment 30(f)–2 (‘‘[w]hether a person number of circumstances when with a finance charge.503 Thus, unless provides remittance transfers in the normal course of business depends on the facts and merchants engaged in these activities either of those circumstances is present, circumstances’’). Regulation E further provides a are not excluded by Dodd-Frank section the proposal would not affect the cost of safe harbor whereby persons providing 100 or fewer 1027(a)(2). Section 1027(a)(2)(B) confers credit of such merchants when they are transfers in the current and prior calendar years are authority upon the Bureau generally engaged in such business borrowing deemed not to be remittance transfer providers. 12 CFR 1005.30(f)(2). Thus, the proposed rule would over such extensions of consumer credit activities. By contrast, for example, not apply to transfers provided by persons who are when the merchants are significantly not remittance transfer providers, because such 502 When the general exclusion in section engaged in extending consumer credit transfers are not ‘‘remittance transfers’’ as defined 1027(a)(2)(A) does apply, the merchant would be with a finance charge (generally covered by Regulation E. excluded by proposed § 1040.3(b)(5). As discussed by TILA and Regulation Z), however, 501 For example, the definition of creditor in below, that proposed provision would clarify that ECOA and Regulation B and debt collector in the the proposal would not apply to persons when they FDCPA refer to regular activity but do not specify are excluded from the rulemaking authority of the 503 See Dodd-Frank sections 1027(a)(2)(B)(ii) and a numeric threshold. Bureau by Dodd-Frank section 1027 or 1029. (iii); 12 U.S.C. 5517(a)(2)(B)(ii) and (iii).

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the proposed rule generally would definitions or changes the Bureau auto dealer is excluded from Bureau apply. should consider and why. rulemaking authority under Dodd-Frank Proposed § 1040.3(b)(4)(i) would thus section 1029. exclude from the coverage of proposed 1040.3(b)(5) part 1040 merchants, retailers, or other The proposed rule would not apply to Section 1040.4 Limitations on the Use sellers of nonfinancial goods or services persons to the extent they are excluded of Pre-Dispute Arbitration Agreements to the extent providing an extension of from the rulemaking authority of the Dodd-Frank section 1028(b) consumer credit covered by proposed Bureau under Dodd-Frank sections 1027 authorizes the Bureau to prohibit or § 1040.3(a)(1)(i) and described by Dodd- and 1029. For the sake of clarity, the impose conditions or limitations on the Frank section 1027(a)(2)(A)(i) in Bureau proposes to make this limitation use of an agreement between a covered connection with a credit transaction an explicit exemption in proposed person and a consumer for a consumer pursuant to Dodd-Frank section § 1040.3(b)(5). Proposed § 1040.3(b)(5) financial product or service providing 1027(a)(2)(B)(i) unless the same credit thus would clarify that Part 1040 would for arbitration of any future dispute transactions are also credit transactions not apply to a person to the extent the between the parties, if the Bureau finds pursuant to Dodd-Frank section Bureau lacks rulemaking authority over that doing so is in the public interest 1027(a)(2)(B)(ii) or (iii). Thus, a that person or a product or service and for the protection of consumers. merchant who is a creditor under offered or provided by the person under Section 1028(b) also requires that the Regulation B that is extending consumer Dodd-Frank sections 1027 and 1029 (12 findings in such rule be consistent with credit as described in Dodd-Frank U.S.C. 5517 and 5519). the Study conducted under Dodd-Frank section 1027(a)(2)(A)(i) would be However, the application of proposed section 1028(a). Section 1028(d) further eligible for this exemption with respect § 1040.4 would be limited under states that any regulation prescribed by to such consumer credit transactions proposed § 1040.3(b)(5) only to the the Bureau under section 1028(b) shall when they are sold, assigned, or extent that sections 1027 and 1029 apply to any agreement between a otherwise conveyed to a third party, if constrain the Bureau’s authority. consumer and a covered person entered the consumer credit was not extended Consistent with these restraints in into after the end of the 180-day period in an amount that significantly sections 1027 and 1029, the Bureau may beginning on the effective date of the exceeded the value of the good or have section 1028 rulemaking authority regulation.504 Pursuant to this authority service under section 1027(a)(2)(B)(ii) in certain circumstances over a person and the findings set forth in greater and did not have a finance charge under that assumes or seeks to use an detail in Part VI above, the Bureau section 1027(a)(2)(B)(iii) (or it did have arbitration agreement entered into by proposes § 1040.4, which would set a finance charge but the creditor was not another person over whom the Bureau forth the conditions or limitations that engaged significantly in that type of lacked such authority. Notably, entities the Bureau would impose on providers lending under section 1027(a)(2)(C)(i)). excluded from Bureau rulemaking that use pre-dispute arbitration Proposed § 1040.3(b)(4) would only authority under sections 1027 and 1029 agreements entered into after the exempt a merchant, retailer, or seller of may still be covered persons as defined compliance date. the nonfinancial good or service and by Dodd-Frank section 1002(6). Thus, Specifically, proposed § 1040.4 would therefore would not affect coverage of proposed § 1040.4 may apply to a contain three provisions. Proposed other persons who may conduct provider that assumes or seeks to use an § 1040.4(a)(1) would generally prohibit servicing, debt collection activities, or arbitration agreement entered into by a providers from seeking to rely in any provide covered products and services covered person over whom the Bureau way on a pre-dispute arbitration pursuant to proposed § 1040.3(a) in lacks rulemaking authority under Dodd- agreement entered into after the connection with the same extension of Frank sections 1027 and 1029 with compliance date with respect to any consumer credit. As discussed below in respect to the activity at issue. aspect of a class action that is related to For example, proposed § 1040.4 may the Section-by-Section Analysis to any of the consumer financial products apply to a provider that is a debt proposed comments 4–1 and 4–2, those or services covered by proposed collector as defined in the FDCPA providers would be subject to the § 1040.3. Proposed § 1040.4(a)(2) would collecting on debt arising from a proposed rule. require providers, upon entering into a consumer credit transaction originated Further, the exclusion in proposed pre-dispute arbitration agreement for a by a merchant, even if the merchant § 1040.3(b)(4)(ii) would apply to a product or service covered by proposed would be exempt under proposed merchant who purchases or acquires § 1040.3 after the compliance date, to § 1040.3(b)(5) because the merchant is credit extended by another merchant in include a specified plain-language excluded from Bureau rulemaking a sale, assignment, or other conveyance provision in their pre-dispute authority under Dodd-Frank section that is subject to Dodd-Frank section arbitration agreements disclaiming the 1027 for the particular extension of 1027(a)(2)(B)(i). As a result, the agreement’s applicability to class consumer credit at issue. As noted in proposed rule would not apply, for actions. And proposed § 1040.4(b) the discussion of proposed example, to a merchant who, in a would require a provider that includes § 1040.3(a)(10) above, for example, merger or acquisition transaction, a pre-dispute arbitration agreement in hospitals, doctors, and other service acquires customer accounts of another its consumer contracts to submit providers extending incidental ECOA merchant who had extended credit with specified arbitral records to the Bureau credit would not be subject to the no finance charge and not in an amount for any pre-dispute arbitration requirements of § 1040.4 to the extent that significantly exceeded the value of agreement entered into after the the Bureau lacks rulemaking authority the goods or services (i.e., credit not compliance date. subject to Dodd-Frank section over them under Dodd-Frank section Each of these three proposed 1027(a)(2)(B)(ii) or (iii)). 1027. Similarly, proposed § 1040.4 may provisions contains the phrase ‘‘entered The Bureau invites comment on the apply to a provider that is acquiring an into.’’ To aid interpretation of proposed exception in proposed § 1040.3(b)(4) automobile loan originated by an including on whether the Bureau should automobile dealer in circumstances 504 For further discussion of the compliance date, consider alternatives in defining this where the automobile dealer is exempt see the Section-by-Section Analysis to proposed exception, and if so, particular by proposed § 1040.3(b)(5) because the § 1040.5(a), below.

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§ 1040.4, the Bureau proposes to add in with proposed § 1040.4 to the extent comment 4–2 would clarify this by the official interpretations a series of they choose to add pre-dispute explaining how proposed § 1040.4 examples of what would and would not arbitration agreements to existing applies to a provider that does not itself constitute ‘‘entering into’’ a pre-dispute consumer agreements after the enter into a pre-dispute arbitration arbitration agreement. As noted above, compliance date. agreement. the term ‘‘entering into’’ appears in Proposed comments 4–1.ii would Proposed comment 4–2 would Dodd-Frank section 1028(d), which then state that examples of when a explain that pursuant to proposed states that any rule prescribed by the provider does not enter into a pre- § 1040.4(a)(1), a provider cannot rely on Bureau under section 1028(b) shall dispute arbitration agreement include, any pre-dispute arbitration agreement apply to any pre-dispute arbitration but are not limited to, two scenarios. entered into by another person after the agreement ‘‘entered into’’ after the end Proposed comment 4–1.ii.A would state effective date with respect to any aspect of the 180-day period beginning on the the first scenario—that a provider does of a class action concerning a product or rule’s effective date. The phrase not enter into a pre-dispute arbitration service covered by § 1040.3 and ‘‘entered into’’ is not defined in section agreement where it modifies, amends, or pursuant to § 1040.4(b). That comment 1028 or anywhere else in the Dodd- implements the terms of a product or would further clarify that a provider Frank Act. The Bureau interprets the service that is subject to a pre-dispute may be required to submit certain phrase ‘‘entered into’’ generally to arbitration agreement that was entered specified records related to claims filed include any circumstance in which a into before the compliance date. in arbitration pursuant to such pre- person agrees to undertake obligations However, a provider would be dispute arbitration agreements and or gains rights in an agreement. The considered to enter into a pre-dispute cross-reference comment 4(a)(2)–1 Bureau believes that this interpretation arbitration agreement where the which is discussed below. The comment best effectuates the purposes of section modification, amendment, or would go on to provide an example of 1028, is practical and clear in its implementation constitutes providing a a debt collector collecting on covered meaning, and is reasonable. new covered product or service. consumer credit that is prohibited by Proposed comment 4–1.ii.A would also Proposed comment 4–1.i would § 1040.4(a)(1) from relying on a pre- address the scenario in which a provide illustrative examples of when a dispute arbitration agreement entered provider modifies, amends, or provider enters into a pre-dispute into by the creditor with respect to a implements the terms of a pre-dispute arbitration agreement for purposes of class action even when the debt arbitration agreement itself. Proposed collector does not itself enter a pre- § 1040.4 and proposed comment 4–1.ii comment 4–1.ii.B would address the would provide illustrative examples of dispute arbitration agreement. The second scenario and would state that a Bureau seeks comment whether when a provider does not enter into a provider does not enter into a pre- pre-dispute arbitration agreement for proposed comments 4–1 and –2 are dispute arbitration agreement where it helpful in facilitating compliance, and purposes of § 1040.4. Proposed acquires or purchases a product that is comments 4–1.i.A through C would whether the Bureau should provide subject to a pre-dispute arbitration but additional or different examples. state that examples of when a provider does not become a party to that enters into a pre-dispute arbitration agreement. The Bureau believes that the 4(a) Use of Pre-Dispute Arbitration agreement include, but are not limited phrase entered into an agreement as Agreements in Class Actions to, the following three scenarios. First, used in Dodd Frank section 1028 can be For the reasons discussed more fully proposed comment 4–1.i.A would interpreted to permit application of a in Part VI and pursuant to its authority explain that a provider enters into a pre- Bureau regulation issued under the under Dodd-Frank section 1028(b), the dispute arbitration agreement where it provision to agreements modified or Bureau proposes § 1040.4(a). Proposed provides to a consumer a new product amended after the compliance date, in § 1040.4(a)(1) would require that a or service that is subject to a pre-dispute certain circumstances. However, for the provider shall not seek to rely on a pre- arbitration agreement, and the provider purposes of this proposal, the Bureau is dispute arbitration agreement entered is a party to the pre-dispute arbitration proposing to interpret the phrase more into after the compliance date with agreement. The Bureau does not narrowly, as reflected by, for example, respect to any aspect of a class action interpret this example to include new proposed comment 4–1.ii.B. The Bureau that is related to any of the consumer charges on a credit card covered by a solicits comment on whether, for the financial products or services covered pre-dispute arbitration entered into purposes of the proposal, it should by proposed § 1040.3, unless the court before the compliance date. Second, instead interpret the phrase more has ruled that the class action may not proposed comment 4–1.i.B would broadly to encompass certain proceed and any appellate review of explain that a provider enters into a pre- modifications or amendments of an that ruling has been resolved. dispute arbitration agreement where it agreement after the compliance date and Proposed § 1040.4(a)(2) would acquires or purchases a product covered what the impacts of such an generally require providers to ensure by proposed § 1040.3 that is subject to interpretation would be. that any pre-dispute arbitration a pre-dispute arbitration agreement and Proposed § 1040.4, in general, would agreements entered into after the becomes a party to that agreement, even apply to a provider regardless of compliance date contain a specified if the person selling the product is whether the provider itself entered into provision disclaiming the applicability excluded from coverage under proposed a pre-dispute arbitration agreement, as of those agreements to class action cases § 1040.3(b). Third, proposed comment long as the agreement was entered into concerning a consumer financial 4–1.i.C would explain that a provider after the compliance date.505 Proposed product or service covered by the enters into a pre-dispute arbitration proposed rule. agreement where it adds a pre-dispute 505 The Bureau believes this is consistent with The Bureau notes that proposed arbitration agreement to an existing Dodd-Frank sections 1028(b) and 1028(d), which § 1040.4(a) would permit an arbitration product or service. The Bureau authorize the Bureau to prohibit or impose conditions or limitations on the use of a pre-dispute agreement that allows for class interprets Dodd-Frank section 1028(b) to arbitration agreement between a covered person and include authority that would allow the a consumer (section 1028(b)) and state that shall covered person entered into after the compliance Bureau to require that providers comply apply to any agreement between a consumer and a date (section 1028(d)).

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arbitration, provided that a consumer aspects of costs related to small entities. in the current calendar year and to no could not be required to participate in The Bureau believes that small more than 25 consumers in the class arbitration instead of class consumer finance entities face class preceding calendar year. Consistent litigation. In other words, a pre-dispute litigation at a lower rate than entities with the Panel’s recommendation, arbitration agreement that allows a that are not small. Depository however, the Bureau solicits further consumer to choose whether to file a institutions with less than $600 million feedback on the costs of defending class class claim in court or in arbitration in assets, for example, make up the vast actions and whether those costs may would be permissible under proposed majority of depositories overall; differ or be disproportionate for small § 1040.4(a), although an arbitration however, only about one Federal class entities as compared to larger ones. agreement that permits the claim to only settlement per year with depository The Panel Report reflects a concern be filed in class arbitration would not be institutions analyzed in the Study expressed by several SERs that permissible.506 involved institutions below that preventing providers from relying on threshold. Further, the magnitude of the pre-dispute arbitration agreements in Small Business Review Panel settlements, measured by payments to class litigation would affect the small Recommendations class members, is also considerably entities’ ability to obtain insurance As discussed above, the Bureau smaller. The documented payments to coverage for class action litigation preliminarily finds that the proposed class members from all cases that defense costs, which the SERs noted rule would be in the public interest and involve smaller depository institutions was already expensive. The Panel for the protection of consumers and added together is under $2 million over recommended that the Bureau further would be consistent with the Study. the five years analyzed in the Study. assess the availability and costs of Those findings are subject to further The Bureau’s Section 1022(b)(2) insurance for small entities including revision in light of comments received, Analysis also notes several factors that impacts on insurance premiums and however. In addition, the Bureau affect how small entities in consumer deductibles and any costs related to continues to consider recommendations financial markets may respond to the pursuing unpaid claims against an made to it by the SBREFA Panel Report proposed rule in a different manner insurer, particularly whether and how as part of the SBREFA process.507 Some than larger entities. insurance covers class action defense of the broader concerns from SERs Further, despite the fact that the costs and whether exposure to class regarding whether to adopt the class Bureau is not certifying, at this time, actions would impact the cost and proposal are addressed above in Part VI, that the proposed rule would not have availability of this insurance. as well as below in Part VIII (the Section a significant economic impact on a As discussed in the Bureau’s Section 1022(b)(2) Analysis) and Part IX (the substantial number of small entities, the 1022(b)(2) Analysis, the Bureau Regulatory Flexibility Analysis). In the Bureau believes that the arguments and recognizes that, in response to the discussion that follows, the Bureau calculations outlined both in Section Bureau’s proposal, providers may make considers other recommendations 1022(b)(2) Analysis, as well as the various investments to reduce the contained in the Panel Report. arguments and calculations that follow, potential financial impacts of class As the Panel Report indicates, many strongly suggest that the proposed rule litigation. For example, providers might of the SERs expressed concern about the would indeed not have a significant opt for more comprehensive insurance impacts of limiting the use of pre- economic impact on a substantial coverage that would presumably cover dispute arbitration agreements in class number of small entities in any of the more class litigation exposure or would action litigation. Specifically, the SERs covered markets. As discussed in greater have a higher reimbursement limit. expressed concern that defending even detail in the Section 1022(b)(2) However, during the Small Business one class action litigation—including Analysis, while the expected cost per Review Panel, the SERs noted that it defense counsel fees and any provider from the Bureau’s rule is about often is not clear to them which type of settlements ultimately paid out—could $200 per year from Federal class cases, class litigation exposure a policy covers put a small entity out of business. In these costs would not be evenly nor was it clear that providers typically response to these concerns, the SBREFA distributed across small providers. In ask insurers about this sort of coverage. Panel recommended that the Bureau particular, the Bureau estimates that The SERs explained that their coverage continue to evaluate the costs to small about 25 providers per year would be is often determined on a more entities of defending class actions and involved in an additional Federal class specialized case-by-case basis that limits how such costs may differ from the settlement—a considerably higher at least small providers’ ability to plan costs to larger entities. expense than $200 per year. In addition, ahead. Larger firms may have more This proposed rule’s impacts analyses the additional Federal cases filed as sophisticated policies and more pursuant to section 1022(b)(2) of the class litigation that would end up not systematic understanding of their Dodd-Frank Act (Part VIII below) and settling on class basis (121 per year coverage, however, or they may self- section 603 of the Regulatory Flexibility according to the Bureau’s estimates) are insure. Finally, the insurance providers Act 508 (Part IX below) examines several also likely to result in a considerably might require at least some of the higher expense that $200. However, as changes to compliance discussed above 506 In its SBREFA Outline, the Bureau noted that noted in the Regulatory Flexibility as a prerequisite for coverage or for a it was considering an alternative that would have Analysis, the vast majority of the discounted premium. Consistent with given consumer financial services providers providers covered by the proposal the Panel’s recommendation, the Bureau discretion to use arbitration agreements that would not experience any of these seeks comment on whether and, if so, required that class proceedings be conducted in arbitration instead of court, provided those effects. how the rule would affect class action arbitration proceedings satisfied minimum The Bureau also notes that, under litigation defense insurance costs for standards of fairness. The Bureau has not heard proposed § 1040.3(b)(4), its proposed covered entities. from any stakeholders that this option is preferable rule would not apply to any person Some SERs rejected the Bureau’s to the class proposal. Nonetheless, the Bureau will continue to consider feedback regarding this when providing a product or service reasoning, discussed in Part VI, that the alternative. covered by § 1040.3(a) that the person potential for class action litigation 507 See supra Part IV (Post-Study Outreach). and any of its affiliates collectively encourages companies to comply with 508 5 U.S.C. 601, et seq. provide to no more than 25 consumers relevant consumer finance laws and

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deters companies from practices that arbitration agreements to reduce The Bureau could also use some other may harm consumers. The Panel exposure to class actions. standard that would apply to all recommended that the Bureau seek The SERs suggested alternatives to the providers based on, for example, the comment on whether small entities Bureau’s class proposal that, in their volume of covered products or services engage in different compliance practices view, would protect small entities from provided to consumers or revenue than large entities and that the Bureau the costs of class litigation. One such derived from such products or services. further analyze the impact of class alternative would be exempting small The Bureau could also adopt varying actions on small entities’ conduct. As entities from some, or all, of the standards based on other criteria for discussed more fully above, the Bureau proposed rule’s requirements. each covered market, but that could continues to believe that, with respect to Accordingly, the Panel recommended involve the same complexity as using both small entities and larger entities, that the Bureau evaluate the impact of the SBA size standards. Apart from the availability of class actions its class proposals on small entities and what standard the Bureau might adopt, encourages compliance with relevant consider exempting small entities from the Bureau also seeks comment on consumer finance laws and deters some requirements of the class proposal whether the Bureau would need to practices that may harm consumers. or consider delaying implementation of monitor which entities would avail Consistent with the Panel’s the rule for small entities. themselves of such an exemption and, if recommendation, the Bureau seeks At this time, the Bureau is not so, how the Bureau should do so. comment on the impact of class action proposing an exemption for small Finally, the Bureau seeks comment on exposure on providers’ compliance and entities because it believes that the whether, if it were to adopt an specifically on whether those availability of class actions protects exemption, it should monitor exempt compliance efforts might differ for consumers who do business with small entities’ reliance on arbitration smaller entities as compared to larger entities. While the Study shows that agreements in class actions, such as by ones. small entities are less likely to have requesting that such entities submit arbitration agreements than larger A few of the SERs further expressed copies of motions to compel arbitration entities,509 the Bureau is aware that both concern that the Bureau’s class proposal that they file in class action cases. large and small entities commit would expose their businesses to more Some of the SERs also suggested that, violations of consumer financial laws in class litigation which could, in turn, rather than prohibit providers from ways that harm consumers. The Bureau increase their companies’ litigation relying on pre-dispute arbitration believes that the availability of defense costs and therefore increase the agreements in class actions, the Bureau meaningful relief is important in such cost of business credit that the entities instead mandate improved disclosures cases. Further, it has considered the rely on to facilitate their operations. regarding arbitration and educate impact of its class proposals on small consumers regarding their dispute These SERs stated that they believed entities, including the concerns that their lenders would increase the resolution rights. These SERs stated that expressed by SERs about the cost of consumer education could encourage cost of business credit for their litigating class actions, and as discussed companies if their companies could no consumers to pursue individual claims in Part IX and above believes that they in small claims court or arbitration that longer rely on arbitration agreements in would be relatively modest. class actions. The Panel recommended they might otherwise abandon or be Consequently, the Bureau seeks discouraged from pursuing, thereby that the Bureau consider whether there comment on whether the Bureau should are alternative actions that the Bureau reducing the need for class action exempt small entities from some or all litigation to address consumer harms. could take that would still accomplish requirements of the proposed rule. The the Bureau’s goals of encouraging The SERs thus echoed what some other Bureau seeks comment on whether industry participants have told the increased compliance with relevant adopting a small entity exemption consumer financial laws and providing Bureau—that, rather than limit the use would advance the purposes of the of arbitration in any way, the Bureau relief to harmed consumers while not proposed rule, namely, the furtherance increasing small entities’ exposure to should advocate for arbitration and of the public interest and the protection encourage consumers to take their class action lawsuits that could increase of consumers regarding the use of pre- their cost of credit. individual claims before an arbitrator. dispute arbitration agreements in The Panel recommended that the The Bureau has analyzed the potential agreements for consumer financial impacts on small providers’ own costs Bureau consider whether, through products or services. improved disclosure requirements and of credit and the availability of other In the event the Bureau were to adopt consumer education initiatives, the alternatives, as discussed further in Part a small entity exemption, the Bureau Bureau could increase consumers’ IX (the Regulatory Flexibility Analysis). seeks comment on how to formulate awareness and understanding of their Consistent with that more extended such an exemption for all small available dispute resolution discussion and the Panel’s providers or for small providers in mechanisms and use of these recommendation, the Bureau seeks particular industries. One approach mechanisms to resolve disputes and comment on whether proposed could be to use the Small Business redress consumer harms. § 1040.4(a) would increase the cost of Administration (SBA) size standards to credit for small entities and whether The Bureau has considered the issue determine whether an entity is small, carefully and preliminarily concludes there are alternatives to proposed although that could involve complexity § 1040.4(a) that would accomplish the that better consumer understanding particularly as to entities that might through either disclosure or consumer Bureau’s objectives while mitigating any qualify in more than one category.510 potential increases to the cost of credit education would not lead to a material increase in the filing of individual for small entities. The Bureau also seeks 509 See Study, supra note 2, section 2, at 16–17. comment on whether and to what extent 510 SBA has established numerical definitions, or claims to the level necessary that would commercial lenders inquire in the ‘‘size standards,’’ for all for-profit industries. Size standards represent the largest size that a business programs. See Small Bus. Admin., Table of Small course of underwriting a loan about a (including its subsidiaries and affiliates) may be to Business Size Standards (updated Feb. 26, 2016), potential borrower’s exposure to class remain classified as a small business concern for available at https://www.sba.gov/content/small- actions or ability to rely on pre-dispute purposes of qualifying for SBA and other Federal business-size-standards.

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alleviate the need for class action entity may be unable to absorb a class 4(a)(1) General Rule litigation to remedy large-scale action award or settlement of claims In furtherance of the Bureau’s goal to consumer harms. This analysis is brought under a statute, like the TCPA, ensure that class actions are available to described further below in Part IX (the where damages are uncapped. The consumers who are harmed by Regulatory Flexibility Analysis). As Panel recommended that the Bureau providers of consumer financial described above in Part VI, consumer evaluate and seek comment on whether products and services, for the reasons financial claims often involve claims for specific features of particular causes of discussed above in Part VI and in such small amounts that they are action affect the availability of accordance with the Bureau’s authority impractical for consumers to pursue on consumer relief, the deterrent effect of under Dodd-Frank section 1028(b), the an individual basis in any forum— class actions, and consequences to small Bureau proposes § 1040.4(a)(1). litigation or arbitration. Unlike class entities arising from settlement or Proposed § 1040.4(a)(1) would require actions, which permit consumers to recovery for those causes of action. that a provider shall not rely in any way pursue their claims as a group and share The Bureau has considered, but is not on a pre-dispute arbitration agreement the costs of bringing the claim, entered into after the compliance date increased disclosure and consumer at this time proposing, an exemption to this part for particular causes of action. with respect to any aspect of a class education alone would not address this action that is related to any of the underlying economic obstacle that The Bureau believes that Congress and State legislatures, as applicable, are consumer financial products or services prevents most consumers from covered by proposed § 1040.3 including better positioned than the Bureau to obtaining relief for violations of law. to seek a stay or dismissal of particular establish the appropriate level of Further, where a provider has violated claims or the entire action, unless and damages for particular harms under the law, many consumers may be until the presiding court has ruled that unaware that they have been harmed. established statutory schemes. While the case may not proceed as a class Class actions address this problem, the Bureau recognizes the concern, action and, if that ruling may be subject because, typically, all consumers expressed by SERs, among others, that to appellate review on an interlocutory harmed by a course of conduct become particular statutes may create the basis, the time to seek such review has part of the class. In contrast, improved possibility of disproportionate damages elapsed or the review has been disclosures do not, because improved awards, the Bureau believes that resolved.514 awareness of dispute resolution options Congress and the courts are the Proposed § 1040.4(a)(1) would bar is not likely to affect a consumer’s appropriate institutions to address such providers from relying on a pre-dispute behavior where the consumer does not issues. For example, industry groups arbitration agreement entered into after know that the consumer has suffered a have lobbied, and may continue to the compliance date of the rule, as legally actionable harm. Thus, the lobby Congress and the FCC to amend described above, even if the pre-dispute Bureau believes that making class the TCPA, including its statutory arbitration agreement does not include actions available to consumers would damages scheme.512 The Bureau the provision required by § 1040.4(a)(2). result in consumers being able to pursue believes it is particularly appropriate to Examples of this scenario include where their claims on a much greater scale defer to Congress and the courts on the a provider uses preprinted agreements than would improving disclosures and TCPA, which the Bureau does not that would be temporarily excepted increasing consumer education. administer.513 The Bureau nevertheless from proposed § 1040.4(a)(2) (see Consistent with the Panel’s seeks comment on its approach to this proposed § 1040.5(b)); a debt collector recommendation, and to gather issue, including whether there are with respect to a pre-dispute arbitration additional views about this issue, the compelling reasons to exclude agreement entered into after the Bureau solicits comment on whether particular causes of action from the compliance date by a creditor that was improved disclosure or consumer proposed rule, bearing in mind that excluded from coverage under proposed education could increase consumers’ legislatures are ultimately charged with § 1040.3(b); and where a provider has understanding of dispute resolution and setting that balance. violated proposed § 1040.4(a)(2) by use of individual arbitration to resolve failing to amend its agreement to disputes and redress consumer harms $500 to $1,500 per violation, with each unsolicited include the required provision. The sufficient to obviate the need for the call or text message considered a separate violation. Section-by-Section Analysis to proposed class proposal. The Bureau also 47 U.S.C. 227(b)(3). The TCPA does not place an § 1040.3(a)(10), above, contains continues to evaluate whether it should aggregate cap on statutory damages in class actions. additional examples, pertaining to debt Consequently, statutory damages may be substantial provide additional consumer education if the same conduct applies to a large class of collection by merchants, of scenarios materials regarding dispute resolution consumers. where proposed § 1040.4(a)(1) would rights, in addition to rather than in lieu 512 See, e.g., Letter from U.S. Chamber of Com., apply even where the pre-dispute of the proposed interventions. et al., to FTC, In the Matter of Rules and arbitration agreements itself is not Regulations Implementing the Telephone Consumer Finally, the SERs expressed concern Protection Act of 1991, CG Docket No. 02–278 (Feb. required to contain the provision about exposure to class action litigation 2, 2015), available at https://www.uschamber.com/ outlined in proposed § 1040.4(a)(2). based on certain statutory causes of sites/default/files/2.2.15-_multi-association_letter_ Proposed § 1040.4(a)(1) would action that have no limit on statutory to_fcc_on_tcpa.pdf; Credit Union Nat’l Ass’n, prevent providers from relying on a pre- CUNA Sends Letter to Energy and Commerce dispute arbitration agreement in a class damages in a class action, such as the Subcommittee about TCPA Order Concerns, 511 TCPA. The SERs stated that a small CUNA.org (Nov. 17, 2015), available at http:// action unless and until the presiding www.cuna.org/Legislative-And-Regulatory- court has ruled that the case may not 511 The TCPA is a statute implemented by the Advocacy/Removing-Barriers-Blog/Removing- proceed as a class action, and, if the Federal Communications Commission that affords Barriers-Blog/CUNA-Sends-Letter-to-Energy-and- ruling may be subject to interlocutory consumers certain rights and protections related to Commerce-Subcommittee-about-TCPA-Order- telephone solicitations and the use of automated Concerns/. appellate review, the time to seek such telephone equipment, such as automatic dialing 513 The Bureau further notes that the Supreme systems. 47 U.S.C. 227. TCPA allows for actual Court this term is considering a challenge that 514 The Bureau notes that the prohibition in damages (which are awarded rarely) or statutory would limit the scope of statutory damage claims proposed § 1040.4(a)(1) would apply to providers’ damages (authorized by the statute without regard in class actions. See Spokeo, Inc. v. Robins, cert. relying on provisions in pre-dispute arbitration to the degree of harm to the plaintiff) ranging from granted, 135 S. Ct. 1892 (2015). agreements, as well as on the overall agreement.

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review has elapsed or the review has One purpose of proposed comments authority under Dodd-Frank section been resolved. For example, when a 4(a)(1)–1.iv through vi would be to 1028(b), proposed § 1040.4(a)(2) would case is filed as a putative class action prevent providers from evading generally require providers to ensure and a court has not yet ruled on a proposed § 1040.4(a)(1) by filing an that pre-dispute arbitration agreements motion to certify the class, proposed arbitration claim against a consumer contain specified provisions explaining § 1040.4(a)(1) would prohibit a motion who has already filed a claim on the that the agreements cannot be invoked to compel arbitration that relied on a same issue in a putative class action. in class proceedings. These proposed pre-dispute arbitration agreement. If the The Bureau notes, however, that requirements are discussed in greater court denies a motion for class proposed § 1040.4(a)(1) would not detail below. prohibit a provider from continuing to certification and orders the case to 4(a)(2)(i) proceed on an individual basis, and the arbitrate a claim that was filed before ruling may be subject to interlocutory the consumer filed a class action claim. Proposed § 1040.4(a)(2)(i) would state appellate review—pursuant to Rule 23(f) For example, if a provider files an that, except as permitted by proposed of the Federal Rules of Civil Procedure arbitration claim to collect a debt from § 1040.4(a)(2)(ii) and (iii) and proposed or an analogous State procedural rule— a consumer, and the consumer later files § 1040.5(b), providers shall, upon proposed § 1040.4(a)(1) would prohibit a class action claim, the arbitration of entering into a pre-dispute arbitration a motion to compel arbitration based on that claim would still be permitted to go agreement for a product or service a pre-dispute arbitration agreement until forward, although, under proposed covered by proposed § 1040.3 after the the time to seek appellate review has § 1040.4(a)(1) the provider could not use compliance date, ensure that any such elapsed or appellate review has been the pre-dispute arbitration agreement to agreement contains the following resolved. If the court denies a motion for block the class action. provision: class certification and the ruling is The Bureau seeks comment on these We agree that neither we nor anyone else either not subject to interlocutory examples and whether further will use this agreement to stop you from appellate review, the time to seek clarification regarding when this being part of a class action case in court. You review has elapsed, or the appellate provision would apply in the course of may file a class action in court or you may litigation would be helpful to providers. be a member of a class action even if you do court has determined that the case may not file it. not proceed as a class action, proposed Specifically, the Bureau seeks comment § 1040.4(a)(1) would no longer prohibit on whether the language ‘‘claim on the Requiring a provider’s arbitration a provider from relying on a pre-dispute same issue,’’ which appears in proposed agreement to contain such a provision arbitration agreement in the case. comment 4(a)(1)–1.v and vi, is would ensure that consumers, courts, sufficiently limiting and would not and other relevant third parties, Proposed comment 4(a)(1)–1 provides prevent, for example, arbitrations including potential purchasers, are a non-exhaustive list of examples involving unrelated claims to go made aware when reading the illustrating what it means for a provider forward even if they involve the same agreement that it may not be used to to ‘‘rely on a pre-dispute arbitration consumer. The Bureau also seeks prevent consumers from pursuing class agreement with respect to any aspect of comment on whether entities may seek actions concerning consumer financial a class action.’’ The proposed comment to circumvent or evade proposed products or services covered by the would provide six examples: Seeking § 1040.4(a)(1) and whether additional proposed rule. Moreover, to the extent dismissal, deferral, or stay of any aspect clarification would be needed to prevent a provider attempts to invoke a pre- of a class action (proposed comment such circumvention or evasion.515 dispute arbitration agreement, 4(a)(1)–1.i); seeking to exclude a person Proposed comment 4(a)(1)–2 would consumers could invoke this contractual or persons from a class in a class action state that, in a class action concerning provision to enforce their right to (proposed comment 4(a)(1)–1.ii); multiple products or services only some proceed in court for class claims. The objecting to or seeking a protective order of which are covered by proposed Bureau intends this provision to be intended to avoid responding to § 1040.3, the prohibition in proposed limited to class action cases that discovery in a class action (proposed § 1040.4(a)(1) applies only to claims that concern a consumer financial product or comment 4(a)(1)–1.iii); filing a claim in concern the covered products or service that would be covered by arbitration against a consumer who has services. The Bureau seeks comment on proposed § 1040.3. In addition, the filed a claim on the same issue in a class this comment and whether providers Bureau intends the phrase ‘‘neither we action (proposed comment 4(a)(1)–1.iv); need additional clarification regarding nor anyone else shall use this filing a claim in arbitration against a the application of proposed agreement’’—rather than merely ‘‘we consumer who has filed a claim on the § 1040.4(a)(1) in class actions for shall not use this agreement’’—to make same issue in a class action after the multiple products and services, only clear to consumers that the proposed trial court has denied a motion to certify some of which are covered by proposed rule would bind both the provider that the class but before an appellate court § 1040.3. initially enters into the agreement and has ruled on an interlocutory appeal of any third party that might later be that motion, if the time to seek such an 4(a)(2) Provision Required in Covered Pre-dispute Arbitration Agreements assigned the agreement or otherwise appeal has not elapsed and the appeal seek to rely on it. has not been resolved (proposed In furtherance of the Bureau’s goal to The Bureau has attempted to draft the comment 4(a)(1)–1.v); and filing a claim ensure that class actions are available to proposed contractual provision—as well in arbitration against a consumer who consumers who are harmed by as the contractual provisions in has filed a claim on the same issue in consumer financial service providers, proposed § 1040.4(a)(2)(ii) and (iii)—to a class action after the trial court has for the reasons discussed above in Part be in plain language. While the Bureau granted a motion to dismiss the claim VI and in accordance with the Bureau’s does not believe that disclosure where the court has noted that the requirements or consumer education consumer has leave to refile the claim 515 The Bureau notes that it has the authority could lead to a material increase in the under Dodd-Frank section 1022(b)(1) to, among on a class basis, if the time to refile the other things, issue orders or guidance after a rule filing of individual claims, the Bureau claim has not elapsed (proposed to prevent evasions of Federal consumer financial does believe that consumers who comment 4(a)(1)–1.vi). law. consult their contracts should be able to

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access an understandable explanation of issued by the Consumer Financial Protection in proposed § 1040.4(a)(2)(iii)(B). For their dispute resolution rights. Bureau. We agree that neither we nor anyone providers that choose to ensure that the The Bureau intends the phrase else will use this agreement to stop you being agreement is amended, the provision ‘‘contains the following provision’’ in part of a class action case in court. You may specified by proposed proposed § 1040.4(a)(2)(i) to clarify that file a class action in court or you may be a member of a class action even if you do not § 1040.4(a)(2)(iii)(A) would be as the text specified by proposed file it. This provision applies only to class follows: § 1040.4(a)(2)(i) shall be included as a action claims concerning the products or We agree that neither we nor anyone else provision of the pre-dispute arbitration services covered by that Rule. that later becomes a party to this pre-dispute agreement, as for example, the FTC’s Under proposed § 1040.4(a)(2)(ii), arbitration agreement will use it to stop you Holder in Due Course Rule also providers using one contract for from being part of a class action case in court. requires.516 Thus, providers may not— You may file a class action in court or you transactions involving both products for example—include the required may be a member of a class action even if you and services covered by proposed language as a separate notice or do not file it. § 1040.3 and products and services not consumer advisory, except in certain covered by proposed § 1040.3 would For providers that choose to provide circumstances that would be governed have the option to—but would not be consumers with a written notice, the by proposed § 1040.4(a)(2)(iii). Further, required to—use the alternative required notice provision specified by similar to how the Bureau understands provision. Where contracts cover § 1040.4(a)(2)(iii)(B) would be as the provision required by the Holder in products and services covered by follows: Due Course Rule, the Bureau intends the proposed § 1040.3 and products and We agree not to use any pre-dispute provision to create a binding legal services not covered by proposed arbitration agreement to stop you from being obligation. As a result, if a consumer or § 1040.3, the Bureau believes that the part of a class action case in court. You may attorney were unaware of proposed alternative provision would improve file a class action in court or you may be a § 1040.4(a)(1), the Bureau expects that consumer understanding because the member of a class action even if you do not the provision required by proposed file it. alternative provision would more § 1040.4(a)(2)(i) would have a accurately describe consumers’ dispute The Bureau believes that by substantially similar legal effect through resolution rights. As with proposed permitting providers to furnish a notice the operation of applicable contract law. to consumers, in lieu of amending their The Bureau seeks comment on § 1040.4(a)(2)(i), discussed above, the Bureau intends for the text to be agreements, the notice option afforded proposed § 1040.4(a)(2)(i) generally. The by proposed § 1040.4(a)(2)(iii)(B) would Bureau also seeks comment on whether included as a provision in the pre- dispute arbitration agreement and for yield consumer awareness benefits the rule should mandate that covered while reducing the burden to providers entities insert the provision into their the text to have binding legal effect. The Bureau seeks comment on for whom amendment may be pre-dispute arbitration agreements. In proposed § 1040.4(a)(2)(ii) generally. challenging or costly. Further, the addition, the Bureau seeks comment on The Bureau also seeks comment on Bureau intends the notice option to whether the provision, as drafted, is in whether it would be appropriate to ensure that consumers are adequately plain language and would be permit the use of an alternative informed even if the provider that enters understandable to consumers. The provision; whether the text of the into a pre-existing agreement lacks a Bureau further seeks comment on proposed provision would be legally permissible means for amending whether the proposed provision would understandable to consumers; whether the agreement to add the required accomplish its purpose of binding both providers should be permitted to specify provision. The Bureau notes that, the provider that forms an initial which products being provided are whether the provider elects to ensure agreement with the consumer and any covered by the Rule; and whether the that the agreement is amended, chooses future acquirers of it, as well as third Bureau should consider making the to provide the required notice, or parties that may seek to rely on it, such alternative provision mandatory, rather violates proposed § 1040.4(a)(2)(iii) by as debt collectors. than optional, in contracts for multiple failing to do either of the above, the 4(a)(2)(ii) products and services, only some of provider would still be required to Proposed § 1040.4(a)(2)(ii) would which would be covered by the comply with proposed § 1040.4(a)(1). permit providers to include in a pre- proposed rule. The Bureau seeks comment on proposed § 1040.4(a)(2)(iii). The Bureau dispute arbitration agreement covering 4(a)(2)(iii)(A) and (B) multiple products or services—only also seeks comment on whether the text some of which are covered by proposed Proposed § 1040.4(a)(2)(iii) would set of proposed § 1040.4(a)(2)(iii)(A) and (B) § 1040.3—an alternative provision in forth how to comply with proposed would be understandable to consumers. place of the one required by proposed § 1040.4(a)(2) in circumstances where a The Bureau further seeks comment on § 1040.4(a)(2)(i). Proposed provider enters into a pre-existing pre- whether 60 days would be an § 1040.4(a)(2)(ii) would require this dispute arbitration agreement that does appropriate timeframe for requiring alternative provision to contain the not contain either the provision providers to ensure that agreements are following text: required by proposed § 1040.4(a)(2)(i) or amended or provide notice, taking into the alternative permitted by proposed consideration situations where, for We are providing you with more than one § 1040.4(a)(2)(ii). Under proposed example, providers are acquiring product or service, only some of which are § 1040.4(a)(2)(iii), within 60 days of accounts. covered by the Arbitration Agreements Rule entering into the pre-dispute arbitration As discussed in the Bureau’s Section 516 This rule prohibits a person who, in the agreement, providers would be required 1022(b)(2) Analysis below, buyers of ordinary course of business, sells or leases goods or either to ensure that the agreement is medical debt would, in some cases, services to consumers from taking or receiving a amended to contain the provision need to perform due diligence to consumer credit contract that fails to contain a specified in proposed determine how this proposed rule provision specified in the regulation stating that any holder of the contract is subject to all claims § 1040.4(a)(2)(iii)(A) or provide any would apply to the debts they buy. For and defenses that the debtor could assert against the consumer to whom the agreement example, proposed § 1040.4(a)(2) would seller. 16 CFR 433.2. applies with the written notice specified require buyers of consumer credit,

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including medical credit, when they a debt buyer that acquires or purchases proposed § 1040.4(a)(3) may be enter into a pre-dispute arbitration a product covered by proposed § 1040.3 provided in any way the provider agreement to amend the agreement to and becomes a party to the pre-dispute typically communicates with the contain a provision—or send the arbitration agreement.519 Proposed consumer, including electronically, consumer a notice—stating that the debt comment 4(a)(2)–1 would clarify this provides adequate clarification to buyer would not invoke that pre-dispute distinction by stating that the providers while helping ensure that arbitration agreement in a class action. requirements of proposed § 1040.4(a)(2) consumers receive the notice. In cases that may involve incidental would not apply to a provider that does 4(b) Submission of Arbitral Records credit under ECOA, debt buyers might not enter into a pre-dispute arbitration face additional impacts from the rule agreement with a consumer. While proposed § 1040.4(a) would from additional due diligence to Proposed comment 4(a)(2)–2 would prevent providers from relying on pre- determine which acquired debts arise provide an illustrative example dispute arbitration agreements in class from credit transactions,517 or clarifying what proposed actions, it would not prohibit covered alternatively from the additional class § 1040.4(a)(2)(iii) requires when a entities from maintaining pre-dispute action exposure created from sending provider enters into a pre-dispute arbitration agreements in consumer consumer notices on debts that did not arbitration agreement that the consumer contracts generally. Providers could still arise from credit transactions (i.e., from had previously entered into with invoke such agreements to compel potential over-compliance). The Bureau another entity and does not contain the arbitration in cases not filed as class seeks comment on the extent of these provision required by proposed actions. Thus, the Bureau has separately impacts, and whether an exemption § 1040.4(a)(2)(i) or the alternative considered whether regulatory from the notice requirement in proposed permitted by proposed § 1040.4(a)(2)(ii). interventions pertaining to these § 1040.4(a)(2) would be warranted for The proposed comment would explain ‘‘individual’’ arbitrations would be in buyers of medical debt, or whether the that such a situation could arise where the public interest and for the protection proposed rule should allow a medical Bank A is B after the of consumers, as well as whether the debt buyer to send a tailored notice to compliance date, and Bank B had findings for such interventions are the consumer that does not specify entered into pre-dispute arbitration consistent with the Bureau’s Study. whether the underlying debt is covered agreements before the compliance date. For reasons discussed more fully in credit in the first instance. The proposed comment would state that Part VI and pursuant to its authority Proposed comment 4(a)(2)–1 would if, as part of the acquisition, Bank A under section 1028(b), the Bureau highlight an important difference in the acquires products of Bank B’s that are proposes § 1040.4(b), which would application of proposed § 1040.4(a)(2), subject to pre-dispute arbitration mandate the submission of certain as compared with proposed agreements (and thereby enters into arbitral records to the Bureau. Proposed § 1040.4(a)(1). Proposed § 1040.4, in such agreements), proposed § 1040.4(b)(1) would require, for any general, would apply to a provider § 1040.4(a)(2)(iii) would require Bank A pre-dispute arbitration agreement regardless of whether the provider itself to either (1) ensure the account entered into after the compliance date, entered into a pre-dispute arbitration agreements are amended to contain the providers to submit copies of specified agreement, as long as the agreement was provision required by proposed arbitration records enumerated in entered into after the compliance date. § 1040.4(a)(2)(iii)(A), or (2) deliver the proposed § 1040.4(b)(1) to the Bureau, For example, proposed § 1040.4(a)(1) notice in accordance with proposed in the form and manner specified by the would prohibit a debt collector that § 1040.4(a)(2)(iii)(B). Bureau. As with all the requirements in does not enter into a pre-dispute Proposed comment 4(a)(2)–3 would this proposed rule, compliance with this arbitration agreement from moving to state that providers that elect to deliver provision would be required beginning compel a class action case to arbitration a notice in accordance with proposed on the compliance date. The Bureau on the basis of that agreement, so long § 1040.4(a)(2)(iii) may provide the would develop, implement, and as the original creditor entered into the notice in any way the provider publicize an electronic submission pre-dispute arbitration agreement after communicates with the consumer, process that would be operational before the compliance date. Proposed including electronically. The proposed this date, were proposed § 1040.4(b) to § 1040.4(a)(2), in comparison, would comment would further explain that the be adopted. Proposed § 1040.4(b)(2) would require apply to providers only when they enter notice may be provided either as a that providers submit any record into a pre-dispute arbitration agreement standalone document or included in 518 required pursuant to proposed for a product or service. Thus, another notice that the customer § 1040.4(b)(1) within 60 days of filing by proposed § 1040.4(a)(2) would not apply receives, such as a periodic statement to the provider of any such record with the to the debt collector in the example the extent permitted by other laws and arbitration administrator and within 60 cited previously; but it would apply to regulations. The Bureau believes that days of receipt by the provider of any permitting providers a wide range of 517 such record filed or sent by someone The Bureau has previously recognized that options for furnishing the notice would requiring such determinations across an entire other than the provider, such as the accomplish the goal of consumer portfolio of collection accounts may be burdensome arbitration administrator or the for buyers of medical debt because whether such understanding while affording providers consumer. Proposed § 1040.4(b)(3) debts constitute credit will turn on facts and flexibility, thereby reducing the burden circumstances that are unique to the health care would set forth the information that context and of which the debt buyer may not be on providers. The Bureau seeks comment on providers shall redact before submitting aware. As a result, the Bureau exempted medical records to the Bureau. Proposed debt from revenue that must be counted toward proposed comments 4(a)(2)–1, –2, and larger participant status of a debt collector. See Debt –3. The Bureau also seeks comment on § 1040.4(b)(1) through (3) are discussed Collection Larger Participant Final Rule, 77 FR whether proposed comment 4(a)(2)–3’s in greater detail below. 65775, 65780 (Oct. 31, 2012). The Bureau notes that proposed explanation that the notice permitted by 518 See proposed § 1040.4(a)(2) (‘‘Upon entering § 1040.4(b) would require submission into a pre-dispute arbitration agreement for a product or service covered by proposed § 1040.3 519 See proposed comment 4–1.i (providing only of records arising from arbitrations after the date set forth in § 1040.5(a) . . .’’ examples of entering into a pre-dispute arbitration pursuant to pre-dispute arbitration (emphasis added). agreement). agreements entered into after the

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compliance date where one or more of additional studies on consumer monitor or quantify the claims that the parties is a provider and the dispute arbitration pursuant to Dodd-Frank consumers may have been deterred from concerns a product covered by the rule. section 1028(a) for the purpose of filing because of the existence of a pre- The Bureau further notes that the evaluating whether further rulemaking dispute arbitration agreement. In provision would apply to both would be in the public interest and for particular, consumer advocates and individual arbitration proceedings and the protection of consumers; improving some other stakeholders have expressed class arbitration proceedings. If its consumer education tools; or, where concern that pre-dispute arbitration providers participate in arbitrations as appropriate, undertaking enforcement or agreements discourage consumers from the result of agreements with consumers supervisory actions.521 filing claims in court or in arbitration to arbitrate that are not made until after The Bureau notes that the question of and discourage attorneys from a dispute has arisen, proposed whether the use of individual representing consumers in such § 1040.4(b) would not require arbitration in consumer finance cases is proceedings. Consumer attorneys have submission of such records. Proposed in the public interest and for the noted, for example, that arbitration does § 1040.4(b) further would provide that protection of consumers is discrete from not allow them to file cases that can copies of records should be submitted, the question of whether some covered develop the law (because the outcomes to ensure that providers do not submit persons are engaged in unfair, are usually private and do not have original documents. deceptive, or abusive acts or practices in precedential effect) and, thus, they are As noted above, the Bureau proposes connection with their individual wary of expending limited resources.522 § 1040.4(b) pursuant to its authority arbitration agreements. The Bureau The Bureau acknowledges that its under Dodd-Frank sections 1028(b) and intends to use its supervisory and proposal would provide limited insight 1022(c)(4). Section 1022(c)(4) authorizes enforcement authority as appropriate to into how and whether arbitration the Bureau to ‘‘gather information from evaluate whether specific practices in agreements discourage filing of claims, time to time regarding the organization, relation to arbitration—such as the use but it nonetheless seeks comment on business conduct, markets, and of particular provisions in agreements or whether the proposed collection of the activities of covered persons and service particular arbitral procedures— arbitral records specified in proposed providers.’’ The Bureau notes that it is constitute unfair, deceptive, or abusive § 1040.4(b) would permit the Bureau— not proposing to obtain information in acts and practices pursuant to Dodd- and the public, to the extent the Bureau this rule for the purpose of gathering or Frank section 1031. The Bureau will pay publishes the records (discussed analyzing the personally identifiable particular attention to any provisions in below)—to monitor arbitration and financial information of consumers. arbitration agreements that might detect practices that harm consumers. Proposed § 1040.4(b)(3) would require function in such a way as to deprive Proposed comment 4(b)–1 would providers to redact information that consumers of their ability to pursue clarify that, to comply with the 520 could directly identify consumers. their claims in arbitration. For example, submission requirement in proposed As discussed above, the Bureau is not in certain circumstances, an agreement § 1040.4(b), providers would not be now proposing to ban pre-dispute that requires consumers to resolve required to submit the records arbitration agreements entirely, nor is it disputes, in arbitration or otherwise, in themselves if they arranged for another proposing to prohibit specific practices person in a particular location person, such as an arbitration in individual arbitration other than the regardless of the consumer’s location administrator or an agent of the use of pre-dispute arbitration could violate Dodd-Frank section 1031. provider, to submit the records on the agreements to block class actions. In certain circumstances, requiring providers’ behalf. Proposed comment Nevertheless, the Bureau will continue consumers to resolve claims in a 4(b)–1 would also make clear, however, to evaluate the impacts on consumers of systematically biased forum or before a that the obligation to comply with arbitration and arbitration agreements. biased decision-maker, in a forum that proposed § 1040.4(b) nevertheless To the extent necessary and appropriate, does not exist, or in a forum that does remains on the provider and, thus, the the Bureau intends to draw upon all of not have a procedure to allow a provider must ensure that such person its statutorily authorized tools to consumer to bring a claim could submits the records in accordance with address conduct that harms consumers. similarly violate Dodd-Frank section proposed § 1040.4(b). This proposed Specifically, the Bureau will continually 1031. The Bureau is actively monitoring comment anticipates that arbitration analyze all available sources of the use of such practices that may administrators may choose to provide information, including, if the proposed function in such a way as to deprive rule is finalized, information submitted this service to providers. consumers of their ability to pursue The Bureau seeks comment on its to the Bureau pursuant to proposed their claims in arbitration and will approach to arbitration agreements § 1040.4(b) as well as other information continue to evaluate them in accordance generally and all aspects of its proposal garnered through its supervisory, with all applicable law and the full to collect certain arbitral records. The enforcement, and market monitoring extent of the Bureau’s authorities. Bureau further seeks comment on activities. The Bureau will draw upon Consumer advocates and some other known and potential consumer harms in these sources to assess trends pertinent stakeholders have expressed concern individual arbitration. In particular, it to its statutory mission, including trends that a proposal under consideration in the use of arbitration agreements; the seeks comment on whether it should similar to proposed § 1040.4(b) that the consider fewer, more, or different terms of such agreements; and the Bureau described in its SBREFA Outline procedures, conduct, and results of restrictions on individual arbitration, would allow the Bureau to monitor whether it should prohibit individual arbitrations. certain arbitration trends, but not to Among other regulatory tools, the arbitration altogether and whether it has accurately assessed the harm to Bureau may consider conducting 521 The Bureau interprets section 1028 to allow it, as appropriate, to further study the use of pre- consumers that occurs when covered 520 Pursuant to Dodd-Frank section 1022(c)(4)(C), dispute arbitration agreements and, if appropriate, the Bureau may not obtain information under its to promulgate rules that would prohibit or impose 522 See, e.g., Arbitration: Is It Fair When Forced? section 1022(c)(4) authority ‘‘for the purpose of conditions or limitations on the use of a pre-dispute Hearing before the S. Comm. on the Judiciary, 112th gathering or analyzing the personally identifiable arbitration agreement or to amend any rule that it Cong. 177 (2011) (Prepared Statement of F. Paul financial information of consumers.’’ would finalize pursuant to this proposal. Bland, Senior Attorney, Public Justice), at 81–82.

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entities include pre-dispute arbitration the cost of arbitration administration to specified by the Bureau.523 Proposed agreements. As for its proposal to increase and whether it might require § 1040.4(b)(1) would list the arbitral collecting arbitral records, the Bureau companies to devote employee records that providers would be seeks comment on whether doing so resources to redacting consumers’ required to submit to the Bureau. As will further the Bureau’s stated goal of confidential information before with all the requirements in this monitoring potential harms in submission. The SERs also expressed proposed rule, compliance with this providers’ use of arbitration agreements concern about the possibility of the provision would be required for pre- as well as the underlying legal claims. Bureau publishing arbitral claims and dispute arbitration agreements entered Further, the Bureau seeks comment on awards (as was set forth in the SBREFA into after the compliance date. whether proposed comment 4(b)–1 Outline) due to perceived risks to 4(b)(1)(i) provides adequate clarification consumer privacy, impacts on their regarding the fact that the proposed rule companies’ reputation, and fear that Proposed § 1040.4(b)(1)(i) would would allow third parties to fulfill publication of data regarding claims and require, in connection with any claim companies’ obligations under proposed awards might not present a filed by or against the provider in § 1040.4(b). In addition, the Bureau representative picture of arbitration. arbitration pursuant to a pre-dispute seeks comment on its plan to make an In response to these and other arbitration agreement entered into after electronic submission process concerns raised by the SERs, the Panel the compliance date, that providers operational before the compliance date, recommended that the Bureau seek submit (A) the initial claim form and including what features of such a comment on whether the publication of any counterclaim; (B) the pre-dispute system would be useful to providers, claims and awards would present a arbitration agreement filed with the their agents, or the general public. representative picture of arbitration. The arbitrator or administrator; (C) the judgment or award, if any, issued by the Publication of Arbitral Records Panel also recommended that the Bureau continue to assess whether and arbitrator or arbitration administrator; The Bureau intends to publish arbitral by how much the proposal to require and (D) if an arbitrator or arbitration records collected pursuant to proposed submission of arbitral records would administrator refuses to administer or § 1040.4(b)(1). The Bureau is increase the costs of arbitration dismisses a claim due to the provider’s considering whether to publish such including administrative fees or covered failure to pay required filing or records individually or in the form of entities’ time. In addition, the Panel administrative fees, any communication aggregated data. Prior to publishing recommended that the Bureau consider the provider receives from the arbitrator such records, the Bureau would ensure the privacy and reputational impacts of or an arbitration administrator related to that they are redacted, or that the data publishing claims and awards for both such a refusal. is aggregated, in accordance with the businesses and consumers involved Proposed § 1040.4(b)(1)(i)(A) would applicable law, including Dodd-Frank in the dispute. The Bureau appreciates require providers to submit any initial section 1022(c)(8), which requires the the SERs’ concern about privacy risks claims filed in arbitration pursuant to a Bureau to ‘‘take steps to ensure that and has sought to mitigate these risks by pre-dispute arbitration agreement and proprietary, personal, or confidential proposing the redaction requirements in any counterclaims. By ‘‘initial claim,’’ consumer information that is protected proposed § 1040.4(b)(3), described the Bureau means the filing that from public disclosure under [the below. The Bureau understands the initiates the arbitration, such as the Freedom of Information Act or the SERs’ concerns that publishing certain initial claim form or demand for Privacy Act] . . . is not made public arbitral records could affect companies’ arbitration. The Bureau believes that under this title.’’ reputations or paint an unrepresentative collecting claims would permit the The Bureau seeks comment on the Bureau to monitor arbitrations on an publication of the records that would be picture of arbitration (for example, by publishing awards, but not settlements). ongoing basis and identify trends in required to be submitted by proposed arbitration proceedings, such as changes § 1040.4(b)(1), including whether it However, the Bureau notes that published court opinions also have this in the frequency with which claims are should limit any publication based on filed, the subject matter of the claims, consumer privacy concerns arising out effect (in that settlements are typically not public), and the Bureau is not aware and who is filing the claims. Based on of the publication of such records after the Bureau’s expertise in handling and their redaction pursuant to proposed of any distinctions specific to arbitration in this respect. The Bureau has monitoring consumer complaints as § 1040.4(b)(3) or if providers would well as monitoring private litigation, the have other confidentiality concerns. In considered several aspects of the costs of its proposed submission requirement monitoring of claims would also help addition, the Bureau seeks comment on the Bureau identify business practices whether it should publish arbitral in its Section 1022(b)(2) Analysis, below. However, the Bureau continues that harm consumers. The Bureau seeks records individually or in the form of comment on its proposal to require aggregated data. to assess each of these issues and believes public comment would assist submission of claims. The Bureau also The Bureau also seeks comment on seeks comment on whether further whether there are alternatives to the Bureau in its assessment. Consistent with the SERs’ recommendation, the clarification of the meaning of ‘‘claim,’’ publication by the Bureau—such as either in proposed § 1040.2 or in publication by other entities—that Bureau seeks comment on each of the above issues. commentary, would be helpful to would further the purposes of providers. In addition, the Bureau also publication described above. 4(b)(1) Records To Be Submitted seeks comment on whether it should Small Business Review Panel As stated above, proposed § 1040.4(b) collect the response by the opposing party, if any, in addition to the claim. During the Small Business Review would require that, for any pre-dispute arbitration agreement entered into after The Bureau further seeks comment on Panel process, the SERs expressed some whether providers would encounter concern about the indirect costs of the compliance date, providers submit a copy of the arbitration records specified requiring submission of arbitral claims 523 The Bureau anticipates that it would and awards to the Bureau, such as by proposed § 1040.4(b)(1) to the separately provide technical details pertaining to whether the requirement might cause Bureau, in the form and manner the submission process.

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other obstacles in complying with the dismisses a claim due to the provider’s arbitration fees to claim, in bad faith, proposed submission requirement and, failure to pay required filing or ongoing settlement talks to avoid the if so, what those obstacles are. administrative fees. If this occurs, disclosure to the Bureau of Proposed § 1040.4(b)(1)(i)(B) would proposed § 1040.4(b)(1)(i)(D) would communications regarding their non- require providers to submit, in require the provider to submit any payment. The Bureau anticipates that connection with any claim filed in communication the provider receives companies submitting communications arbitration by or against the provider, from the arbitration administrator pursuant to proposed the pre-dispute arbitration agreement related to such a refusal or dismissal. § 1040.4(b)(1)(i)(D) could indicate in filed with the arbitrator or arbitration With regard to communications relating their submission that nonpayment administrator. The Bureau notes that, to nonpayment of fees, the Bureau resulted from settlement and not from a due to concerns relating to burden on understands that arbitrators or tactical maneuver to prevent a consumer providers and the Bureau itself, the administrators, as the case may be, from pursuing the consumer’s claim. Bureau is not proposing to collect all typically refuse to administer an Further, as stated above in the pre-dispute arbitration agreements that arbitration proceeding if filing or discussion of proposed are provided to consumers. Instead, it is administrative fees are not paid. The § 1040.4(b)(1)(i)(C), the Bureau would proposing only to require submission in Bureau understands that arbitrators or not be requiring submission of the the event an arbitration filing occurs.524 administrators will typically send a underlying settlement agreement or By collecting the pre-dispute arbitration letter to the parties indicating that the notification that a settlement has agreement, the Bureau would be able to arbitration has been suspended due to occurred. monitor the impact that particular nonpayment of fees.525 Pre-dispute The Bureau seeks comment on clauses in the agreement have on the arbitration agreements often mandate proposed § 1040.4(b)(1)(D). In addition, conduct of an arbitration. For example, that the provider, rather than the the Bureau seeks comment on the collecting pre-dispute arbitration consumer, pay some of the consumer’s submission of communications from agreements pursuant to which arbitration fees.526 arbitration administrators related to the arbitrations were filed—combined with Where providers successfully move to dismissal or refusal to administer a collecting judgments and awards compel a case to arbitration (and obtain claim for nonpayment of fees even when pursuant to proposed its dismissal in court), but then fail to such nonpayment is the result of a § 1040.4(b)(1)(i)(C)—may permit the pay the arbitration fees, consumers may settlement between the provider and the Bureau to gather information about be left unable to pursue their claims. consumer, including whether doing so whether clauses specifying that the The Study identified at least 50 would serve the policy goal of parties waive certain substantive rights instances of such non-payment of fees discouraging non-payment of arbitral when pursuing the claim in arbitration by companies in cases filed by fees by providers. The Bureau also seeks affect outcomes in arbitration. The consumers.527 The Bureau is proposing comment on the impact such a Bureau seeks comment on its proposal § 1040.4(b)(1)(i)(D) to permit it to requirement would have on providers. to require submission of pre-dispute monitor non-payment of fees by arbitration agreements when arbitration providers whose consumer contracts 4(b)(1)(ii) claims are filed. include pre-dispute arbitration Proposed § 1040.4(b)(1)(ii) would Proposed § 1040.4(b)(1)(i)(C) would agreements and whether particular require providers to submit to the require providers to submit the entities appear to be not paying fees as Bureau any communication the provider judgment or award, if any, issued by the part of a tactical effort to avoid receives from an arbitrator or arbitration arbitrator or arbitration administrator in arbitration, which essentially forecloses administrator related to a determination an arbitration subject to proposed a consumer’s ability to bring a claim if that a provider’s pre-dispute arbitration § 1040.4(b). This proposed requirement the claim is governed by a pre-dispute agreement that is entered into after the would be intended to reach only awards arbitration agreement. The Bureau compliance date for a consumer issued by an arbitrator that resolve an further expects that requiring financial product or service covered by arbitration and not settlement submission of communications related proposed § 1040.3 does not comply with agreements where they are not to non-payment of fees would the administrator’s fairness principles, incorporated into an award. The Bureau discourage providers from engaging in rules, or similar requirements, if such a believes that the proposed submission such activity. determination occurs. The Bureau is of these awards would aid the Bureau in Proposed § 1040.4(b)(1)(i)(D) would concerned about providers’ use of its ongoing review of arbitration and require providers to submit arbitration agreements that may violate help the Bureau assess whether communications from arbitration arbitration administrators’ fairness arbitrations are being conducted fairly administrators related to the dismissal principles or rules. Several of the and without bias. The Bureau seeks or refusal to administer a claim for leading arbitration administrators comment on this aspect of the proposal nonpayment of fees even when such maintain fairness principles or rules, and on whether it should consider nonpayment is the result of a settlement which the administrators use to assess requiring the submission of records that between the provider and the consumer. the fairness of the company’s pre- are not awards but that also close The Bureau believes this requirement dispute arbitration agreement.528 These arbitration files. would prevent providers who are administrators may refuse to hear an Proposed § 1040.4(b)(1)(i)(D) would engaging in strategic non-payment of arbitration if the company’s arbitration apply where an arbitrator or arbitration administrator refuses to administer or 525 See AAA, Consumer Arbitration Rules, supra 528 See AAA Consumer Due Process Protocol, note 130 at 32; JAMS, Streamlined Arbitration supra note 131; JAMS, Policy on Consumer 524 Pursuant to Regulation Z, credit card issuers Rules and Procedures, supra note 132 at 9 (effective Arbitrations Pursuant to Pre-Dispute Clauses are already required to submit their consumer July 1, 2014). Minimum Standards of Procedural Fairness agreements to the Bureau (although the Bureau has 526 Study, supra note 2, section 5 at 58. (effective July 15, 2009), available at http:// temporarily suspended this requirement). See 12 527 Study, supra note 2, section 5 at 66 n.110. The www.jamsadr.com/files/Uploads/Documents/JAMS- CFR 1026.58. The Bureau has also proposed to Bureau has similarly received consumer complaints Rules/JAMS_Consumer_Min_Stds-2009.pdf collect prepaid account agreements. Prepaid NPRM, involving entities’ alleged failure to pay arbitral (hereinafter JAMS Minimum Standards of supra note 470. fees. Procedural Fairness).

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agreement does not comply with the provider submits a prototype pre- providers will continue to face relevant principles or rules.529 Some dispute arbitration agreement for review arbitrations infrequently,533 and, as a administrators will also review a by the arbitration administrator and result, may be relatively unfamiliar with company’s agreement preemptively— never actually includes it in any the requirements of proposed before an arbitration claim has been consumer agreements, the pre-dispute § 1040.4(b). filed—to determine if the agreement arbitration agreement would not be The Bureau also notes that, as complies with the relevant principles or entered into and thus submission to the proposed comment 4(b)–1 indicates, rules.530 Bureau of communication related to a providers would comply with proposed The Bureau believes that requiring determination made by the § 1040.4(b) if another person, such as an submission of communications from administrator concerning the pre- arbitration administrator, submits the administrators concerning agreements dispute arbitration agreement would not specified records directly to the Bureau that do not comply with arbitration be required. The Bureau believes that on the provider’s behalf, although the administrators’ fairness principles or this clarification is needed to avoid provider would be responsible for rules would allow the Bureau to discouraging providers from submitting ensuring that the person submits the monitor which providers could be prototype pre-dispute arbitration records in accordance with proposed attempting to harm consumers or agreements to administrators for their § 1040.4(b). discourage the filing of claims in review. This proposed 60-day period is arbitration by mandating that disputes Proposed comment 4(b)(1)(ii)–2 consistent with feedback the Bureau be resolved through unfair pre-dispute would clarify that what constitutes an received from the SERs during the Small arbitration agreements. The Bureau also administrator’s fairness principles or Business Review panel process who believes that requiring submission of rules pursuant to proposed expressed concern that a short deadline such communications could further § 1040.4(b)(ii)(B) should be interpreted might burden companies given the discourage covered entities from broadly. That comment would further relative infrequency of arbitration and, inserting pre-dispute arbitration provide current examples of such thus, their potential unfamiliarity with agreements in consumer contracts that principles or rules, including the AAA’s this particular requirement. The Bureau do not meet arbitrator fairness Consumer Due Process Protocol and the seeks comment on whether 60 days principles. The Bureau notes that, JAMS Policy on Consumer Arbitrations would be a sufficient period for pursuant to proposed § 1040.4(b)(1)(ii), Pursuant to Pre-Dispute Clauses providers to comply with the communications that the provider Minimum Standards of Procedural requirements of proposed § 1040.4(b). receives would include communications Fairness.532 sent directly to the provider as well as The Bureau seeks comment on 4(b)(3) Redaction those sent to a consumer or a third party proposed § 1040.4(b)(1)(ii)(B) and Proposed § 1040.4(b)(3) would require where the provider receives a copy. proposed comments 4(b)(1)(ii)(B)–1 and providers to redact certain specific types Proposed comment 4(b)(1)(ii)–1 –2. The Bureau also seeks comment on of information that can be used to would clarify that, in contrast to the whether these provisions would directly identify consumers before other records the Bureau proposes to encourage providers to comply with submitting arbitral records to the Bureau collect under proposed § 1040.4(b)(1), their arbitration administrators’ fairness pursuant to proposed § 1040.4(b)(1). The proposed § 1040.4(b)(1)(ii) would principles or rules. In addition, the Bureau endeavors to protect the privacy require the submission of Bureau seeks comment on whether there of consumer information. Additionally, communications both when the are other examples of fairness principles as discussed more fully above, the determination occurs in connection the Bureau should list or concerns Bureau proposes § 1040.4(b), in part, with the filing of a claim in arbitration regarding the principles that the Bureau pursuant to its authority under Dodd- as well as when it occurs if no claim has has proposed to list as examples. Frank section 1022(c)(4), which been filed. Proposed comment provides that the Bureau may not obtain 4(b)(1)(ii)–1 would state further that, if 4(b)(2) Deadline for Submission information ‘‘for the purpose of such a determination occurs with Proposed § 1040.4(b)(2) would state gathering or analyzing the personally respect to a pre-dispute arbitration that a provider shall submit any record identifiable financial information of agreement that the provider does not required by proposed § 1040.4(b)(1) consumers.’’ The Bureau has no enter into with a consumer, submission within 60 days of filing by the provider intention of gathering or analyzing of any communication related to that of any such record with the arbitration information that directly identifies determination is not required. The administrator and within 60 days of consumers. At the same time, the Bureau understands that providers may receipt by the provider of any such Bureau seeks to minimize the burden on submit pre-dispute arbitration record filed or sent by someone other agreements to administrators, which providers by providing clear than the provider, such as the instructions for redaction. review such agreements for compliance arbitration administrator or the with rules even where an arbitral claim Accordingly, the Bureau proposes consumer. The Bureau proposes a 60- § 1040.4(b)(3), which would require that has not been filed.531 The proposed day period for submitting records to the comment would state that, if the providers, before submitting arbitral Bureau to allow providers a sufficient records to the Bureau pursuant to amount of time to comply with these 529 See AAA Consumer Arbitration Rules, supra proposed § 1040.4(b), redact nine requirements. The Bureau proposes specific types of information that note 130, at 10; JAMS Streamlined Arbitration what it believes is a relatively lengthy Rules and Procedures, supra note 132, at 6. directly identify consumers. The Bureau 530 See AAA Consumer Arbitration Rules, supra deadline because it expects that believes that these nine items would be note 130, at 16. easy for providers to identify and, 531 Beginning September 1, 2014, a business that 532 AAA Consumer Due Process Protocol, supra intends to provide the AAA as a potential arbitrator note 131; JAMS Minimum Standards for Procedural therefore, that redacting them would in a consumer contract must notify the AAA at least Fairness, supra note 528. The Bureau notes that it 30 days before the planned effective date of the would be offering these specific principles or rules 533 See Study, supra note 2, section 5 at 20 contract and provide a copy of the arbitration merely to assist providers with compliance; this (stating that, from 2010 to 2012, 1,847 individual agreement to the AAA. AAA Consumer Arbitration comment does not represent an endorsement by the AAA cases, or about 616 per year, were filed for six Rules, supra note 130 at 16. Bureau of these specific principles or rules. consumer financial product markets).

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impose minimal burden on providers. all types of information that could be The Bureau interprets the statutory Proposed comment 4(b)(3)–1 would deemed to be personally identifiable language ‘‘shall apply to any agreement clarify that providers are not required to financial information (PIFI). Because . . . entered into after the end of the perform the redactions themselves and Federal law prescribes an open-ended 180-day period beginning on the may assign that responsibility to another definition of PIFI,534 the Bureau effective date’’ to mean that the entity, such as an arbitration believes that broadly requiring redaction proposed rule may apply beginning on administrator or an agent of the of all PIFI could impose a significant the 181st day after the effective date, as provider. burden on providers while affording this day would be the first day ‘‘after the Pursuant to proposed § 1040.4(b)(3)(i) few, if any, additional protections for end of the 180-day period beginning on through (v), the Bureau would require consumers relative to the redactions the the effective date of the regulation.’’ The providers to redact names of Bureau is proposing to require. As such, Bureau proposes that the proposed rule individuals, except for the name of the the list of items in proposed establish an effective date of 30 days provider or arbitrator where either is an § 1040.4(b)(3)(i) through (ix) identifies after publication of a final rule in the individual; addresses of individuals, the examples of PIFI that the Bureau Federal Register. Were this 30-day excluding city, State, and zip code; anticipates are likely to exist in the period finalized, the requirements of the email addresses of individuals; arbitral records that would be submitted proposed rule would apply beginning telephone numbers of individuals; and under § 1040.4(b)(1). The Bureau’s on the 211th day after publication of the photographs of individuals from any preliminary view is that the list of items rule in the Federal Register. arbitral records submitted to the Bureau. strikes the appropriate balance between The Bureau believes that stating in the The Bureau notes that, with the protecting consumer privacy and regulatory text the specific date on exception of the names of providers or imposing a reasonable redaction burden which the rule would begin to apply arbitrators where either are individuals, on providers. and adopting a user-friendly term such information related to any individuals— The Bureau seeks comment on its as ‘‘compliance date’’ for this date not merely the consumer to whom the approach of requiring these redactions would improve understanding among consumer financial product is offered or and on the burden to providers of this providers of their obligations, and provided—would be required to be redaction requirement. The Bureau also consumers of their rights, under the redacted pursuant to proposed seeks comment on whether it should rule. As such, proposed § 1040.5(a) § 1040.4(b)(3)(i) through (v). This would require redaction of a consumer’s city, would state that compliance with this include names or other items of State, and zip code, in addition to the part is required for any pre-dispute information relating to third-party consumer’s street address. In addition, arbitration agreement entered into after individuals, such as individual the Bureau seeks comment on whether the date that is 211 days after employees of the provider. it should require redaction of any publication of the rule in the Federal Proposed § 1040.4(b)(3)(ii) would additional types of consumer Register; the Bureau would instruct the require redaction of street addresses of information, including other types of Office of the Federal Register to insert individuals, but not city, State, and zip information that may be considered PIFI a specific date upon publication in the code. The Bureau believes that and that are likely to be present in the Federal Register. Proposed § 1040.5(a) collecting such high-level location arbitral records. The Bureau further would also adopt the term ‘‘compliance information for arbitral records could, seeks comment on whether any of the date’’ to refer to this date. As discussed among other things, help the Bureau items described in proposed above, the Bureau is proposing match the consumer’s location to the § 1040.4(b)(3)(i) through (ix), such as commentary to proposed § 1040.4. arbitral forum’s location in order to ‘‘account number,’’ should be further Specifically, proposed comment 4–1 monitor issues such as whether defined or clarified. Finally, the Bureau which would provide examples of when consumers are being required to also seeks comment on whether the a provider does and does not ‘‘enter arbitrate in remote fora, and assist the scope of any of the items should be into’’ an agreement after the compliance Bureau in identifying any local or expanded; for example, whether date. regional patterns in consumer harm as ‘‘passport number’’ should be expanded The Bureau expects that most providers, with the exception of well as arbitration activity. The Bureau to include the entire passport. believes that collecting city, State, and providers that would be covered by zip code would pose limited privacy Section 1040.5 Compliance Date and proposed § 1040.5(b), discussed below, risk and that any residual risk would be Temporary Exception would be able to comply with proposed balanced by the benefit derived from Proposed § 1040.5 would set forth the § 1040.4(a)(2) by the 211th day after collecting this information. compliance date for part 1040 as well as publication of a final rule. Typically, Proposed § 1040.4(b)(3)(vi) through a limited and temporary exception to contracts that contain pre-dispute (ix) would require redaction from any compliance with proposed arbitration agreements are standalone arbitral records submitted to the Bureau, § 1040.4(a)(2) for certain consumer documents provided in hard copy or of account numbers; social security and financial products and services. electronic form. These contracts are tax identification numbers; driver’s provided to the consumer at the time of license and other government 5(a) Compliance Date contracting by either the provider or a identification numbers; and passport Dodd-Frank section 1028(d) provides third party (for example, a grocery store numbers. These redaction requirements that any regulation prescribed by the where a consumer can send remittances would not be limited to information for Bureau under section 1028(b) shall through a remittance transfer provider). individual persons because the Bureau apply to any agreement between a The Bureau believes that, for all believes that the privacy of any account consumer and a covered person entered providers—except those that would be numbers, social security, or tax into after the end of the 180-day period covered by the temporary exception in identification numbers should be beginning on the effective date of the proposed § 1040.5(b)—a 211-day period maintained, to the extent they may be regulation, as established by the Bureau. would give providers sufficient time to included in arbitral records. revise their agreements to comply with The Bureau notes that it is not broadly 534 Personally identifiable financial information is proposed § 1040.4(a)(2) (and to make proposing to require providers to redact defined in 12 CFR 1016.3(q)(1). any other changes required by the rule)

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and would give providers using hard- would, among other things, be required requirement; within 30 days of copy agreements sufficient time to print to ensure that the pre-dispute arbitration obtaining the consumer’s contact new copies and, to the extent necessary, agreement contains the provision information, the provider notifies the deliver them to the needed locations. required by proposed § 1040.4(a)(2)(i) or consumer in writing that the pre-dispute The Bureau anticipates that providers an alternative provision permitted by arbitration agreement complies with the could continue to provide non- proposed § 1040.4(a)(2)(ii). As described requirements of proposed § 1040(a)(2) compliant hard-copy agreements as long above, the Bureau expects that most by providing an amended pre-dispute as they simultaneously gave consumers providers would be able to comply with arbitration agreement to the consumer. a notice or amendment including the proposed § 1040.4(a)(2)(i) or (ii) by the In the Bureau’s view, this exception required provision as part of the 211th day after publication of a final would permit prepaid card providers to agreement. rule. avoid the considerable expense of As noted above, the Bureau proposes However, for certain products, there pulling and replacing packages at retail a 30-day effective date. The Bureau has may be additional factors that would stores while adequately informing chosen 30 days based on the make compliance by the 211th day consumers of their dispute resolution Administrative Procedure Act, which challenging. The Bureau has concerns rights, where feasible, due to the requires that, with certain enumerated about whether providers of certain types notification requirement in proposed exceptions, a substantive rule be of prepaid cards would be able to ensure § 1040.5(b)(2). The Bureau notes that published in the Federal Register not that only compliant products are offered proposed § 1040.5(b)(2) would not less than 30 days before its effective for sale or provided to consumers after impose on providers an obligation to date.535 In the Bureau’s view, a longer the compliance date. Prepaid cards are obtain a consumer’s contact period before the effective date would typically sold in an enclosed package information. Where providers are able not be needed to facilitate compliance, that contains a card and a cardholder to contact the consumer in writing, the given that Dodd-Frank section 1028(d) agreement. These packages are typically Bureau expects that they could satisfy mandates an additional 180-day period printed well in advance of sale and are proposed § 1040.5(b)(2) by, for example, between the effective date and the distributed to consumers through third- sending the compliant agreement to the compliance date. For the reasons party retailers such as drugstores, check consumer when the consumer calls to discussed above, the Bureau believes cashing stores, and convenience register the account and provides a that a 211-day period between Federal stores.537 As a result, to comply with the mailing address or email address; Register publication and the compliance rule by the compliance date, providers sending the revised terms when the date would afford most providers—with would need to search each retail provider sends a personally-embossed the exception of providers that would location at which their products are sold card to the consumer; or communicating covered by proposed § 1040.5(b)— for any non-compliant packages; remove the new terms on the provider’s Web sufficient time to comply. The Bureau them from the shelves; and print new site. reiterates that this 211-day period packages, which could likely incur Proposed comment 5(b)(2)–1 would includes the effective date; thus, by considerable expense. The Bureau clarify that the 30-day period would not virtue of setting this effective date, no believes that this represents a unique begin to elapse until the provider is able additional time would be added to this situation not present with other to contact the consumer. Proposed 211-day period. products and services that would be comment 5(b)(4)–1 would also provide The Bureau seeks comment on covered by proposed Part 1040. illustrative examples of situations where whether a different formulation would For these reasons, proposed the provider has the ability to contact provide greater clarity to providers and § 1040.5(b) would establish a limited the consumer, including when the consumers as to when the rule’s exception from proposed § 1040.4(a)(2)’s provider obtains the consumer’s mailing requirements would begin to apply. In requirement that the provider’s pre- address or email address. addition, the Bureau seeks comment on dispute arbitration agreement contain Importantly, providers who avail whether a period of 211 days between the specified provision by the themselves of the exception in proposed publication of a final rule in the Federal compliance date. Proposed § 1040.5(b) § 1040.5(b) would still be required to Register and the rule’s compliance date would state that proposed § 1040.4(a)(2) comply with proposed § 1040.4(a)(1) constitutes sufficient time for providers shall not apply to a provider that enters and proposed § 1040.4(b) as of the to comply with proposed § 1040.4(a)(2) into a pre-dispute arbitration agreement compliance date. As such, providers and, if not, what an appropriate for a general-purpose reloadable prepaid who avail themselves of this exception effective date should be.536 card if certain conditions are met. For a would still be prohibited, as of the compliance date, from relying on a pre- 5(b) Exception for Pre-Packaged provider that cannot contact the consumer in writing, proposed dispute arbitration agreement entered General-Purpose Reloadable Prepaid into after the compliance date with Card Agreements § 1040.5(b)(1) would set forth the following requirements: (1) The respect to any aspect of a class action As described above in the Section-by- consumer acquires the card in person at concerning any of the consumer Section Analysis to proposed a retail store; (2) the agreement was financial products or services covered § 1040.5(a), that provision would inside of packaging material when it by proposed § 1040.3, pursuant to specify the rule’s compliance date—the was acquired; and (3) the agreement was proposed § 1040.4(a)(1). The amended date on which the rule’s requirements packaged prior to the compliance date pre-dispute arbitration agreement would begin to apply—and that such of the rule. For a provider that has the submitted by providers in accordance date would be 211 days after ability to contact the consumer in with proposed § 1040.5(b)(4) would be publication of a final rule in the Federal writing, proposed § 1040.5(b)(2) would required to include the provision Register. Starting on this date, providers require that the provider meet all of the required by proposed § 1040.4(a)(2)(i) or requirements specified in proposed the alternative permitted by proposed 535 5 U.S.C. 553(d). § 1040.5(b)(1) as well as one additional § 1040.4(a)(2)(ii). And providers would 536 The Bureau notes that if an electronic also still be required to submit certain submission system is not ready by the effective date, the Bureau may consider delaying the 537 See Prepaid NPRM, supra note 470, at 77106– arbitral records to the Bureau, pursuant effective date of proposed § 1040.4(b). 07. to proposed § 1040.4(b), in connection

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with pre-dispute arbitration agreements VIII. Dodd-Frank Act Section 1022(b)(2) economic attributes of the relevant entered into after the compliance date. Analysis markets and the existing legal and regulatory structures applicable to Further, the Bureau does not anticipate A. Overview that permitting prepaid providers to sell providers. The Bureau seeks comment existing card stock containing non- In developing this proposed rule, the on this baseline. compliant agreements would affect Bureau has considered the potential The Bureau invites comment on all consumers’ shopping behavior, as, benefits, costs, and impacts required by aspects of the data that it has used to section 1022(b)(2) of the Dodd-Frank currently, consumers are typically analyze the potential benefits, costs, and Act. Specifically, section 1022(b)(2) impacts of the proposed provisions.539 unable to review the enclosed terms and calls for the Bureau to consider the However, the Bureau notes that in some conditions before purchasing a prepaid potential benefits and costs of a instances, the requisite data are not product in any event (although the regulation to consumers and covered available or are quite limited. In Bureau would expect that persons (which in this case would be particular, with the exception of corresponding product Web sites would the providers subject to the proposed estimating consumer recoveries from contain an accurate arbitration rule), including the potential reduction Federal class settlements, data with agreement). of access by consumers to consumer which to quantify the benefits of the The Bureau seeks comment on financial products or services, the proposed rule are especially limited. As whether the temporary exception in impact on depository institutions and a result, portions of this analysis rely in proposed § 1040.5(b) is needed, and, if credit unions with $10 billion or less in part on general economic principles and so, on the exception as proposed. While total assets as described in section 1026 the Bureau’s expertise in consumer the Bureau believes that the term of the Dodd-Frank Act, and the impact financial markets to provide a ‘‘general-purpose-reloadable prepaid on consumers in rural areas. qualitative discussion of the benefits, The Bureau requests comment on the card’’ has an accepted meaning, the costs, and impacts of the proposed rule. preliminary analysis presented below as The Bureau discusses and seeks Bureau seeks comment on whether a well as submissions of additional data comment on several alternatives, definition of this term or additional that could inform the Bureau’s analysis including ones that would be applicable clarification regarding its meaning of the benefits, costs, and impacts of the to larger entities as well, in the would be helpful to providers. proposed rule. The Bureau has Regulatory Flexibility Analysis below. Additionally, the Bureau seeks consulted, or offered to consult with, In this analysis, the Bureau focuses on comment on whether the exception the prudential regulators, the Federal the benefits, costs, and impacts of the should use a different term describing Housing Finance Agency, the Federal main aspects of the proposed rule: (1) prepaid products. The Bureau also seeks Trade Commission, the U.S. Department The requirement that providers with comment on whether the proposed of Agriculture, the U.S. Department of arbitration agreements include a exception should be available to Housing and Urban Development, the provision in the arbitration agreements providers of other products—instead of, U.S. Department of the Treasury, the they enter into in the future stating that or in addition to, prepaid products—or U.S. Department of Veterans Affairs, the the arbitration agreement cannot be whether the exception’s coverage U.S. Commodities Futures Trading invoked in class litigation; and (2) the should not be limited based on product Commission, the U.S. Securities and type, but based on other criteria. Exchange Commission, and the Federal 2001). Indeed, in Section 2 of the Study, the Bureau Communications Commission including documents a slight but gradual increase in the The Bureau also seeks comment on adoption of arbitration agreements by industry in consultation regarding consistency with whether requiring providers who take particular markets. See generally Study, supra note any prudential, market, or systemic advantage of the exception in proposed 2, section 2. See also Peter Rutledge & Christopher objectives administered by such Drahozal, Sticky Arbitration Clauses—the Use of § 1040.5(b) to make available a agencies. Arbitration Clauses after Concepcion and Amex, 67 compliant pre-dispute arbitration The Bureau has chosen to consider Vand. L. Rev. 955 (2014). The Bureau believes that agreement within 30 days after the this trend is likely to continue, but for simplicity the benefits, costs, and impacts of the and transparency, the Bureau assumes that, if the provider becomes aware that the proposed provisions as compared to the proposed rule is not finalized, the future prevalence agreement has been provided to the status quo in which some, but not all, of arbitration agreements would remain the same as consumer would be a feasible process the current prevalence. The estimated impact, both consumer financial products or services of benefits and costs, would be significantly larger for providers while also adequately providers in the affected markets (see if the Bureau had instead used the hypothetical protecting consumers. Further, the proposed § 1040.2(c), defining the future state of universal adoption of arbitration Bureau seeks comment on whether entities covered by this rule as agreements as the baseline, because the baseline that the Bureau actually uses assumes that a alternatives to the proposed exception ‘‘providers’’) use arbitration significant amount of class litigation remains 538 would better accomplish the objectives agreements. The baseline considers regardless of whether the proposed rule is finalized. of furthering consumer awareness of 539 The estimates in this analysis are based upon their dispute resolution rights and 538 The Bureau has discretion in each rulemaking data obtained and statistical analyses performed by to choose the relevant provisions to discuss and to the Bureau. This includes much of the data ensuring consumers receive accurate choose the most appropriate baseline for that underlying the Study and some of the Study’s disclosures without imposing excessive particular rulemaking. A potential alternative results. The collection of the data underlying the costs on providers. One alternative, for baseline for this rulemaking is the baseline of a Study is described in the relevant sections and hypothetical future state of the world where ‘‘class appendices of the Study. Some of the data was example, could be for the Bureau to actions against businesses would be all but collected from easily accessible sources, such as the prohibit providers from selling non- eliminated.’’ See Brian Fitzpatrick, The End of Class data underlying the Bureau’s analysis of Federal compliant agreements after the Actions?, 57 Ariz. L. Rev. 161 (2015). Such a class settlements. Other data is confidential, such compliance date, except for agreements baseline could be justified because the use of class- as the data underlying the Bureau’s analysis of the eliminating arbitration agreements may continue to pass-through of costs of arbitration onto interest that were printed prior to a specified grow over time. See also Myriam Gilles, Opting Out rates for large credit card issuers. The Bureau also number of days (such as 90 or 120 days) of Liability: The Forthcoming, Near-Total Demise of collected additional information from trade groups before the compliance date. the Modern Class Action, 104 Mich. L. Rev. 373 on the prevalence of arbitration agreements used in (2005); Jean Sternlight, As Mandatory Binding markets that were not analyzed in Section 2 of the Arbitration Meets the Class Action, Will the Class Study. The collection of data from trade groups is Action Survive?, 42 Wm. & Mary L. Rev. 1 (2000– discussed further below in Part VIII and in Part IX.

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related prohibition that would forbid collect both from consumers whose proposal, the Bureau is focusing on a providers from invoking such an contracts with their original creditor related market failure: reduced agreement in a case filed as a class contain arbitration agreements and from incentives for providers to comply with action. Thus, given the baseline of the consumers whose contracts with their the underlying laws. The reduced status quo, the analysis below focuses original creditor do not contain incentives for providers to comply are on providers that currently have arbitration agreements. Thus, these debt due to an insufficient level of private arbitration agreements. collectors already face class litigation enforcement. The effect of the proposal on risk, but if the proposal were adopted, While the Bureau assumes that the arbitration of individual disputes, both this risk would be increased, at most, in underlying laws are addressing a range the indirect effect of the class provision proportion to the fraction of the of market failures, it also recognizes that discussed above and the direct effect of providers’ consumers whose contracts compliance with these underlying laws provisions that would require the contain arbitration agreements.541 The requires some costs. There are out-of- reporting of certain arbitral records to actual magnitude by which debt pocket costs required to, e.g., distribute the Bureau for monitoring purposes, is collectors’ risk would be increased required disclosures or notices, relatively minor. The Bureau is aware of would likely be lower because even investigate alleged errors, or resolve only several hundred consumers when a consumer’s contract contains an disputes. There are opportunity costs in, participating in such disputes each year arbitration agreement today, the ability for example, forgoing adjustments in and the Bureau does not expect a sizable of the debt collector to rely upon it interest rates, limiting penalty fees, or increase, regardless of whether the varies across arbitration agreements and limiting calling hours for debt proposed rule is finalized.540 If depends on the applicable contract and collections. And, there are costs anything, the number of such disputes background law.542 associated with establishing a might decrease if the proposed rule The analysis below applies to both compliance management system which, results in some providers removing types of providers. For additional clarity e.g., trains and monitors employees, arbitration agreements altogether. As and to avoid unnecessary duplication, reviews communications with discussed below, there is no reliable the discussion is generally framed in consumers, and evaluates new products evidence on whether this would occur. terms of the first type of provider or features. Providers that currently use (which faces virtually no exposure to The Bureau believes, based on its arbitration agreements can be divided class claims today), unless otherwise knowledge and expertise, that the into two categories. The first category is noted. The Bureau estimates below the current incentives to comply are weaker comprised of providers that currently number of additional Federal class than the economically efficient levels. It include arbitration agreements in actions and putative class proceedings further believes that conditions are such contracts they make with consumers. that are not settled on a class basis for that this implies that the economic costs For these providers, which constitute both types of provider. of increased compliance (due to the the vast majority of providers using additional incentives provided by the arbitration agreements, the Bureau Description of the Market Failure and proposed rule) are justified by the believes that the proposed class rule Economic Framework economic benefits of this increased would result in the change from Before considering the benefits, costs, compliance. If these conditions do not virtually no exposure to class litigation and impacts of the proposed provisions hold in particular cases, the increased to at least as much exposure as is on consumers and covered persons, as compliance due to the proposed rule currently faced by those providers with required by Section 1022(b)(2), the would likely lower economic welfare. similar products or services that do not Bureau believes it may be useful to The data and methodologies available to use arbitration agreements. provide the economic framework the Bureau do not allow for an The second category includes through which it is considering those economic analysis of these premises on providers that invoke arbitration factors in order to more fully inform the a law-by-law basis.544 However, for agreements contained in consumers’ rulemaking, and in particular to purposes of this discussion, the Bureau contracts with another person. This describe the market failure that is the assumes that these conditions hold. category includes, for example, debt basis for the proposed rule.543 The The Study shows that class litigation collectors and servicers who, when sued Bureau’s economic framework assumes is currently the most effective private by a consumer, invoke an arbitration that when Congress and States have enforcement mechanism for most claims agreement contained in the original promulgated consumer protection laws in markets for consumer financial contract formed between the original that are applicable to consumer products or services in providing provider and the consumer. For these financial products and services (‘‘the monetary incentives (including forgone providers, the additional class litigation underlying laws’’) they have done so to profits due to in-kind or injunctive exposure caused by the proposed rule address a range of market failures, for relief) for providers to comply with the would be somewhat less than the example asymmetric information. The law.545 During the years covered by the increase in exposure for providers of the underlying laws need enforcement Study, providers paid out hundreds of first type because the providers in this mechanisms to ensure providers millions of dollars per year in class second category are not currently conform their behavior to these laws. In relief and related litigation expenses in uniformly able to rely on arbitration analyzing and proposing the class consumer finance cases.546 Class actions agreements in their current operations. For example, debt collectors typically 541 For example, if half of consumers on whose 544 The Bureau seeks comment and data that debts a debt collector collects have arbitration would allow further analysis of how to determine 540 These numbers come from a single arbitration agreements in their contracts, then the debt the point at which strengthening incentives might provider, the AAA, for several consumer finance collector’s class litigation risk would at most double become inefficient. markets. See generally Study, supra note 2, section if the proposed rule is finalized as proposed. 545 As discussed further below, if class litigation 5. Based on the analysis of consumer financial 542 See Study, supra note 2, section 6 at 54 n.94. is generally meritless then it does not provide an contracts in Section 2 of the Study, it is likely that 543 Although section 1022(b)(2) does not require incentive for providers to comply with the law. the AAA accounts for the majority of arbitrations the Bureau to provide this background, the Bureau 546 See generally Study, supra note 2, section 8. in several large consumer financial markets does so as a matter of discretion to more fully As discussed further below, with regard to (checking and credit cards, for example). inform the rulemaking. Continued

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also resulted in substantial but difficult remedy do not justify the potential experience similarly confirms that these to quantify prospective relief. This rewards). When thousands or millions mechanisms do not completely solve compares to the purely retrospective of consumers may have individual the market failure that the class relief and other expenses related to negative-value legal claims, class proposal would attempt to address. about 1,000 individual lawsuits in actions can provide a vehicle to Given the Bureau’s assumptions Federal courts filed by consumers with combine these negative-value legal outlined above, economic theory respect to five of the largest consumer claims into a single lawsuit worth suggests that any void left by weakening finance markets, a similar number of bringing.549 any one of these incentives will not be individual arbitrations, and a similar The Bureau’s economic framework filled completely by the remaining number of small claims court cases filed also takes into account other incentives incentives. by consumers.547 Individual consumer that may cause providers to conform Reputation concerns will create the finance lawsuits filed in state courts their conduct to the law; there are at incentive for a firm to comply with the (other than small claims courts) add least two other important mechanisms, law only to the extent legally compliant some additional modest volume, but the which are both described here. The first or non-compliant conduct would be Bureau does not believe that they incentive is the economic value for the visible to consumers and affect the change the magnitude of the differential provider to maintain a positive consumer’s desire to keep doing between class and individual relief. In reputation with its customers, which business with the firm, and even then, other words, the monetary incentives for will create an incentive to comply with with a lag.553 Thus, there is an incentive providers to comply with the law due to the law to the extent such compliance for firms to underinvest in compliance the threat of class actions are is correlated with the provider’s because consumers will not notice the substantially greater than those due to reputation. As the Study shows, many non-compliant conduct resulting from the threat of consumers bringing consumers might consider switching to underinvestment for some time or may individual disputes against providers. a competitor if the consumer is not not view the non-compliant conduct as The relative efficacy of class satisfied with a particular provider’s sufficient to affect the consumer’s litigation—as compared to individual performance.550 In part in response to willingness to do business with the dispute resolution, either in courts or in this and to other reputational incentives firm.554 front of an arbitrator—in achieving these (including publicly accessible Economic theory also suggests that incentives is not surprising. As complaint databases), many providers regardless of whether relief is warranted discussed in Part VI, the potential legal have developed and administer internal under the law, the provider has a harm per consumer arising from dispute resolution mechanisms.551 The relatively strong incentive to correct violations of law by providers of second incentive is to avoid supervisory issues only for the consumers who consumer financial products or services actions or public enforcement actions by complain directly about particular is frequently low in monetary terms. Federal and state regulatory bodies, practices to the provider—as those are Moreover, consumers are often unaware such as the Bureau. In response to this, the consumers for whom the provider’s that they may have suffered legal harm. many providers have developed reputation is most at risk—and less of For any individual, the monetary compliance programs, particularly an incentive to correct the same issues compensation a consumer could receive where they are subject to ongoing active for other consumers who do not raise if successful will often not be justified supervision by Federal or state them or who may be unaware that the by the costs (including time) of engaging regulators. practices are occurring. Accordingly, the in any formal dispute resolution process However, economic theory suggests providers’ incentive to comply due to even when a consumer strongly that these other incentives (including reputational concerns is, in part, driven suspects that a legal harm might have reputation and public enforcement) are by the fraction of consumers who could occurred. This is confirmed by the insufficient to achieve optimal become aware of the issue. In addition, Study’s nationally representative survey compliance (again, assuming that the with such informal dispute resolution, of consumers.548 In economic terms, current levels of compliance are below correcting issues for a particular these are negative-value legal claims those that would be economically (claims where costs of pursuing a efficient),552 and the Bureau’s of Econ. 20 (1982) for reputation and Posner supra note 546, section 13.1 for complementarity with public enforcement. Note that earlier economic providing monetary incentives to increase 549 See, e.g., Posner, supra note 546 at 785–92. literature suggested that reputation alone, coupled investment in complying with the law, both relief See also Louis Kaplow & Steven Shavell, Fairness with competitive markets, could lead to an efficient to consumers and litigation expenses serve to versus Welfare, 114 Harv. L. Rev. 961 (2001), at outcome. See, e.g., Benjamin Klein & Keith B. increase the strength of deterrence incentives. See 1185 n. 531 (‘‘[C]lass actions are valuable when Richard Posner, Economic Analysis of Law, 8th ed. they allow claims that would otherwise be brought Leffler, The Role of Market Forces in Assuring (2011) 785–92. In particular, effectively evoking the individually to proceed jointly at lower cost due to Contractual Performance, 89 J. of Polit. Econ. 4 logic of Pigouvian taxes, he notes, ‘‘what is most the realization of economies of scale. In addition, (1981). However, formal modeling of this issue important from an economic standpoint is that the our analysis emphasizes that, when legal costs revealed that earlier intuition was incomplete. See violator be confronted with the costs of his exceed the stakes, there may be no suits and thus Carl Shapiro, Premiums for High Quality Products violation—this preserves the deterrent effect of no deterrence; aggregating claims also solves this as Returns to Reputations, 98 Q. J. of Econ. 4 (1983). litigation—not that he pays them to his victims.’’ problem (although it is still possible that the 553 In addition, the non-compliance would have 547 See Study, supra note 2, section 1 at 11, 15– aggregated claim may not be socially desirable if the to be sufficiently egregious to cause consumers to 16. The Bureau could not quantify providers’ benefit from improved behavior is sufficiently want to given switching costs, and some spending on individual adjudications for a variety small).’’). consumers might not be able to switch ex-post at of reasons, most importantly that settlement terms 550 The Study only considered the credit card all depending on the product in question. of these cases are most often private. market. See Study, supra note 2, section 3 at 18. 554 See Shapiro, supra note 552. This 548 See generally Study, supra note 2, section 3. This finding might not be generalizable to any underinvestment is a perpetual, rather than a In particular, while being presented with a market where consumers face a significantly higher temporary phenomenon: A firm underinvests today hypothetical situation of a clearly erroneous charge cost of switching providers. because consumers will not become aware of on their credit card bill that the provider is 551 The Bureau notes that an incentive to act to today’s underinvestment until tomorrow, but then unwilling to remedy, 1.4 percent of consumers preserve good reputation with the consumers is not the firm also underinvests tomorrow because surveyed stated that they would seek legal advice necessarily the same as an incentive to comply with tomorrow’s consumers will not become aware of or sue using an attorney, and 0.7 percent of the law, especially when consumers are not even tomorrow’s underinvestment until the day after consumers stated that they would seek legal aware of the legal harm. tomorrow, and so on. Moreover, competition is not remedies without mentioning an attorney. Id., 552 See, e.g., Carl Shapiro, Consumer Information, a panacea in this model: Every firm rationally section 3 at 18. Product Quality, and Seller Reputation, 13 Bell J. underinvests in compliance.

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consumer could mean waiving a fee or posited that the (ostensible) ease and In general, if the extant laws were reducing a charge, in what a provider low up front cost of arbitration may adopted to solve some other underlying may call a ‘‘one time courtesy,’’ instead change many negative-value individual market failures, it means that, by of changing the provider’s procedures legal claims into positive-value definition, the market could not resolve prospectively even with regard to the arbitrations that, in turn, create an these failures on its own. Therefore, individual consumer. additional incentive for providers to given the Bureau’s assumptions Furthermore, economic theory resolve matters internally.558 In outlined above, a practice (arbitration suggests that providers will decide how principle, if arbitration agreements had agreements that can be invoked in class to resolve informal complaints by the effect of transforming negative-value litigation) that lowers providers’ weighing the expected profitability of claims into positive ones, that would incentive to follow these laws is a the consumer who raises the complaint affect not just providers’ incentives to market failure since it allows the against the probability that the resolve individual cases (as stakeholders underlying market failures to reappear. consumer will indeed stop patronizing have posited) but also their incentives to The providers (and the market in the provider, rather than legal merit per comply with the law ex ante. general) are unable (do not find it se. In the Bureau’s experience, some As noted above, however, there is profitable) to resolve this market failure companies implement this through little if any empirical support for such for the same reasons (and frequently profitability models which are used to an argument. The Bureau has only been additional other reasons) that the cabin the discretion of customer service able to document several hundred providers could not (did not find it representatives in resolving individual consumers per year actually filing profitable to) solve the underlying 561 disputes. Indeed, providers may be arbitration claims,559 and the Bureau is market failures in the first place. more willing to resolve disputes unaware that providers have routinely Overview of Effects of the Proposed favorably for profitable consumers even concluded that considerably more Rule in cases where the disputes do not have consumers were likely to file. The proposed rule would require a legal basis, than for non-profitable Additionally, the Bureau believes that consumers with serious legal claims. providers to include language in their this argument is flawed conceptually as arbitration agreements stating that the Thus, reputation incentives do not well. The Bureau disagrees that, even always coincide with complying with agreement cannot be used to block a for consumers who are aware of the class action with respect to those the law. legal harm, the presence of arbitration Public enforcement could consumer financial products and agreements changes many negative- services that would be covered by the theoretically bring some of the same value individual legal claims into cases that are not going to be brought by positive-value arbitrations and, in turn, 561 This argument also illustrates why form private enforcement absent the creates additional incentives for language regarding arbitration agreements is proposed rule. However, public providers to resolve matters internally. fundamentally different from standardized language enforcement resources are limited Notably, consumers weigh several other regarding other contract terms, and is not relative to the thousands of firms in necessarily efficient. The debate about the costs before engaging in any individual efficiency of boilerplate language, from the consumer financial markets. Public dispute resolution process, including perspective of law and economics, is whether enforcement resources also focus only arbitration. It still takes time for a boilerplate language allows for more efficient on certain types of claims (for instance, consumer to learn about the process, to contracting between the firm and the customer, thus violations of state and Federal consumer enhancing both parties’ welfares, or whether prepare for the process, and to go boilerplate language allows the firm to take protection statutes but not the parties’ through the process. There is also still advantage of its customer in a welfare-reducing 555 underlying contracts). In addition, a risk of losing and, if so, of possibly manner, with this advantage potentially remaining other factors may be at play, such as having initial filing fees shifted back to even if the market is competitive. The same public prosecutors could be more arguments apply to contracts of adhesion. See, e.g., the consumer. Symposium, ‘‘Boilerplate’’: Foundations of Market cautious or have other, non-consumer In addition, where arbitration Contracts, 104 Mich. L Rev. No. 5 (2006). Any law finance priorities. For all these reasons, agreements exist, consumers are still, in restricting two parties’ freedom to contract (for public enforcement can and will not example, a mandatory disclosure or a limit on some practice, more likely to use formal entirely fill the void left by the lack of financing terms in a consumer finance statute) dispute resolution mechanisms introduces the following friction: To comply with private enforcement. The Study is (including small claims courts) than the law, these two parties will agree to a different consistent with this prediction, arbitration, and this suggests that contract or not contract at all. Each of these options suggesting that there is limited overlap was available to the parties before the law was arbitration does not turn negative-value adopted, but at the time the parties chose to between the two types of 560 556 claims positive. contract more efficiently from the parties’ enforcement. perspectives, at least to the extent that both parties The Bureau has considered arguments had a choice. However, to the extent that the law consumer disputes internally, under the threat that was adopted to fix a market failure, this friction is that arbitration agreements provide a aggrieved consumers can (ostensibly easily) escalate sufficiently strong incentive to exactly what is preventing that market failure from the disputes to (ostensibly more expensive) occurring: The introduction of the contracting providers to address consumers’ arbitration. friction is necessary for the underlying market concerns and obviate the need to 558 Note that a provider does not have to know, failure to be alleviated, as opposed to being a strengthen private enforcement for example, during a consumer’s call to the potential source of inefficiency that could be provider’s service phone line whether this mechanisms. One reason suggested is reduced by using boilerplate contracts. That particular consumer will file for arbitration. The underlying market failure could be, for example, a that many such agreements contain fee- provider can wait until the consumer files for negative externality exerted by the firm’s and its shifting provisions that require arbitration, and then resolve the matter with the customer’s contract on third parties. In a theoretical providers to pay consumers’ up front consumer without paying any fees related to model, this would imply that the laws were arbitration. filing fees.557 Some stakeholders have endogenously chosen to correct pre-existing market 559 See generally Study, supra note 2, section 5. failures. And this fact means that an ability to sign 560 See Study, supra note 2, section 1 at 15 an efficient contract from the bilateral perspective 555 See Part VI. (providers typically do not invoke arbitration that lowers the incentives to comply with the law 556 See generally Study, supra note 2, section 9. agreements in individual cases). The Study showed is welfare-reducing since this law was supposedly 557 The argument depends on arbitration being that the presence of small claims court carve-outs passed exactly to ensure that the incentive to easy for consumers to engage in and costly to the in the majority of clauses. See Study, supra note 2, comply with the law is there and because this providers. Thus, the providers seek to resolve all section 2 at 33. incentive alleviates another market failure.

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proposed rule and would prohibit upheld, but it would not recognize as an compliance with laws (that is, so long providers from invoking such an economic benefit any value to society at as class litigation is not brought agreement in a case filed as a class large from justice being served.564 And randomly without regard to the level of action with respect to those consumer in practice, with regard to the value that compliance and thus is meritless in financial products and services. The individual consumers derive from such general), providers would want to proposed rule would also prohibit third- considerations, the Bureau is unaware ensure more compliance than if there party providers facing class litigation of any applicable studies that would was no threat of class litigation.567 from relying on such arbitration allow the Bureau to assess the strength Given the Bureau’s assumptions agreements. The Bureau believes that of this value separate and apart from outlined above, economic theory the proposed rule would have three deterrence, relief, or other tangible suggests that providers who are immune main effects on providers with benefits.565 from class litigation currently under- arbitration agreements: (1) They would Another example would be the impact comply from the economic welfare have increased incentives to comply on some consumers of lost privacy that perspective, and therefore this with the law in order to avoid class could result when providers would be additional deterrence is beneficial.568 litigation exposure; (2) to the extent they required to send redacted arbitration For this purpose, both the cost of class do not act on these incentives or acting records about them to the Bureau. relief and the cost of related litigation is on these incentives does not prevent Unlike the impact on consumers when counted as contributing to the size of class litigation filed against them, the their data becomes public in a data the strengthened compliance additional class litigation exposure breach, the impact of the lost privacy incentives.569 would ultimately result in additional that the proposed rule could create is At least two sources might inform a litigation expenses and potentially generally something that, if it exists, the provider’s determination of its profit- additional class settlements; and (3) Bureau does not have the ability to maximizing level of compliance in a they would incur a one-time cost of assess meaningfully, especially given regime in which there is potential class changing language in consumer the nature of the proposed redactions. action exposure for non-compliance. contracts entered into 180 days after the And, as discussed above with the value First, the potential exposure can cause rule’s effective date, or an ongoing cost that consumers may derive from the rule a provider to devote increased resources associated with providing contract of law being upheld, the Bureau is to monitoring and evaluating amendments or notices in the case of unaware of any applicable studies that compliance, which can in turn lead the providers who acquire pre-existing would allow the Bureau to assess the provider to determine that its contracts that lack the required language strength of this privacy value. compliance is not sufficient given the in their arbitration agreements. Below, Accordingly, while as discussed in risk of litigation. Second, the potential the Bureau refers to these three effects Part VI above, the Bureau believes that exposure to class litigation can cause a as, respectively, the deterrence effect, the proposal is in public interest due, in provider to monitor and react to class the additional litigation effect, and the part, to reinforcing the rule of law, the litigation or enforcement actions (that administrative change effect. discussion in this section considers the could result in class litigation) against In this Section 1022(b)(2) Analysis, standard economic concept of its competitors, regardless of whether the Bureau abides by standard economic individual well-being and focuses in the provider previously believed that its practice, and omits non-economic particular on more tangible impacts on compliance was sufficient. considerations which the Bureau individual consumers and providers considers above in Part VI (the that are readily ascertainable in the The Additional Litigation Effect Findings). In standard economic framework under which the Bureau is A class settlement could result in practice, individuals’ well-being results assessing the costs and benefits of the three types of relief to consumers: (1) primarily from tangible impacts and is proposed rule for purposes of this Cash relief (monetary payments to affected by direct costs or payments, Section 1022(b)(2) Analysis.566 consumers); (2) in-kind relief (free or changes in behavior, and so on. The Deterrence Effect discounted access to a service); and (3) Conceptually, it also includes less injunctive relief (a commitment by the concrete impacts on individuals, such As discussed above, class litigation defendant to alter its behavior as their ‘‘degree of aesthetic fulfillment, exposure provides a deterrence prospectively, including the their feelings for others, or anything else incentive to providers, above and commitment to stop a particular they might value, however beyond other incentives they may have practice or follow the law). intangible.’’ 562 However, such items can to comply with the law. So long as the When a class action is settled, the be extraordinarily difficult to discern level of class litigation exposure is payment from the provider to and evaluate in practice. Moreover, related to the level of providers’ consumers is intended to compensate economic theory does not generally class members for injuries suffered as a 564 Id. at 975 (‘‘[P]eople might feel upset if result of actions asserted to be in recognize the value of intangible wrongdoers escape punishment, quite apart from impacts to society at large apart from any view people might have about the effect of violation of the law and is a benefit to costs or benefits that accrue to specific punishment on the crime rate.’’). individual consumers or providers.563 565 See, e.g., Christopher Anderson & Louis 567 See, e.g., Kaplow & Shavell supra note 549 at To take one example specific to this Putterman, Do Non-Strategic Sanctions Obey the 1166, (‘‘In many areas of law . . . a primary reason Law of Demand? The Demand for Punishment in to permit individuals to sue is that the prospect of rulemaking, the economic conception of the Voluntary Contribution Mechanism, 54 Games suit provides an incentive for desirable behavior in well-being would count any value that and Econ. Beh. 1 (2006); Jeffrey Carpenter, The the first instance.’’). consumers derive from perceiving class Demand for Punishment, 62 J. of Econ. Beh. & Org. 568 See Gary Becker, Crime and Punishment: An settlements as indications that justice is 522 (2007) for two examples of such studies using Economic Approach, 76 J. Pol. Econ. 169 (1968). being served and the rule of law is being lab experiments with college students. See also Shapiro, supra note 552; Posner, supra 566 The Bureau has discretion in any rulemaking note 546. See discussion above on why other to choose an appropriate scope of analysis with incentives to comply, such as public enforcement 562 Kaplow & Shavell, supra note 549 at 968. respect to potential benefits and costs. In this and reputation, are often insufficient or could be 563 ‘‘Conversely, welfare economics omits any rulemaking, the Bureau, as a matter of discretion, made more effective and efficient by introducing factor that does not affect any individual’s well- has chosen to focus on the tangible, economic private enforcement as well. being.’’ Id. impacts on individual consumers and providers. 569 See Kaplow & Shavell, supra note 549.

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those consumers. However, this benefit violation of the law in ways other than this proposed requirement: Any to consumers is also a cost to by directly providing them with money. eventual litigation could proceed more providers.570 This payment from the Injunctive relief is typically intended to smoothly due to the lack of need for provider to consumers in and of itself is, stop or alter the defendant’s practices courts or arbitrators to analyze whether in economic terms, a transfer,571 that were asserted to be in violation of the Bureau’s rule indeed applies in the regardless of whether this payment is a law. Both forms of relief benefit particular case (to the extent that the remedy for a legal wrong or restitution consumers. However, this benefit to provider has complied with the of providers’ previous ill-gotten gains consumers is also frequently a cost to proposed rule’s language requirement). from consumers that led to the class providers (e.g., if the practice that the The new contract language could reduce action in the first place. To effectuate provider agrees to halt was profitable, legal fees and the time spent in court for the transfer there are also other costs the loss of that profit is a cost to the both parties in class litigations. involved, such as spending on attorneys provider). To effectuate the relief there Moreover, to the extent providers adopt (both the plaintiff’s and the defendant’s) are some similar transaction costs arbitration agreements that comply, and providers’ management and staff involved as with monetary relief, such attorneys would not need to be familiar time, making any such transfer payment as spending on attorneys (both the with the Bureau’s rule to know that an in and of itself (i.e., absent any plaintiff’s and the defendant’s) and arbitration agreement could not be consideration of its deterrent impact) providers’ management time. invoked in class litigation. economically inefficient.572 These costs Unlike with monetary relief, however, B. Potential Benefits and Costs to are incurred both in cases with an the benefits to consumers of in-kind and Covered Persons eventual class settlement and in cases injunctive relief may not be a mirror that ultimately are dismissed by motion, image of the costs to providers, and the Overview abandoned, or settled on an individual cost of providing the relief might be Given that providers using arbitration basis, although the magnitude of the lower than consumer’s value of agreements have chosen to do so and costs may vary depending upon how a receiving the relief.574 In that event, would be limited in their ability to 573 case is resolved. Thus, economic litigation could be viewed as efficient continue doing so by the proposed rule, theory views class actions that result from the perspective of economic theory these providers are unlikely to solely in cash relief as inefficient (i.e., independent of any deterrent effect. experience many notable benefits from absent any consideration of its deterrent The Administrative Change Effect the Bureau’s proposed rule.576 Rather, impact). More generally, under standard the benefits of the proposed rule would economic theory, any delivery system The proposed class rule would flow largely to consumers, as discussed for formal or informal compensation of mandate that providers with arbitration in detail in the next part of this section. victims for violations of law is typically agreements include a provision in their Providers’ costs correspond directly to inefficient unless this system of future contracts stating that the provider the three aforementioned effects of the remedies deters at least some of these cannot use the arbitration agreement to proposed rule: (1) Providers would violations before they occur. block a class action. This administrative experience costs to the extent they act Much of the discussion above also change would require providers to incur on additional incentives for ensuring applies to in-kind and injunctive relief. expenses to change their contracts going more compliance with the law; (2) In-kind relief is intended to compensate forward, and amend contracts they providers would spend more to the class members for injuries suffered as a 575 acquire or provide a notice. However, extent that the exposure to additional result of actions asserted to be in there would also be benefits related to class litigation materializes into additional litigation; and (3) providers 570 There might also be an associated increase in 574 This is more likely to be the case where there would incur a one-time administrative prices due to firms passing on the cost of these were also pre-existing negotiation frictions that payments back to consumers. See the discussion on prevented a Coasian outcome. The Coase Theorem, change cost or ongoing amendment or pass-through below. applied to this context, postulates that a firm notices costs. The Bureau considers 571 ‘‘Benefit and cost estimates should reflect real provides a service to its customer if and only if the each of these effects in turn. To the resource use. Transfer payments are monetary customer values the service more than its costs. extent providers would pass these costs payments from one group to another that do not When the Coase Theorem holds, such a delivery affect total resources available to society.’’ Office of system of formal or informal relief will typically be through to consumers, providers’ costs Mgmt. & Budget, Exec. Office of the President, inefficient, since the efficiency of the interaction Circular A–4, Regulatory Analysis, (Sept. 17, 2003) between the firm and its consumer would have 576 The Bureau believes that it is possible that at 38, available at https://www.whitehouse.gov/ already been maximized before any relief occurred. some providers without arbitration agreements sites/default/files/omb/assets/omb/circulars/a004/ As noted in Ronald Coase, The Problem of Social would benefit from the proposed rulemaking. Their a-4.pdf. See Richard Posner, Cost-Benefit Analysis: Cost, 3 J. of L. & Econ. 1 (1960), absent transaction rivals’ costs would increase, and thus providers Definition, Justification, and Comment on costs, the Coase Theorem holds. However, again as without arbitration agreements benefit to the extent Conference Papers, 29 J. of Leg. Studies 1153, 1155 Coase notes, presence of transaction costs might that cost increase is passed through to consumers (Univ. of Chi. Press 2000) (‘‘In the discussion at the result in such a solution not materializing. In (or to the extent rivals change their aggressive conference John Broome offered as a general, economic theory behind optimal choices by practices). See Steven C. Salop and David T. counterexample to the claim that efficiency in the firms in such contexts is ambiguous, at least as long Scheffman, Raising Rivals’ Costs, 73 a.m. Econ. Rev. Kaldor-Hicks sense is a social value the forced as a solution consistent with the Coase Theorem is 267 (1983). However, the Bureau believes that the uncompensated transfer of a table from a poor not available because of a particular pre-existing magnitude of this benefit is relatively low. In person to a rich person. I agree that allowing the market friction (transactions costs). See, e.g., A. addition, the Bureau acknowledges that these transfer would not improve social welfare in any Michael Spence, Monopoly, Quality & Regulation, providers without arbitration agreements would intelligible sense. But it would not be Kaldor-Hicks 6 Bell J. of Econ. 417 (1975). For a somewhat more lose the option going forward to adopt an efficient when one considers the incentive accessible treatment (at a cost of assuming away arbitration agreement that could be invoked in class effects.’’). several issues), see Richard Craswell, Passing on the litigation. As discussed above, economic theory 572 As noted above, these other costs still Cost of Legal Rules: Efficiency and Distribution in treats a constraint on a party’s options as imposing contribute to the deterrence incentive. Buyer-Seller Relationships, 43 Stan. L. Rev. 361 costs on that party, though given that these 573 Given the Bureau’s assumptions outlined (1991). providers currently do not have arbitration above, because of these costs, from the perspective 575 As discussed further below, providers like agreements, the Bureau believes that the magnitude of economic theory, the best outcome is the one debt buyers or indirect auto lenders would need to of this cost is also relatively low. Thus, for the ease where the possibility of class litigation results in provide notices to consumers upon purchase of of presentation and due to the low magnitude of optimal compliance, and this optimal compliance consumer debt with an arbitration agreement that these benefits and costs, the Bureau focuses its in turn results in no actual class litigation does not adhere to the proposed rule’s mandated analysis only on providers that currently have occurring. provision. arbitration agreements.

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would be lower. Providers’ pass-through its possession, the Bureau is unable to court cases, rulemakings, and other incentives are discussed further below. quantify these costs. The Bureau again regulatory activities address areas of requests comment and data, if available. legal uncertainty over time, the Bureau Covered Persons’ Costs Due to The Bureau believes that, as a general believes that providers at a minimum Additional Compliance matter, the proposed rule would would have incentives to respond to Persons exposed to class litigation increase some providers’ incentives to class litigation against them and their have a significant monetary incentive to invest in additional compliance. The competitors and to respond to other new avoid class litigation. The proposed rule Bureau believes that the additional legal developments as they occur. would prohibit providers from using investment would be significant, but arbitration agreements to limit their Examples of Investments in Avoiding cannot predict precisely what Class Litigation exposure to class litigation. As a result, proportion of firms in particular markets providers may attempt to lower their would undertake which specific Providers who decide to make class litigation exposure (both the investments (or forgo which specific compliance investments might take a probability of being sued and the activities) described below. variety of specific actions with different magnitude of the case if sued) in a However, economic theory offers cost implications. First, providers might multitude of other ways. All of these general predictions on the direction and spend more on general compliance ways of lowering class litigation determinants of this effect. Whether and management. For example, upon the exposure would likely require incurring how much a particular provider would effective date of the rule, if finalized, a expenses or forgoing profits. The invest in compliance would likely provider might decide to go through a investments in (or the costs of) avoiding depend on the perceived marginal one-time review of its policies and class litigation described below, and benefits and marginal costs of procedures and staff training materials other types of investments for the same investment. For example, if the provider to minimize the risks of future class purpose, would likely be enhanced by believes that it is highly unlikely to be litigation exposure. This review might monitoring the market and noting class subject to class litigation and that even result in revisions to policies and litigation settlements by the then the amount at stake is low (or the additional staff training. There might competitors, as well as actions by provider is willing to file for bankruptcy also be an ongoing component of costs regulators. Providers would also likely if necessary to ward off a case), then the arising from periodic review of policies seek to resolve any uncertainty incentive to invest is low. Conversely, if and procedures and regularly updated regarding the necessary level of the provider believes that it is highly training for employees, as well as third- compliance by observing the outcomes likely to be subject to class litigation party service providers, to mitigate of such litigation. These investments and that the amount at stake would be conduct that could create exposure to 579 might also reduce providers’ exposure large if it is sued, then the incentive to class litigation. Moreover, there to public enforcement. invest is high. might be additional costs to the extent The Bureau has previously attempted Providers’ calculus on whether and that laws change, class litigation cases to research the costs of complying with how much to invest in compliance may are publicized, or new products are Federal consumer financial laws as a also be affected by the degree of developed. Both the one-time and the general matter, and found that providers uncertainty over whether a given ongoing components could also include themselves often lack the data on practice is against the law, as well as the outside audits or legal reviews that the compliance costs.577 Even if basic data size of the stakes. Where uncertainty provider might perform. were available on how much money levels are very high and providers do Second, providers might incur costs providers invest in legal compliance not believe that they can be reduced by due to changes in the consumer generally—as distinct from investments seeking guidance from legal counsel or financial products or services in customer service, general risk regulators or by forgoing a risky practice themselves. For example, a provider management, and related undertakings that creates the uncertainty, providers might conclude that a particular feature and functions—it is difficult to isolate may have less incentive to invest in of a product makes the provider more the marginal compliance costs related to lowering class litigation exposure under susceptible to class litigation, and particular deterrence and to quantify the logic that such actions will not make therefore decide to remove that feature any additional investment that would any difference in light of the residual from the product or to disclose the occur in the absence of arbitration uncertainty about the underlying law. In feature more transparently, possibly agreements. Specifically, any the limit, if a provider believes that resulting in additional costs or differences in compliance-related class litigation is completely unrelated decreased revenue. Similarly, a provider expenditures between firms that have to compliance, then the provider will might update its product features based and do not have arbitration agreements rationally not invest in lowering class on external information, such as actions may be the result of other underlying litigation exposure at all: the deterrence against the provider’s competitors by factors such as a general difference in effect is going to be absent. Nonetheless, either regulators or private actors. The risk tolerance and management the Bureau believes that many providers ongoing component could also include philosophy. Thus, given the data within know that class litigation is indeed changes to the general product design related to their actual compliance with process. Product design could consume 577 See Bureau of Consumer Fin. Prot., the law and adherence to their contracts more time and expense due to Understanding the Effects of Certain Deposit with consumers.578 Moreover, because additional rounds of legal and Regulations on Financial Institutions’ Operations compliance review. The additional (2013), available at http:// files.consumerfinance.gov/f/201311_cfpb_report_ 578 This is hard to measure empirically and the findings-relative-costs.pdf, for challenges in general Bureau requests comments on or submissions of Professor Grundfest’s ‘‘Disimplying Private Rights of and for a description of the amount of resources any empirical studies that have measured the merit Action Under the Federal Securities Laws: The spent collecting compliance information from seven of class actions involving consumer financial Commission’s Authority,’’ 108 Harv. L. Rev. 438 banks with respect to their compliance to parts of products or services. The Bureau is aware of some (1994). four regulations. A significant part of the challenge empirical literature on this question involving 579 The providers that already have a compliance is that providers typically do not track their securities but does not believe that this literature management system with an audit function could, compliance costs and it is not possible to calculate directly applies in this context. See, e.g., Joel for example, increase the frequency and the breadth them from the standard accounting metrics. Seligman, The Merits Do Matter: A Comment on of audits.

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exposure to class litigation could also a notice (some consumers will not even Bureau had classified each case in the result in some products not being know they are entitled to one) or on its Study by the North American Industry developed and marketed primarily due content (consumers will not generally Classification System (NAICS) code that to the risk associated with class be in a position to know whether the most closely corresponded to the litigation. reason given is legally sufficient or consumer financial product or service at Some of the compliance changes that accurate). The consumer is more likely issue in the case.585 providers might make are relatively to seek credit from another source, or To estimate the impact of the rule the inexpensive changes in business simply to proceed unaware of the Bureau used the Study data to estimate processes that nonetheless are less reasons why they are not able to access the percentage of providers in each likely to occur in the absence of class credit. However, a creditor could invest market with an arbitration agreement litigation exposure. Three examples of in improving its notice procedures and today. The Bureau assumed that the such investments in compliance follow. content. class settlements that occurred involved First, under the Fair Debt Collection providers without an arbitration Practices Act, debt collectors are not Covered Persons’ Costs Due to Additional Class Litigation: Description agreement. The Bureau was then able to allowed to contact a consumer at an calculate the incidence and magnitude unusual time or place which the of Assumptions Behind Numerical Estimates of class action settlements for those collector knows or should know to be providers in each market and use these inconvenient to the consumer.580 Additional investments in compliance calculations to estimate the impact of However, it is highly unlikely that even are unlikely to eliminate additional the proposed rule going forward in each a consumer who is aware of this rule class litigation completely, at least for market if the providers who currently will bring an individual lawsuit or an some providers.583 Thus, if the class have arbitration agreements were no individual arbitration over a single proposal is finalized, those providers longer insulated from class actions. contact because it will require that are sued in a class action would The Bureau’s estimation of additional considerable time on the consumer’s also incur expenses associated with Federal class litigation costs is based part, which is likely to be an even additional class litigation. The major upon the set of Federal class settlements higher burden for consumers subject to expenses to providers in class litigation analyzed in the Study, with adjustments debt collection than for other types of are payments to class members and to align those data with the scope of the consumers. To the extent that a debt related expenses following a class proposed rule, which is somewhat collector wants to minimize class settlement, plaintiff’s legal fees to the narrower.586 The Study sought to litigation exposure, however, it could extent that the provider is responsible identify all class action settlements develop a procedure to avoid such for paying them following a class involving any of the enumerated contacts. settlement, the provider’s legal fees and consumer financial statutes under Title As a second example, consider a bank other litigation costs (in all cases X of the Dodd-Frank Act. The proposed stopping an Automated Clearing House regardless of how it is resolved), and the rule is narrower in scope. Due to its (ACH) payment to a third party at a provider’s management and staff time narrower scope, the proposed rule consumer’s request. While important to devoted to the litigation. would only have an impact on those a consumer, absent the possibility of To provide an estimate of costs entities within the proposed coverage related to class settlements of class litigation, the bank’s primary when they offer products and services incremental class litigation that would incentive to ensure that the ACH subject to the proposed rule, rather than payment is discontinued is to maintain be permitted to proceed under the proposed rule, the Bureau developed a positive reputation with this particular percent-100 percent]. The Bureau then inquired consumer.581 It is highly unlikely that a estimates using the data underlying the whether this number would change if the question consumer would sue individually if the Study’s analysis of Federal class had been asked to just small providers. For the bank fails to take action, and it might settlements over five years (2008–12), markets for which prevalence was analyzed in the the Study’s analysis of arbitration Study, the Bureau converted the estimate from the even be unlikely that the consumer Study into one of these four ranges. Finally, the would switch to another bank because agreement prevalence, and additional Bureau utilized the midpoint of each range for this of that failure, especially given the data on arbitration agreement quantification exercise (for example, assuming that switching costs entailed in such a move. prevalence collected by the Bureau 35 percent of providers use arbitration agreements However, a bank could invest in through outreach to trade associations if the trade group reported that some, but less than half [20 percent-50 percent] of providers use developing proper procedures to ensure in several markets during the arbitration agreements). See Part IX below for that such payments are stopped at most development of this proposal.584 The further description of the data received from the three business days after a consumer’s trade groups. Any inaccuracy in the prevalence request as required under prevailing 583 For example, as noted above, some providers numbers affects the estimates below. For example, might choose to forgo sufficient additional if prevalence is actually higher in a particular law. market than the number used by the Bureau, then The third example is a creditor investment in compliance. 584 See generally Study, supra note 2, sections 2 the actual costs to providers (and benefits to sending a consumer an adverse action and 8. During the SBREFA process, the Bureau consumers) would be higher. In this example, the notice explaining the reasons for denial sought and obtained permission from OMB to increases in across all markets costs to providers 582 conduct a survey of trade groups (and potentially and benefits to consumers (stemming from the relief of a credit application. While to class members) are not necessarily symmetric, knowing when and why a denial has providers) in order to assess the prevalence of arbitration agreements in the markets for which since the Bureau’s estimates are market-by-market. occurred may be important to an prevalence was not reported in the Study. Unless 585 See U.S. Census Bureau, North American individual consumer, it is unlikely that the trade groups had an exact estimate, the Bureau Industry Classification System (2012), available at a consumer would bring an individual asked the trade group representatives to pick one http://www.census.gov/eos/www/naics/. 586 suit based on the failure to provide such of four options for the prevalence of arbitration The Study’s Section 8 analyzed class agreements in a given market, with the percentages settlements of claims under enumerated consumer in the brackets also mentioned: (1) Barely any laws, unless excluded as described in the 580 15 U.S.C. 1692(a) providers use arbitration agreements [0 percent-20 methodology for Section 8. See Study, supra note 581 A bank would have to stop such payments in percent]; (2) some providers but fewer than half use 2, Appendix S at 129. In addition, class settlements at most three business days after a consumer’s arbitration agreements [20 percent-50 percent]; (3) of claims concerning consumer financial products request. See 15 U.S.C. 1693e(a). more than half but not the vast majority use or services more generally were included, even if 582 A creditor would have to send such a notice. arbitration agreements [50 percent-80 percent]; and claims were not raised under enumerated consumer See 15 U.S.C. 1681m(a). (4) the vast majority use arbitration agreements [80 laws. Id.

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the broader scope of the research of that they either chose not to invoke or Bureau performs similar calculations for Federal class actions in the Study. failed to invoke successfully, in which the monetary exposure in terms of Additionally, the proposed rule would event the Bureau’s incidence estimates payments to class members and not have an impact on cases in which here are overstated. On the other hand, plaintiff’s attorney’s fees. arbitration agreements cannot play a similar to issues discussed above with In the Study, the Bureau reports both role today, either because the law does regard to estimating compliance-related the amount defendants agreed to not allow them to be used for the type expenditures, it may be that some other provide as cash relief (gross cash relief) of dispute at issue or that type of underlying factor (such as a general dispute does not involve a written difference in risk tolerance and and the amount that public court filings contract with the consumer on which management philosophy) might prompt established a defendant actually paid or the defendant in the case could rely to providers that use arbitration was unconditionally obligated to pay to invoke arbitration.587 The set of Federal agreements today to take a different class members because of either class settlements the Bureau uses to approach to underlying business submitted claims, an automatic estimate impact therefore excludes 117 practices and product structures than distribution requirement, or a pro rata Federal class settlements analyzed in providers who otherwise appear similar distribution with a fixed total amount Section 8 of the Study.588 In addition, but have never used arbitration (payments).590 The Bureau documented to avoid underestimating the effects, the agreements. This might make providers about $2 billion in gross cash relief and estimates in this section of the proposed who use arbitration agreements today about $1.09 billion in payments.591 The rule also include 10 additional class more prone to class litigation than actual (as opposed to documented by settlements identified through the providers who do not, and increase both the end date of the Study) payments to Section 8 search methodology which the costs to providers and benefits to consumers from the 419 Federal class may be within the scope of the proposed consumers discussed below. settlements in the Study are somewhere rule and affected by it but which had The Bureau also generally assumed between these two numbers. The Bureau not been counted in the data analyzed for purposes of the estimation that uses the documented payments amount in Section 8. litigation data from 2008 to 2012 were ($1.09 billion in total) as an input in The resulting set of 312 cases used to representative of an average five-year calculating payments to class members estimate impact of the proposed rule on period. However, the Bureau recognizes in the derivations below. However, Federal class litigation are identified in that the Bureau’s own creation in 2010 accounting for the different scope of the Appendix A hereto, along with a list of may have increased incentives for some proposed rule results in the aggregate the 117 excluded cases described above providers to increase compliance payment amount changing from $1.09 in Appendix B. The Bureau notes that investments, although it did not begin billion to $1.07 billion.592 In contrast, the total amount of payments and enforcement actions until 2012. To the using gross cash relief would roughly attorney’s fees—the two statistics that extent that the existence and work of the double the calculated amount of the Bureau uses for its estimates in this Bureau, including its supervisory Section 1022(b)(2) Analysis—for the 312 activity and enforcement actions, payments to class members (thus it cases are not materially different than increased compliance since 2010 in the would double both this cost to providers the totals for the aforementioned cases markets the proposed rule would affect, and the benefit to consumers, but not from the 419 used in the Study. That is the estimates of costs to providers and largely a function of the fact that the the benefits to consumers going forward contracts varies depending on the circumstances. See SBREFA Panel Report, supra note 332 at additions and subtractions were for the would be overestimates. Appendix A. Thus, as discussed above, arguably all most part relatively small class actions To provide a more specific illustration debt collectors face the risk of class litigation that did not contribute materially to the of the Bureau’s methodology, suppose already. However, as discussed above, they are amount of aggregate gross or net relief. for example that out of 1,000 providers likely to experience an increase in risk proportional With regard to the Bureau’s in a particular market (NAICS code), 20 to the share of debt that they are collecting on that currently enjoys arbitration agreement protection. estimations overall, the accuracy of the percent currently use arbitration For purposes of this calculation, the Bureau estimates is limited by the difficulty that agreements, and the Bureau found 40 assumed that 53 percent of debt collectors’ current often arises in data analysis of class litigation settlements over five portfolios are subject to arbitration agreements disentangling causation and correlation, years. That implies that 800 providers based on the Study’s estimate that 53 percent of the credit card loans outstanding are subject to namely unobserved factors than can (1,000—1,000 * 20 percent) did not use arbitration agreements. Study, supra note 2, section affect multiple outcomes. As noted arbitration agreements and the overall 2 at 7. Thus, the Bureau assumed that the above, the core assumptions underlying exposure for these 800 providers was 40 proportion of debt collectors’ general portfolios that the Bureau’s estimates are that the cases total, for a rate of 5 percent (40/ would be affected by the proposal has a prevalence of arbitration agreements on par with credit card settlements identified in the Study were 800) for five years. In turn, this implies debt. The prevalence is likely to be different from all brought against providers without an that the 200 providers (1,000 * 20 53 percent as there are other sources of debt, for arbitration agreement and that providers percent) that currently use arbitration example, payday and medical debt. As with other with arbitration agreements affected by agreements would be expected to face, estimates of prevalence, if 53 percent is an underestimate, then debt collectors would incur the rule would be subject to class collectively, 10 class settlements in five more costs (and consumers would experience more settlements to the same extent as years (200 * 5 percent), or 2 class benefits). providers without arbitration settlements per year (10/5).589 The 590 See Study, supra note 2, section 8 at 3–5 and agreements today. The first assumption 23–29. is a conservative one: It is likely that 589 These calculations were done by NAICS codes 591 The Bureau notes that the number of class some of the settlements involved and adjusted for the composition of the debt cases litigated, and the corresponding numbers for portfolios at debt collectors. According to the both gross cash relief and payments vary year-to- providers with arbitration agreements comments made by SERs and other anecdotal year. See Study, supra note 2, section 8 at 12, 16, evidence, debt collectors currently do not 24, and 27. 587 Persons offering or providing similar products differentiate between debt incurred on contracts 592 The data presented below with respect to a or services might be covered by the proposed rule with and without arbitration agreements when given market is after adding and dropping the in some circumstances; the Bureau’s estimates are deciding whether to collect on such debt. Many aforementioned cases from the 419 used in the not a legal determination of coverage. debts in their portfolios do not involve arbitration Study. The total amount of payments, or other 588 See Appendices A and B hereto for additional agreements and their ability to invoke agreements aggregate statistics, did not change materially due details on adjustments in three other cases. where they are present in the original credit to adding and dropping these cases.

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any other costs to providers such as number for calculations below.596 Thus, Covered Persons’ Costs Due to legal fees). the Bureau assumes that in all cases the Additional Class Litigation The Study documents relief provided plaintiff’s attorney’s fees awarded were The Bureau estimates that the to consumers and attorney’s fees paid to 171 percent of the base amount, proposed rule would create class action attorneys for the consumers,593 but the including in cases where the Bureau did exposure for about 53,000 providers Study does not contain data on the not find a lodestar multiplier, which (those who fall within the coverage of defense costs incurred by the providers also include the cases where attorneys the proposed rule and currently have an because these data were not available to were compensated based on a arbitration agreement).600 Based on the the Bureau. The Bureau therefore percentage of the settlement amount. calculation described above, the estimated defendant’s attorney fees The Bureau also notes that the Bureau’s model estimates that this class action exposure would result—on an based on plaintiff’s attorney’s fees with estimates provided below are 594 annual basis—in about 103 additional appropriate adjustments. exclusively for the cost of additional Specifically, the Bureau believed it was class settlements in Federal court. In Federal class litigation filings and those cases, the Bureau estimates that an important to account for the fact that settlements. The Bureau does not while plaintiff’s attorneys are additional $342 million would be paid attempt to monetize the costs of compensated in class actions largely on out to consumers, an additional $66 additional state class litigation filings a contingent basis (and thus not only million would be paid out to plaintiff’s and settlements because limitations on lose the time value of money but, attorneys, and an additional $39 million moreover, face the risk of losing the case the systems to search and retrieve state would be spent by providers on their and earning nothing), the defendant’s court cases precluded the Bureau from own attorney’s fees and internal staff attorneys and the defendant’s staff are developing sufficient data on the size or and management time.601 often compensated on an hourly or costs of state court class action These numbers should be compared salary basis, and face considerably settlements. Based on the Study’s to the number of accounts across the lower risk. Courts review attorney’s fees analysis of cases filed, the Bureau affected markets. While the total in class action settlements for believes that there is roughly the same number of all accounts across all reasonableness. One way courts do this number of class settlements in state markets is unavailable, there are, for is to first calculate a ‘‘lodestar’’ amount courts as there is in Federal courts example, hundreds of millions of by multiplying the number of hours the across affected markets; 597 however, the accounts in the credit card market attorneys devoted to the case by a Bureau generally believes that the alone. Thus, averaged across all reasonable hourly rate, and then adjust amounts at stake are not nearly as large markets, the monetized estimates provided above amount to less than one that amount by a lodestar multiplier in state courts.598 The Bureau notes that dollar per account per year. However, designed to compensate the plaintiff’s while the total number of putative class this exposure could be higher for attorneys for the risk they took in cases filed might be similar in Federal bringing the case with no guarantee of particular markets. and state courts, the relative frequency The Bureau believes that these payment.595 To the extent that lodestar of state and Federal class actions may providers would enter into a similar multipliers incorporate a risk vary in different markets.599 For number of class settlements in state inapplicable to defense costs, the example, there might be considerably court; however, with markedly lower Bureau believes that the proper more putative state class actions filed amounts paid out to consumers and comparison for the defendant’s cost is against auto lenders or smaller payday attorneys on both sides. Many cases also the unadjusted plaintiff’s attorney’s fees. operators than putative Federal class feature in-kind relief.602 However, as in By reviewing the cases used in cases. On the other hand, there might be the Study, the Bureau is unable to Section 8 of the Study, the Bureau considerably more putative Federal quantify this cost in a way that would documented lodestar multipliers in class actions filed against large national be comparable with payments to class about 10 percent of the settlements. The banks than putative state class actions. average multiplier across those cases 600 See IRFA Analysis below for the data used to was 1.71, and thus the Bureau uses this In some markets, such as the payday arrive at this estimate. loan market, there were Federal class 601 These numbers do not include any estimates settlements related to debt collection from costs or benefits from increased investment in 593 These fees include other litigation costs such compliance with the law. As discussed above, the as expert report costs as well as amounts paid for practices, which this Part classifies as Bureau is not estimating those numbers. The settlement administrator costs. See Study, supra relating to the debt collection market. Bureau has also performed a sensitivity analysis by note 2, Appendix B at 137. using market shares of providers with arbitration 594 Including other defense costs, such as agreements in the checking account and credit card 596 Despite the small sample, this number is discovery, and including the provider’s staff and markets instead of prevalence that is unadjusted by management time (as both staff and management consistent with the finding by Professor Fitzpatrick market share. The Bureau used the numbers will spend at least some time with their attorneys of a 1.65 average. See Fitzpatrick, supra note 595, reported in Section 2 of the Study for this in defending the case). at 834. sensitivity analysis. This other specification 595 For this factor, the Bureau averaged lodestar 597 The Study found 470 putative Federal class changes the results to about 109 additional Federal multipliers from a subset of cases from the Study actions filed between 2010 through 2012 versus 92 class settlements, an additional $475 million paid where the Bureau documented a lodestar putative state class actions. However, the state class out to consumers, an additional $114 million paid multiplier. Plaintiff’s attorney compensation in a actions were only for jurisdictions representing 18.1 out to plaintiff’s attorney’s fees, and an additional class settlement is frequently computed using the percent of the U.S. population (92/.181 = 508). See $67 million for defendants’ attorney’s fees and time spent on the case, the per-hour rate of the Study, supra note 2, section 6 at 16–17. Note that internal staff and management time per year. attorneys, all adjusted by the ‘‘lodestar multiplier’’. the scope of Section 6 included six markets, not all 602 See Study, supra note 2, section 8 at 4. As in The multiplier reflects various considerations, for the markets that would be affected. the Study, the Bureau uses the term ‘‘in-kind relief’’ example, the fact that when plaintiff attorneys do to refer to class settlements in which consumers 598 Especially due to the Class Action Fairness not settle a case, they will frequently not be were provided with free or discounted access to a Act of 2005, supra note 54, which in many cases compensated. See, e.g., Theodore Eisenberg & service. Id., section 8 at 4 n.6. While the Study Geoffrey P. Miller, Attorney Fees in Class Action allows defendants to remove class actions to quantified $644 million of in-kind relief, that Settlements: An Empirical Study, 1 J. of Emp. Leg. Federal court when $5 million or more are at stake number is included in relief, but not in payments Stud. 27 (2004); Brian Fitzpatrick, An Empirical and other jurisdictional requirements are met. in the Study, and the Bureau continues to follow Study of Class Action Settlements and Their Fee 599 See Study, supra note 2, section 6 at 19 tbl. this approach here, both for the calculation of costs Awards, 7 J. of Emp. Leg. Stud. 811 (2010). 4. to providers and benefits to consumers.

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members. Similarly, injunctive relief a class case than if it is resolved in any many putative class actions, the case could result in substantial forgone profit other way.606 The Bureau discusses two becomes effectively an individual case (and a corresponding substantial benefit potential estimates below and presents (in terms of how the parties and their to the consumers), but cannot be easily the more conservative one in the table counsel treat the stakes of it), and from quantified.603 below. that point on, its cost should be The Bureau performed a similar For the purposes of the first defense comparable to the cost of an individual analysis to estimate the number of cases cost estimate, the Bureau assumed that case (as opposed to a case settled on a that would be filed as putative class putative class action cases that are not classwide basis). The calculation above actions, but would not result in a class settled on a class basis (for whatever assumes that this point of transition to settlement. Based on the data used in reason) cost 40 percent (1 divided by an individual case is the last day of the the Study, the Bureau believes that 2.5) less to litigate. Therefore, the case. roughly 17 percent of cases that are filed Bureau estimated that these additional In contrast, the opposite assumption as class litigations end up settling on a 501 Federal class cases that do not settle is that from the first day of the case the classwide basis.604 For purposes of this on a class basis would result in $76 parties (in particular, the defense) know estimate the Bureau again assumed that million per year in defense costs to that the case is not going to be settled these putative class actions were all providers. The Bureau did not include on a classwide basis. Using this brought against providers without an in this estimate recovery amounts in assumption, the 501 cases cost as much arbitration agreement. This is a these putative class cases that did not to defend as 501 individual cases. Using conservative assumption; it may be that result in a class settlement, as the $15,000 per individual case as a defense the very reason that some of these Bureau believes those are negligible cost estimate, the cost of these 501 cases putative class actions were resolved on amounts (for example, a few thousand would be approximately $8 million per an individual basis is precisely because dollars per case that had an individual year.608 Thus, the Bureau believes that of an arbitration agreement. settlement). Based on similar numbers the correct estimate is somewhere Nonetheless, on this assumption and of Federal and State cases, it is likely between $8 and $76 million per year. extrapolating from the estimated 103 that there would also be an additional For the purposes of clearer presentation, additional Federal cases that would be 501 State cases filed that do not settle the Bureau conservatively presents the settled on a classwide basis each year, on class basis, whose cost the Bureau $76 million number in the table below. the Bureau estimates that there would does not estimate due to the lack of The Bureau notes that for several be 501 additional Federal court cases nationally representative data; however, markets the estimates of additional filed as class actions that would end up these cases would likely be significantly Federal class action settlements are not settling on a classwide basis, cheaper for providers.607 low.609 These low estimates could assuming no change in filing behavior The Bureau believes that the reflect some combination of the by plaintiff’s attorneys.605 Some of the calculation above might be an following four possibilities. First, as Federal cases analyzed in the Study overestimate of time spent on such cases noted above, in some markets class filed as class actions were filed against because both defendant’s and plaintiff’s actions are more commonly filed in providers that had an arbitration attorneys frequently come to the state courts. Second, it is possible that agreement that applied to the case. conclusion, relatively early in the case, in some markets, where there is less Thus, the Bureau believes that such that the case will not result in a class uncertainty, additional investment in providers already face some exposure, settlement. Once such a conclusion is compliance might result in no class which implies that both the 103 settled reached, the billable hours incurred by actions filed.610 Third, in some markets, class cases and the 501 cases filed as either side (in particular the defense) are by their nature, there will be few claims class actions are likely overestimates of likely significantly lower than for a case that can proceed as class actions, Federal court settlements. that is headed towards a class regardless of arbitration agreements, In order to estimate the costs settlement, even if the final outcome of because there are not common issues associated with these incremental the two cases might be achieved in that are predominant or because the Federal putative class actions, the comparable calendar time. Similarly, market is highly dispersed. Fourth, in Bureau notes that the Study showed that many cases are resolved before some markets the current prevalence of an average case filed as a putative class discovery or motions on the pleadings; arbitration agreements is so high (over action in Federal court takes roughly 2.5 such cases are cheaper to litigate. In 80 percent) that any estimates are times longer to resolve if it is settled as other words, at some point early in especially imprecise.

603 The Study quantified behavioral relief 604 The Bureau reported a lower number (12.3 card markets, the results are additional 530 Federal (defined as a part of injunctive relief) in the Study. percent) in the Study based on final settlements class cases that do not settle on class basis result The Bureau uses ‘‘behavioral relief’’ to refer to class approved before March 1, 2014, though as noted in in $130 million in costs to providers. settlements that contained a commitment by the the Study, nearly 30 additional cases had a final 608 While the $15,000 figure is hard to estimate, defendant to alter its behavior prospectively, for settlement or proposed class settlement entered as this estimate is consistent with data received from example, by promising to change business practices of August 31, 2014. Study, supra note 2, section 6 one of the SERs during the SBREFA process. See in the future or implementing new compliance at 7 and 36. SBREFA Panel Report, supra note 332 at 18. programs. The Bureau did not include a simple 605 The Bureau estimated 102.7 (rounded to 103) 609 As further discussed in Part IX below, a agreement to comply with the law, without more, additional Federal class settlements. Thus, the number of other markets are covered, but not as behavioral relief. Study, supra note 2, appendix calculation for additional Federal cases that sufficiently affected to the point that the Bureau B at 135. If the Bureau were to count such cases, would be settled on a classwide basis is would estimate the number of affected persons. The there would likely be significantly more cases with (102.7/.17)*(1–.17). Bureau likewise does not generally include rows in behavioral relief. As the Bureau notes in the Study, 606 See Study, supra note 2, section 6 at the Federal class settlement estimate table for those behavioral relief is seldom quantified in case 46 tbl. 7. markets. records, and thus the Bureau does not quantify it. 607 For the sensitivity analysis using market share 610 Although as the Bureau’s estimates suggest, Study, supra note 2, section 8 at 5 n.10. prevalence data for checking account and credit this is unlikely to be the case in many markets.

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The Bureau notes that providers increased class litigation exposure by insurance coverage or a higher might attempt to manage the risks of opting for more comprehensive reimbursement limit. However, the

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Bureau is not able to model the impacts Third, there are likely to be some For example, buyers of medical debt of insurance in providers’ response to providers that use contracts that they could incur additional costs due to the proposed rule. During the Small have highly customized to their own additional due diligence they would Business Review Panel, the SERs needs (relative to the first two categories undertake to determine which acquired reported that it often is not clear to them above) and that might not engage in debts arise from consumer credit which type of class litigation exposure annual reviews. These would require a transactions (that would be subject to a policy covers nor was it clear that more comprehensive review in order to the proposed rule), or alternatively by providers typically ask about this sort of either change or remove the arbitration the additional exposure created from coverage. The SERs explained that their agreement. sending consumer notices on debts that coverage is often determined on a more The Bureau believes that smaller did not arise from credit transactions specialized case-by-case basis that limits providers are likely to fall into the first (i.e., potential over-compliance). The at least small providers’ ability to plan category. The Bureau believes that the Bureau does not believe that the cost of ahead. Larger firms may have more largest providers would fall into either sending such a notice would be sophisticated policies and more the second or the third category. On burdensome to the buyers of medical systematic understanding of their average across all categories, the Bureau debt. In particular, the Bureau believes coverage, however, or they may self- believes that the average provider’s that medical debt buyers typically send insure. Finally, the insurance providers expense for the administrative change to out a notice to the consumer upon might require at least some of the be about $400. This consists of acquisition of debt due to requirements changes to compliance and products approximately one hour of time from a of 15 U.S.C. 1692(g), when applicable. discussed above as a prerequisite for staff attorney or a compliance person The Bureau believes that these debt coverage or for a discounted premium. and an hour of supporting staff time. buyers could attach the additional Given the Bureau’s estimate of notice that would be required by the Covered Persons’ Costs Due to the proposed rule to this required FDCPA Administrative Change Expense approximately 48,000 providers that use arbitration agreements,611 the proposal’s notice with a minimal increase in costs. Indirect auto lenders might face a Providers that currently have required contractual change would somewhat different impact. While a arbitration agreements (or who purchase result in a one-time cost of $19 million, loan purchased from an auto dealer contracts with arbitration agreements or about $4 million per year total for all would be from a credit transaction, the that do not include the Bureau’s providers if amortized over five dealer’s contract might contain an language) would also incur years.612 Alternatively, providers might arbitration agreement that does not administrative expenses to make the choose to drop arbitration agreements include the language specified by the one-time change to the arbitration altogether, potentially resulting in lower Bureau because the dealer would not be agreement itself (or a notice to administrative costs. a provider under the rule. However, the consumers concerning the purchased In addition to the one-time change contract). Providers are likely to incur a Bureau believes that because dealers described directly above, some would be aware that their partner range of costs related to these providers could be affected on an administrative requirements. indirect auto lenders would be subject ongoing or sporadic basis in the future to the proposed rule, it is likely that The Bureau believes that providers as they acquire existing contracts as the dealers would voluntarily change their that currently have arbitration result of regular or occasional activity, contracts to streamline the process for agreements would manage and incur such as a merger. Under proposed indirect auto lenders. these costs in one of three ways. First, § 1040.4(a)(2), that would require the Bureau believes that some providers providers who become a party to an Costs to Covered Persons From the rely exclusively on third-party contract existing contract with a pre-dispute Proposed Requirements Regarding forms providers with which they arbitration agreement that does not Submission of Arbitral Records already have a relationship, and for already contain the language mandated There would also be a minor cost these providers the cost of making the by proposed § 1040.4(a)(2) to amend the related to the proposed rule’s required changes to their contracts is agreement to include that provision, or requirements regarding sending records negligible (e.g., downloading a send the consumer a notice indicating to the Bureau related to providers’ compliant contract from the third that the acquirer would not invoke that arbitrations. In the Study, the Bureau party’s Web site, with the form likely pre-dispute arbitration agreement in a documented significantly fewer than being either inexpensive or free to class action.613 Various markets might 1,000 individual arbitrations per download). incur different costs due to this year.614 Given that the proposed rule’s Second, there might be providers that proposed requirement. requirements would involve sending perform an annual review of the records related to a particular arbitration contracts they use with consumers. As 611 See the Regulatory Flexibility Analysis below to the Bureau, it is unlikely that the a part of that review (provided it comes at Part IX. The Bureau estimates that 4,500 debt transmittal requirement would impose a before the proposed rule becomes collectors would be subject to the rule but would cost of more than $100 per arbitration— not incur this cost because they do not act as the effective), they would either revise their original provider of consumer financial products a conservative estimate for the time arbitration agreements or delete them, and services, and thus are unlikely to have required to copy or scan the documents, whether or not most of these contracts contracts directly with the consumers with whom locate the address where to send the are supplied by third-party providers. they interact. documents, and any postage costs. To For these providers, it is also unlikely 612 Some providers have multiple contracts: For the extent covered persons would be example, some of the credit card issuers have filed that the proposed rule would cause dozens of contracts with the Bureau, see http:// required to redact specific identifiers considerable incremental expense of www.consumerfinance.gov/credit-cards/ (such as name, physical and email changing or taking out the arbitration agreements/. Presumably, the marginal cost of agreement insofar as they already changing each additional contract would be 614 See generally Study, supra note 2, section 5. minimal, as long as each of the contracts used the engage in a regular review, as long as Relatedly, JAMS (the second largest provider of same dispute resolution clause. consumer arbitrations) reported about 114 this review occurs before the rule 613 The Bureau believes that medical debt buyers consumer financial products or services arbitrations becomes effective. would be the most affected by this provision. in 2015.

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address, phone number, account percent would mean that consumers maximizing response is not to pass that number, and social security number), would not see a price increase due to change onto prices. this cost might increase, conservatively, the proposal. As noted above, the Economic theory does not provide by a few hundred dollars on average due monetized estimates of additional useful guidance about what the to the time to train the staff on the Federal class settlements above amount magnitude of the pass-through of specific identifiers and the time to to less than one dollar per account per marginal cost is likely to be with regard redact the documents, for each year when averaged across markets to the proposed rule. The Bureau arbitration.615 Thus, the total cost of the (however, it is possible that the number believes that providers might treat the proposed arbitration submission is higher for some markets). Thus, even administrative costs as fixed. Whether requirements is unlikely to reach $1 100 percent pass-through of the the costs due to additional compliance million per year given the current monetized costs of additional Federal are marginal depends on the exact form frequency of individual arbitrations. class settlements in every market would of this spending, but most examples Moreover, these costs could be lower to result in an increase in prices of under discussed above would likely qualify as the extent that providers decide not to one dollar per account per year when largely fixed. The Bureau believes that use arbitration agreements in response averaged across all markets. providers might treat a large fraction of to the rule. the costs of additional class litigation as Determining the extent of pass- marginal: Payments to class members, Potential Pass-Through of Costs to through involves evaluating a trade-off attorney’s fees (both defendant’s and Consumers between volume of business and margin plaintiff’s), and the cost of putative class The Bureau believes that most (the difference between price and cases that do not settle on a class basis. providers would pass through at least marginal cost) on each customer served. The extent to which these marginal portions of some of the costs described Any amount of pass-through increases costs are likely to be passed through to above to consumers. This pass-through price, and thus lowers volume. A pass- consumers cannot be reliably predicted, can take multiple forms, such as higher through rate below 100 percent means especially given the multiple markets prices to consumers or reduced quality that a firm’s margin per customer is affected. Empirical studies are mostly of the products or services they provide lower than it was before the provider unavailable for the markets covered. to consumers. The rate at which firms had to incur the new cost. Economic Empirical studies for other products, pass through changes in their marginal theory suggests that, without accounting mainly consumer package goods and costs onto prices (or interest rates) for strategic effects of competition, the commodities, do not produce a single charged to consumers is called the pass- pass-through rate ends up somewhere in estimate.620 through rate.616 between the two extremes of: (1) No The available pass-through estimates A pass-through rate of 100 percent pass-through (and thus completely for the consumer financial products or means that an increase in marginal costs preserving the volume at the expense of services are largely for credit cards, would not be absorbed by the providers, lowering margin) and (2) full pass- where older literature found pass- but rather would be fully passed through (completely preserving the through rates of close to 0 percent.621 through to the consumers.617 margin at the expense of lowering More recently, researchers have Conversely, a pass-through rate of 0 volume).618 For a case of a monopolist analyzed the effects of regulation that with a linear demand function (a price effectively imposed price ceilings on 615 One of the SERs on the SBREFA Panel increase of a dollar results in the same late payment and overlimit fees on projected 2 to 6 hours of staff time. See SBREFA Panel Report, supra note 332 at 25. change in quantity demanded regardless credit cards and interchange fees on 616 In some markets the provider does not have of the original price level) and constant debit cards. These researchers, by-and- a direct relationship with the consumer, and thus marginal cost (each additional unit of large, found evidence consistent with the pass-through if any will be indirect. In other output costs the same to produce as the low to non-existent pass-through rates markets, providers are already charging a price at 622 the usury limit, and thus would not be able to pass previous unit), the theory predicts a in these markets. However, these through any cost onto price. pass-through rate of 50 percent. The rate 617 Even where providers pass on 100 percent of would be higher or lower depending on 620 See, e.g., RBB Economics, Cost Pass-Through: their costs, they may lose volume and thus how demand elasticity and economies Theory, Measurement, and Potential Policy Implications, A Report Prepared for the Office of experience lower profits. With regard to the of scale change with higher prices and proposal, however, in markets where arbitration Fair Trading, (Feb. 2014), available at https:// 619 agreements are extremely widespread, this would lower outputs. To the extent that a www.gov.uk/government/uploads/system/uploads/ _ _ _ depend on the extent to which the market’s provider’s fixed costs change, economic attachment data/file/320912/Cost Pass-Through aggregate demand is elastic. In other words, theory indicates that the profit- Report.pdf. the entities’ profits would decrease in proportion to 621 See Lawrence Ausubel, The Failure of the fraction of consumers who would stop buying Competition in the Credit Card Market, 81 a.m. the consumer financial products or services if most 618 It is theoretically possible to have a pass- Econ. Rev. 50 (1991); but see Todd Zywicki, The or all firms were to increase their prices at the same through rate of over 100 percent, even without Economics of Credit Cards, 3 Chap. L. Rev. 79 time. The Bureau is unaware of reliable estimates accounting for strategic effects of competition. (2000); Daniel Grodzicki, Competition and of this elasticity for the covered markets, with the These strategic effects tend to drive up the pass- Customer Acquisition in the U.S. Credit Card exception of the credit card market, where such a through rate even higher. See, e.g., Jeremy Bulow Market (Working Paper, 2015), available at: https:// loss would unlikely be significant given the likely & Paul Pfleiderer, A Note on the Effect of Cost editorialexpress.com/cgi-bin/conference/ modest per-consumer magnitude of the marginal Changes on Prices, 91 J. of Polit. Econ. 182(1983),); download.cgi?db_name=IIOC2015&paper_id=308. cost increase. See David Gross & Nicholas Souleles, Rajeev Tyagi, A Characterization of Retailer 622 See Sumit Agarwal, Souphala Do Liquidity Constraints and Interest Rates Matter Response to Manufacturer Trade Deals, 36 J. of Chomsisengphet, Neale Mahoney & Johannes for Consumer Behavior? Evidence from Credit Card Mktg. Res. 510 (1999); E. Glen Weyl & Michal Stroebel, Regulating Consumer Financial Products: Data, 149 Q. J. of Econ. 117 (2002). To the extent Fabinger, Pass-Through as an Economic Tool: Evidence from Credit Cards, 130 Q. J. of Econ. 1 that credit cards and mortgages are indicative of Principles of Incidence under Imperfect (2015); Benjamin Kay, Mark Manuszak & Cindy other markets for consumer financial products and Competition, 121 J. of Pol. Econ. 528 (2013); Alexei Vojtech, Bank Profitability and Debit Card services, this effect is unlikely to be significant. See, Alexandrov & Sergei Koulayev, Using the Interchange Regulation: Bank Responses to the e.g., Andreas Fuster & Basit Zafar, The Sensitivity Economics of the Pass-Through in Proving Antitrust Durbin Amendment (Fed. Reserve Board, Working of Housing Demand to Financing Conditions: Injury in Robinson-Patman Cases, 60 Antitrust Bull. Paper No. 2014–77, 2014), available at http:// Evidence from a Survey (Fed. Reserve Board of 345 (2015). www.federalreserve.gov/econresdata/feds/2014/ N.Y.C., Staff Rept. No. 702, 2015), available at 619 In other words, these rates depend on files/201477pap.pdf. But see Todd Zywicki, http://papers.ssrn.com/sol3/papers.cfm?abstract_ curvatures (concavity/convexity) of cost and Geoffrey Manne & Julian Morris, Price Controls on id=2535912. demand functions. Continued

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findings do not necessarily imply low to affected products benefit consumers provider or customers who fall outside pass-through in other markets that when they are followed is far beyond of the class action but will stand to would be affected by the proposed rule, the scope of this analysis. However, a benefit from the injunctive relief. The as providers in different markets are few examples of types of benefits are Bureau is not aware of a consistent likely to face cost and demand curves of offered. These benefits could take a form method of quantifying the total amounts different curvatures. that is easier to monetize—for example, of additional in-kind and injunctive More directly related to the proposal, a credit card issuer voluntarily relief from the approximately 103 the Study analyzed the effect on prices discontinuing (or not initiating) a charge additional Federal class settlements per of several large credit card issuers to consumers for a service that generates year and a similar number of additional agreeing to drop their arbitration $1 of benefit to consumers for every $10 State class settlements.628 The Bureau agreements for a period of time as a part paid by consumers; a depository ceasing requests comment on whether the extent of a class settlement.623 The Bureau did to charge overdraft fees with respect to of this benefit, and the associated cost not find a statistically significant effect transactions for which the consumer has to providers, could be monetized, and if on the prices that these issuers charged sufficient funds on deposit at the time so how. subsequent to the contract changes, the transaction settles to cover the Potential Costs to Consumers relative to other large issuers that did transaction; or, a lender ceasing to not have to drop their arbitration charge higher rates to minority than The cost to consumers is mostly due agreements. To the extent that this non-minority borrowers. Or this could to the aforementioned pass-through by finding implies low or non-existent take a form that is harder to monetize— providers, to the extent it occurs, as price increases, it could be due to for example, a debt collector investing discussed above. The Bureau does not several reasons other than a low general more in insuring that the correct repeat this general discussion here. industry pass-through rate. For example, consumers are called and in complying A second possible impact could occur issuers may have priced as if the with various provisions limiting certain if some providers decide to remove expected litigation exposure was a fixed types of contacts and calls under the arbitration agreements entirely from cost or as if most of the cost was FDCPA and TCPA; or, a creditor taking their contracts, although there is no expected to be due to investment in more time to assure the accuracy of the empirical basis to determine the more compliance (and would be treated information furnished to a credit proportion of providers that would do as a fixed cost).624 The result also might reporting agency or to investigate so. Assuming that some providers not be representative for other issuers. disputes of that information. would remove these agreements, some Just as the Bureau is unable to consumers who can currently resort to C. Potential Benefits and Costs to quantify and monetize the investment arbitration for filing claims against Consumers that providers would undertake to lower providers would no longer be able to do Potential Benefits to Consumers their exposure to class litigation, the so if the provider is unwilling to engage Bureau is unable to quantify and in post-dispute arbitration. The Bureau Consumers would benefit from the monetize the extent of the consumer is unable to determine empirically proposed class rule to the extent that benefit that would result from this whether individual arbitration is more providers would have a larger incentive investment, or particular subcategories beneficial to consumers than individual to comply with the law; from the class of investment such as improving litigation, and if so the magnitude of the payments in any class settlement that disclosures, improving compliance additional consumer benefit of occurs due to a provider not being able management systems, expanding staff arbitration.629 However, given that the to invoke an arbitration agreement in a training, or other specific activities. The class proceeding; and, from any new Bureau requests comment on any 628 One easier quantification to make is in the compliance with the law they representative data sources that could class settlement analysis in Section 8 of the Study experience as a result of injunctive relief assist the Bureau in both of these where 13 percent of the settlements featured in a settlement or as a result of changes behavioral relief and 6 percent featured in-kind quantifications. relief. Accordingly, out of the additional 103 cases, in practices that the provider adopts in Consumers would also benefit from a reasonable quantification is that 13 percent will the wake of the settlement to avoid class payments that they receive from feature behavioral relief and 6 percent will feature future litigation.625 settlements of additional class actions. in-kind relief. As noted above, while the Study Consumer benefits due to providers’ quantified $644 million of in-kind relief, that According to the calculation above, this number is included in relief, but not in payments larger incentive to comply with the law benefit would be on the order of $342 in the Study, and the Bureau continues to follow are directly related to the million per year for Federal class this approach here, both for the calculation of costs aforementioned investments by settlements, and an unquantified to providers and benefits to consumers. Similarly, as noted above, the Study did not include promises providers to reduce class litigation 626 amount in State court settlements. to obey the law going forward as specific enough exposure. Specifically, consumers Moreover, as noted above as well, the to count toward behavioral relief, suggesting that would benefit from the forgone harm Bureau believes that there would also be injunctive relief overall is likely higher. resulting from fewer violations of law. A significant benefits to consumers when 629 See Study, supra note 2, section 6 at 2. full catalog of how all laws applicable settlements include in-kind and Existing empirical evidence compiled by scholars prior to the Study mainly concerns employment, 627 injunctive relief. This relief can affect franchisee, and security arbitrations (note that Payment Card Interchange Fees: The U.S. consumers beyond those receiving FINRA rules require an option of class action in any Experience, (Geo. Mason L. & Econ., Research Paper arbitration agreement). The Bureau does not believe No. 14–18, 2014), available at http:// monetary remediation, including for _ example future customers of the that these data are necessarily applicable to papers.ssrn.com/sol3/Papers.cfm?abstract consumer financial products and services. Even that id=2446080. evidence is also largely inconclusive. See, e.g., 623 See generally Study, supra note 2, section 10. 626 As noted above, the calculation depends on Theodore Eisenberg & Elizabeth Hill, Arbitration 624 See Study, supra note 2, section 10 (for other many assumptions, and thus there are many reasons and Litigation of Employment Claims: An Empirical caveats to this analysis). See also Alexei for why this number might be considerably higher Comparison, 58 Disp. Res. J. 44 (2004) (finding no Alexandrov, Making Firms Liable for Consumers’ or considerably lower. statistical differences in a variety of outcomes Mistaken Beliefs: Theoretical Model and Empirical 627 In a market with transaction costs (not subject between individual arbitration and individual Applications to the U.S. Mortgage and Credit Card to the Coase Theorem), the value of behavioral relief litigation). See also Peter Rutledge, Whither Markets, Soc. Sci. Res. Network (Sept. 22, 2015). to consumers could be either roughly equal, higher Arbitration?, 6 Geo. J. of L. & Pub. Pol’y 549 at 557– 625 See Part VI for a related discussion. or lower that the value to firms. 9, (2008) (discussing several studies that compared

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Study found only several hundred As discussed above, at least some years involving depositories below the individual arbitrations per year providers might decide that a particular $10 billion threshold if the proposed involving consumer financial products feature of a product makes the provider rule is finalized. or services, the Bureau believes that the more susceptible to class litigation, and However, there might be other ways magnitude of consumer benefit, if any, therefore the provider would decide to in which impacts on smaller depository of individual arbitration over individual remove that feature from the product. A institutions, and smaller providers in litigation would need to be implausibly provider might make this decision even general, would differ from impacts on large for some, or even all, providers if that feature is actually beneficial to larger providers. The Bureau describes that eliminated their arbitration consumers and does not result in legal some of these in this Section 1022(b)(2) agreements to make a noticeable harm to consumers. In this case, Analysis. difference to consumers in the consumers would incur a cost due to the One possibility might be that the aggregate. provider’s over-deterrence with respect managers of smaller providers In short, if a consumer initiates a to this particular decision. The Bureau (depository institutions or otherwise) formal dispute relating to a consumer is not aware of any data showing this are sufficiently risk averse, or generally financial product or service, it is theoretical phenomenon (over- sensitive to payouts, such that putative possible that the consumer would fare deterrence) to be prevalent among class actions have an in terrorem effect. somewhat better in individual providers who currently do not have an To the extent this occurs, small arbitration than in individual arbitration agreement or likely among providers may settle any such litigation.630 However, in practice, this providers who would be required to additional lawsuits for more than the comparison is not material for the forgo using their arbitration agreement expected value of an award if the case analysis of consumer benefits and costs to block class actions. The Bureau were likely to be certified as a class case since consumers do not initiate formal requests comment on the extent of this and go to trial. However, the Study individual disputes involving consumer phenomenon in the context of the found that it is most common for class financial products or services in notable proposed rule, and it specifically action settlements to be reached before numbers in any forum: The Bureau requests data and suggestions about how a court has certified a case as a class to quantify both the prevalence of this documented hundreds of individual case. Moreover, as noted above, the phenomenon and the magnitude of arbitrations versus millions of amount of any such settlement should consumer harm if the phenomenon consumers receiving relief through class be lower for smaller providers given the exists. actions.631 smaller magnitude of the case and the lower number of consumers affected. In Moreover, the stakeholder feedback D. Impact on Depository Institutions addition, as noted above, the Bureau that the Bureau has received so far With No More Than $10 Billion in estimates the number of additional class suggests that if any provider dropped Assets lawsuits in general against small arbitration agreements entirely, the The prevalence of arbitration depository institutions to be extremely decision could be a result of the agreements for large depository low. In particular, the Bureau believes provider not finding it cost-effective to institutions is significantly higher than that out of the 312 cases (over five years) support a dual-track system of litigation that for smaller depository that are used for the estimates of the (on a class or putative class basis) and 633 institutions. Moreover, while more impact on the number of Federal class individual arbitrations. However, the than 90 percent of depository settlements, about one Federal class Study shows that providers often do not institutions have no more than $10 settlement per year involved smaller invoke arbitration agreements in billion in assets, about one in five of the institutions (either depository or non- individual lawsuits,632 and thus class settlements with depository depositories) paying over $1,000,000 to providers are already operating in such institutions in the Study involved class members. a dual-track system. Thus, the Bureau depository institutions under this There is a significant amount of lacks sufficient information to believe threshold (approximately one class academic finance literature suggesting that most, or even any, providers would settlement per year). The magnitude of that management should not be risk indeed drop arbitration agreements these settlements, measured by averse, unless the case involves a altogether rather than adopting the payments to class members, was also possibility of a firm going bankrupt in considerably smaller than settlements Bureau’s language if the rule is finalized case of a loss.634 However, management with institutions above the threshold: as proposed. The Bureau requests of smaller providers, regardless of The aggregated documented payments comment on both providers’ incentives whether they are depository to class members from all cases that to drop arbitration agreements institutions, might be more risk averse involve depository institutions with less altogether and on quantification of because their shareholders or owners than $10 billion in assets was under $2 consumer benefit or cost of individual might be less diversified. arbitration over and above individual million over the five years analyzed in The bargaining theory literature litigation. the Study. generally suggests that the party with Thus, using the same method deeper pockets and relatively less at discussed above to estimate additional outcomes in individual arbitration and individual stake will be the party that gets the most litigation, typically showing comparable outcomes class settlements (and putative class out of the settlement.635 It follows that in the two fora). The Bureau notes that these and cases) among depository institutions smaller defendants might fare worse in other similar comparative studies should be with no more than $10 billion in assets interpreted carefully for reasons stated in the Study. suggests that the proposed rule would See Study, supra note 2, section 6 at 2–5. 634 See, e.g., Clifford Smith & Rene´ Stulz, The 630 Similarly, it is possible that the consumer have practically no effect that could be Determinants of Firms’ Hedging Policies, 20 J. Fin. would fare somewhat worse in individual monetized. Specifically, the calculation & Quantitative Analysis 391 (1985). arbitration than in individual litigation. predicts approximately one additional 635 More generally, economic theory suggests that 631 If anything, the Study shows considerably Federal class settlement and about three the side that is more patient is going to get a better more individual litigation (in Federal and in small deal, all else being equal. For the canonical claims courts) than individual arbitration. See putative Federal class cases over five economic model of bargaining, see Ariel generally, Study, supra note 2, sections 5 and 6. Rubinstein, Perfect Equilibrium in a Bargaining 632 Study, supra note 2, section 1 at 15. 633 See generally Study, supra note 2, sections 2. Model, 50 Econometrica 97 (1982).

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terms of the settlements relative to their might become permanent if such representatives prior to proposing a rule larger peers, all else being equal. litigation significantly depleted the for which an IRFA is required.640 However, from anecdotal evidence, the provider’s financial resources, The Bureau is not certifying that the Bureau believes that, if the smaller potentially resulting in the provider proposed rule would not have a defendants are sued at all, they are exiting the market. significant economic impact on a likely to be sued by smaller law firms. Of course, the incentive for a class substantial number of small entities This could equalize bargaining power counsel to pursue a case to the point within the meaning of the RFA. (as a smaller law firm might not be able where it would cause a defendant’s Accordingly, the Bureau convened and to afford to be too aggressive even in a bankruptcy is low because this would chaired a Small Business Review Panel under the Small Business Regulatory single proceeding) or tilt bargaining leave little, or no, resources from which Enforcement Fairness Act (SBREFA) to power more to a smaller defendant’s to fund a remedy for consumers in a consider the impact of the proposed rule side relative to their larger peers class settlement or any fees for the class on small entities that would be subject defending against larger law firms. counsel and could make the process to that rule and to obtain feedback from Finally, given the considerably lower longer. In addition, the potential representatives of such small entities. frequency of class litigation for smaller consumers of this provider presumably The Small Business Review Panel for providers, it is possible that it is not have the option of seeking this this proposed rule is discussed in the worth the cost for smaller providers to consumer financial product or service SBREFA Panel Report. invest in lowering class litigation from a different company that is not exposure. This might also explain the Among other things, this IRFA facing a class action, and thus a estimates the number of small entities relatively lower frequency of arbitration bankruptcy scenario is substantially agreement use by smaller depositories. that will be subject to the proposed rule more of an issue for the particular and describes the impact of the E. Impact on Rural Areas provider affected than for the provider’s proposed rule on those entities. Rural areas might be differently consumers. Moreover, especially given Throughout this IRFA, the Bureau impacted to the extent that rural areas the low prevalence of cases against draws on the Section 1022(b)(2) tend to be served by smaller providers, smaller providers outlined above and Analysis above. as discussed above with regard to the amounts of documented payments Despite not certifying that the depository institutions with less than to class members, the Bureau does not proposed rule would not have a $10 billion in assets and below with believe that out of the Federal class significant economic impact on a regard to providers of all types that are settlements analyzed in the Study, many substantial number of small entities at below certain thresholds for small settlements threatened the continued this time, the Bureau believes that the businesses. In addition, markets in rural existence of the defendant and the arguments and calculations outlined areas might also be less competitive. resulting access to credit. both in the Section 1022(b)(2) Analysis, Economic theory suggests that less IX. Regulatory Flexibility Analysis as well as the arguments and competitive markets would have lower calculations that follow, strongly pass-through with all else being equal; The Regulatory Flexibility Act (RFA) suggest that the proposed rule would therefore, if there were any price generally requires an agency to conduct indeed not have a significant economic increase due to the proposed rule, it an initial regulatory flexibility analysis impact on a substantial number of small would be lower in rural areas.636 (IRFA) and a final regulatory flexibility entities in any of the covered markets. analysis (FRFA) of any rule subject to The Bureau is requesting comment on F. Impact on Access to Consumer notice-and-comment rulemaking the assumptions and methodology used, Financial Products and Services requirements.637 These analyses must and on potential certification if the Given hundreds of millions of ‘‘describe the impact of the proposed proposed rule is finalized. accounts across affected providers and rule on small entities.’’ 638 An IRFA or In preparing this proposed rule and the numerical estimates of costs above, FRFA is not required if the agency this IRFA, the Bureau has carefully the expected additional marginal costs certifies that the proposed rule will not considered the feedback from the SERs due to additional Federal class have a significant economic impact on participating in the SBREFA process settlements to providers are likely to be a substantial number of small and the findings and recommendations negligible in most markets. Each of the entities.639 The Bureau also is subject to in the SBREFA Panel Report. The product markets affected has hundreds certain additional procedures under the Section-by-Section analysis of the of competitors or more. Thus, the RFA involving the convening of a panel proposed rule, above in Part VII, and Bureau does not believe that this to consult with small entity this IRFA discuss this feedback and the proposed rule would result in a specific findings and recommendations noticeable impact on access to 637 5 U.S.C. 601, et seq. of the Small Business Review Panel, as consumer financial products or services. 638 5 U.S.C. 603(a). For purposes of assessing the applicable. The SBREFA process The Bureau does not believe that impacts of the proposed rule on small entities, provided the Small Business Review access to consumer financial products ‘‘small entities’’ is defined in the RFA to include Panel and the Bureau with an small businesses, small not-for-profit organizations, opportunity to identify and explore or services would be diminished due to and small government jurisdictions. 5 U.S.C. 601(6). effects on providers’ continuing A ‘‘small business’’ is determined by application of opportunities to minimize the burden of viability or, as discussed below in Part Small Business Administration regulations and the proposed rule on small entities IX, due to effects on providers’ access to reference to the North American Industry while achieving the proposed rule’s Classification System (NAICS) classifications and purposes. As in other Bureau’s credit to facilitate the operation of their size standards. 5 U.S.C. 601(3). A ‘‘small businesses. It is possible that consumers organization’’ is any ‘‘not-for-profit enterprise rulemakings, it is important to note, might experience temporary access which is independently owned and operated and is however, that the Small Business concerns if their particular provider was not dominant in its field.’’ 5 U.S.C. 601(4). A ‘‘small Review Panel prepared the SBREFA governmental jurisdiction’’ is the government of a Panel Report at a preliminary stage of sued in a class action. These concerns city, county, town, township, village, school district, or special district with a population of less the proposal’s development and that the 636 See Weyl and Fabinger, supra note 618 and than 50,000. 5 U.S.C. 601(5). Alexandrov and Koulayev, supra note 618. 639 5 U.S.C. 605(b). 640 5 U.S.C. 609.

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SBREFA Panel Report—in particular, and which minimize any significant Bureau is concerned about the potential the Small Business Review Panel’s economic impact of the proposed rule for systemic harm if arbitration findings and recommendations—should on small entities.647 Finally, as agreements were to be administered in be considered in that light. The amended by the Dodd-Frank Act, RFA biased or unfair ways. Accordingly, the proposed rule and this IRFA reflect section 603(d) requires that this IRFA Bureau is considering proposals that further consideration, analysis, and data include a description of any projected would: (1) Prohibit the application of collection by the Bureau. increase in the cost of credit for small certain arbitration agreements regarding Under RFA section 603(a), an IRFA entities, a description of any significant consumer financial products or services ‘‘shall describe the impact of the alternatives to the proposed rule which as to class litigation; and (2) require proposed rule on small entities.’’ 641 accomplish the stated objectives of submission of arbitral claims, awards, Section 603(b) of the RFA sets forth the applicable statutes and which minimize and two other categories of documents required elements of this IRFA. Section any increase in the cost of credit for to the Bureau. This proposed 603(b)(1) requires this IRFA to contain small entities (if such an increase in the rulemaking is pursuant to the Bureau’s a description of the reasons why action cost of credit is projected), and a authority under sections 1022(b) and (c) 642 by the agency is being considered. description of the advice and and 1028 of the Dodd-Frank Act. The Section 603(b)(2) requires a succinct recommendations of representatives of latter section directs the Bureau to study statement of the objectives of, and the small entities relating to the cost of pre-dispute arbitration agreements in 643 648 legal basis for, the proposed rule. credit issues. connection with the offering or This IRFA further must contain a 1. Description of the Reasons Why providing of consumer financial description of and, where feasible, an products or services and authorizes the estimate of the number of small entities Agency Action Is Being Considered and Bureau to regulate their use if the to which the proposed rule will Succinct Statement of the Objectives of, Bureau finds that certain conditions are apply.644 Section 603(b)(4) requires a and Legal Basis for, the Proposed Rule met.649 description of the projected reporting, As the Bureau outlined in the recordkeeping, and other compliance SBREFA Panel Report and discussed 2. Description and, Where Feasible, requirements of the proposed rule, above, the Bureau is considering a Provision of an Estimate of the Number including an estimate of the classes of rulemaking because it is concerned that of Small Entities to Which the Proposed small entities that will be subject to the consumers do not have sufficient Rule Will Apply requirement and the types of opportunity to obtain remedies when professional skills necessary for the they are legally harmed by providers of As noted in the SBREFA Panel preparation of the report or record.645 In consumer financial products and Report, the Panel identified 22 addition, the Bureau must identify, to services, because arbitration agreements categories of small entities that may be the extent practicable, all relevant effectively block consumers from subject to the proposed rule. These were Federal rules which may duplicate, participating in class proceedings. The later narrowed (see discussion and table overlap, or conflict with the proposed Bureau is also concerned that by below with estimates of the number of rule.646 Furthermore, the Bureau must blocking class actions, arbitration entities in each market). The NAICS describe any significant alternatives to agreements reduce deterrent effects and industry and SBA small entity the proposed rule which accomplish the compliance incentives in connection thresholds for these 22 categories are the stated objectives of applicable statutes with the underlying laws. Finally, 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 1500 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. 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). 1000 employees. Wired Telecommunications Carriers ...... 517110 1500 employees.

641 5 U.S.C. 603(a). 644 5 U.S.C. 603(b)(3). 647 5 U.S.C. 603(b)(6). 642 5 U.S.C. 603(b)(1). 645 5 U.S.C. 603(b)(4). 648 5 U.S.C. 603(d)(1); Dodd-Frank section 643 5 U.S.C. 603(b)(2). 646 5 U.S.C. 603(b)(5). 1100G(d)(1). 649 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

Wireless Telecommunications Carriers (except Satellite) ...... 517210 1500 employees.

For purposes of assessing the impacts threshold, the Bureau based its estimate However, this attempt was of the proposals under consideration on for the number of small businesses on unsuccessful.652 For the markets small entities, ‘‘small entities’’ are the estimate that approximately 95 covered in Section 2 of the Study that defined in the RFA to include small percent of firms in finance and provided data on prevalence of businesses, small nonprofit insurance are small.651 arbitration agreements, the Bureau uses organizations, and small government NAICS numbers were taken from the the numbers from the Study. The jurisdictions that would be subject to 2012 NAICS Manual, the most recent Bureau contacted trade associations to the proposals under consideration. A version available from the Census obtain supplemental data for the ‘‘small business’’ is defined by the SBA Bureau. The data provided employment, markets that were not covered in Office of Size Standards for all average size, and an estimate of the Section 2 of the Study.653 industries through the NAICS. number of firms for each industry, The table below sets forth potentially To arrive at the number of entities which are disaggregated by a six-digit affected markets (and the associated affected, the Bureau began by creating a ID. Other industry counts were taken NAICS codes) in which it appears list of markets that would be covered if from a variety of sources, including reasonably likely that more than a few the proposals under consideration were other Bureau rulemakings, internal small entities use arbitration to be adopted. The Bureau assigned at Bureau data, public data and statistics, agreements. Some affected markets (and least one, but often several, NAICS including published reports and trade codes to each market. For example, association materials, and in some cases 652 The Bureau attempted to develop a while payday and other installment from aggregation Web sites. For a select methodology for sampling contracts on the Internet. The methodology involved attempting to sample loans are provided by storefront payday number of industries, usually NAICS the contracts of 20 businesses from randomly- stores (NAICS 522390), they are also codes that encompass both covered and selected states and different levels of Web search provided by other small businesses, not covered markets, the Bureau relevance (to alleviate selection biases). However, such as credit unions (NAICS 522120). estimated the covered market in this providers generally do not provide their contracts or terms and conditions online. Even when some The Bureau estimated the number of NAICS code using data from Web sites contracts are available online in a specific market, small firms in each market-NAICS that aggregate information from multiple providers that provided such information are combination (for example, storefront online sources. The reason the Bureau usually large, national corporations that operated in relied on this estimate instead of the multiple states. The lack of provider-specific payday lenders in NAICS 522390 would revenue and employment information also makes it be such a market-NAICS combination), NAICS estimate is that NAICS estimates hard to determine which of the sampled businesses and then the Bureau added together all are sometimes too broad. For example, are small according to the SBA threshold. After the markets within a NAICS code if the NAICS code associated with virtual attempting this methodology for several markets, wallets includes dozens of other small the Bureau decided to proceed by contacting trade there is more than one market within a associations instead. The Bureau attempted the NAICS code, accounting for the industries, and would overestimate the sampling method for the following markets: potential overlaps between the markets actual number of firms affected by an Currency Exchange, Other Money Transmitters/ (for example, probably all banks that order of magnitude or more. Remittances, Telephone (Landline) Services, Cable Although the Bureau attempted to Television. The Bureau also started work on a few provide payday-like loans also provide other markets before determining that the results checking accounts, and the Bureau does account for overlaps wherever possible, are unlikely to be sufficiently representative for the not double-count them, to the extent a firm could be counted several times if purposes of this analysis. possible given the data). it participates in different industries and 653 The Bureau obtained the necessary PRA The Bureau first attempted to estimate was counted separately in each data approval from OMB for the survey. The Bureau contacted national trade associations with a history the number of firms in each market- source. While this analysis removes of representation of providers in the relevant NAICS combination by using firms that were counted twice using the markets. The questions the Bureau posed related to administrative data (for example, Call NAICS numbers, some double counting the prevalence of arbitration agreements among may remain due to overlap in non- providers in this market generally, as opposed to Reports that credit unions have to file among the members of the trade association. The with the NCUA). When administrative NAICS estimates. For the NAICS codes Bureau uses the prevalence numbers from the Study data was not available, the Bureau that encompass several markets, the for checking/deposit accounts, credit cards, payday attempted to estimate the numbers using Bureau summed the numbers for each of loans, prepaid cards, private student loans, and the market-NAICS combinations to wired and wireless telecommunication providers. public sources, including the Bureau’s All other prevalence estimates used in this section previous rulemakings and impact produce the table of affected firms. and in the Section 1022(b)(2) Analysis are based on analyses. When neither administrative In addition to estimating the number this survey of trade associations. In each such nor other public data was available, the of providers in the affected markets, the market (represented by a separate row in the table Bureau also estimated the prevalence of below), except credit monitoring and providers of Bureau used the Census’s NAICS credit reports, we relied on numbers from one trade numbers. The Bureau estimated the arbitration agreements in these markets. association for that market. For credit monitoring number of small businesses according to The Bureau first attempted to estimate and providers of credit reports, we received the SBA’s size standards for NAICS the prevalence of arbitration agreements supplemental information from a trade association in each market using public sources. that we did not survey that lead us to adjust the codes (when such data was estimate by averaging the two estimates. For the available).650 When the data was markets covered by the Study’s prevalence analysis, insufficient to precisely estimate the 651 See Small Business Administration Office of the Bureau adjusted the numbers to fit into the four Size Standards, SBA’s Size Standards Analysis: An choices provided in the survey: 0–20 percent, 20– number of businesses under the SBA Overview on Methodology and Comprehensive Size 50 percent, 50–80 percent, and 80–100 percent. The Standards Review, Presentation of Sharma R. Khem prevalence column in the tables in this section and 650 The Bureau also used data from the Census at 4 (2011), available athttp:// in the Section 1022(b)(2) Analysis provide the Bureau, including the Census Bureau’s Statistics of www.gtscoalition.com/wp-content/uploads/2011/ midpoint estimate (for example, 10 percent if the U.S. Businesses. 07/Size-Stds-Presentation_Dr.-Sharma-SBA.pdf. answer was 0–20 percent).

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associated NAICS codes) are not listed other than the merchant or, if the Further, the proposal would apply to because the number of small entities in merchant grants a right of deferred extensions of credit by providers of the market using arbitration agreements payment, this is typically done without whole life insurance policies (NAICS is likely to be insignificant. For charge and for a relatively short period 524113) to the extent that these example, the Bureau did not list of time. For example, a provider of companies are ECOA creditors and that convenience stores (NAICS 445120). monthly services may bill in arrears, activity is not the ‘‘business of While consumers can cash a check at allowing the consumer to pay 30 days insurance’’ under the Dodd-Frank some grocery or convenience stores, the after services are rendered each month. section 1002(15)(C)(i) and 1002(3) and Bureau does not believe that consumers Thus the Bureau believes that arbitration agreements are used for such generally sign contracts that contain merchants rarely offer their own policy loans. However, it is unlikely arbitration agreements with grocery or financing with a finance charge, or in an that a significant number of such convenience stores when cashing amount that significantly exceeds the providers would be affected because a checks; indeed, this is even less likely market value of the goods or services number of state laws restrict the use of for check guarantee (NAICS 522390) and sold.655 In those rare circumstances (for arbitration agreements in insurance collection (NAICS 561440). For the example, acting as a TILA creditor due products and, in any event, it is possible same reason, currency exchange to lending with a finance charge), then that the loan feature of the whole life providers (NAICS 523130) are not listed the merchants would be covered by the policy could be part of the ‘‘business of on the table. The Bureau also did not proposal in those transactions (unless, insurance’’ depending on the facts and list department stores (NAICS 4521) in the case of offering credit with a applicable law.657 because the Bureau does not believe finance charge, the merchant is a small The Bureau also does not believe that small department stores are typically entity and meets the other requirements a significant number of new car dealers involved in issuing their own credit of Dodd-Frank section 1027(a)(2)(D)). offer or provide consumer financial cards, rather than partnering with an The Bureau lacks data on how products or services that render these issuing bank that issues cards in the frequently merchants engage in such dealers subject to the Bureau’s name of the department store. transactions, whether in the education, regulatory jurisdiction. As a result, new Other notable exceptions were Other health, or home improvement sectors, car dealers (NAICS 44111) and Depository Credit Intermediation among others, and on how often pre- passenger car leasing companies (NAICS (NAICS 522190) and attorneys who dispute arbitration agreements may 532112) are not included in the table collect debt (NAICS 541110). The apply to such transactions. The Bureau below; rather, the table covers dealer Bureau believes that for these codes requests comment and data on the portfolio leasing and lending with the virtually all providers that are engaged frequency of these transactions, by used car dealer category (NAICS in these activities are already reporting industry. 441120) and indirect auto lenders with under other NAICS codes (for example, the sales financing category (NAICS Commercial Banking, NAICS 52211, or Similarly, the Bureau does not list utility providers (NAICS 221) because 522220). collection agencies, NAICS 561440). In addition, the Bureau does not In addition, the proposed rule would when these providers allow consumers believe that it is common for apply to mortgage referral providers for to defer payment for these providers’ commodities merchants subject to CFTC whom referrals are their primary services without imposing a finance jurisdiction to extend credit to business. For example, the Bureau charge, this type of credit is not subject consumers as defined by Regulation estimates that there are 7,007 entities to the proposed rule. In some cases, B.658 classified as mortgage and nonmortgage utility providers may engage in billing The Bureau does not account for brokers (NAICS 522310), 6,657 of which the consumer for charges imposed by a various types of entities that are are small.654 However, the Bureau third-party supplier hired by the indirectly affected (and thus would believes that arbitration agreements are consumer. However, government likely not need to change their not prevalent in the consumer mortgage utilities providing these services to contracts) and for which the Bureau did market. With respect to brokering of consumers who are located in their not find any Federal class settlements in credit more broadly, the Bureau also territorial jurisdiction would be exempt the Study (and thus would not be believes that some credit lead generators and, with respect to private utility significantly affected by additional class may be primarily engaged in the providers providing these services, the litigation exposure). These entities business of brokering and would be Bureau believes that these private utility include, for example, billing service affected by the proposed rule. The providers’ agreements with consumers, providers for providers of merchant Bureau lacks data on the number of including their dispute resolution credit (third-party servicers NAICS such businesses and the extent to which mechanisms, are generally regulated at 522390). they are primarily engaged in brokering. a State or local level. The Bureau is not Similarly, the Bureau is unaware of The Bureau therefore requests this data aware that those dispute resolution the number of software developers and data on the use of contracts and on mechanisms provide for mandatory arbitration.656 the prevalence of arbitration agreements 657 See, e.g., Kan. Stat. Ann. sec. 5–401 (2015). by these providers. These State laws involve interplay between the Merchants are not listed in the table 655 However, the Bureau includes buy-here-pay- FAA and the McCarran-Ferguson Act, 15 U.S.C. because merchants generally would not here automobile dealers in the table below. 6701 et seq. be covered by the proposal, except in 656 The Bureau notes, for example, that in some 658 See U.S. Dept. of Treasury, Blueprint for a situations, such as some consumer disputes heard Modernized Financial Regulatory Structure, at 116 limited circumstances. For example, the by state utility regulators, consumers may be (2008), available at https://www.treasury.gov/press- Bureau believes that most types of required to submit disputes to governmental center/press-releases/Documents/Blueprint.pdf (‘‘In financing consumers use to buy administrative bodies prior to going to court. If general, margin is a very different concept in the nonfinancial goods or services from courts review the determinations of those futures and securities worlds. In the securities administrative bodies as agency administrative context, margin means a minimum amount of merchants is provided by third parties action, rather than an arbitral award, then the equity that must be put down to purchase securities Bureau does not believe that processes such as on credit, while in the futures context margin 654 NAICS 522292 is similarly-excluded from these would be considered ‘‘arbitration’’ under means a risk-based performance bond system which estimates. proposed § 1040.2(d). acts much like a security deposit.’’).

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(NAICS codes 511210 and 541511) that as payment processing products) that do software developers is low; however, provide covered consumer financial not report in the NAICS codes listed the Bureau requests comment on this products or services with arbitration either above or in the table below. The issue. agreements directly to consumers (such Bureau believes that the number of such

3. Projected Reporting, Recordkeeping, the language that must be used, this can compliance staff to ensure that this has and Other Compliance Requirements of be accomplished in minimal time by indeed been done. See the last column the Proposed Rule, Including an compliance personnel, who do not have in the table above for the Bureau’s Estimate of the Classes of Small Entities to possess any specialized skills, and in estimate of the number of small Which Will Be Subject to the particular who do not require a law providers that use arbitration Requirement and the Type of degree.659 Moreover, the Bureau agreements. Professional Skills Necessary for the believes that to the extent small covered Additionally, as discussed above, debt Preparation of the Report Reporting entities use contracts from form buyers and other providers who become Requirements providers, that task might be done by parties to existing contracts with pre- The providers that use arbitration the providers themselves, requiring a dispute arbitration agreements that do agreements would have to change their simple check by the small provider’s not contain the required language would contracts to state that the arbitration be subject to the ongoing requirements agreements cannot be used to block 659 The Bureau is aware that many small of proposed § 1040.4(a)(2), which would providers do not employ dedicated compliance class litigation. The Bureau believes staff, and uses the term broadly to denote any require them to issue contract that, given that the Bureau is specifying personnel who engage in compliance activities. amendments or notices when they

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become party to a pre-existing contract SBA threshold for their markets,661 the the State to Federal class litigation ratio that does not include the proposed Bureau estimates that the proposed rule is higher for small covered entities to mandated language. As discussed above, would result in about 25 additional the extent that they are more likely to the Bureau believes that this cost and Federal class settlements, and in those serve consumers only in one State. the skills required to satisfy this cases, an additional $3 million paid out However, as discussed above, the requirement would also be minimal to consumers, an additional $2 million Bureau believes that State class since many of these providers typically paid out in plaintiff’s attorney’s fees, litigation is also likely to generate lower send out notices for FDCPA purposes to and an additional $1 million for costs than Federal litigation. The Bureau consumers whose contracts these defendant’s attorney’s fees and internal believes that these calculations strongly providers just acquired. staff and management time per year. suggest that the proposed rule would The proposed rule also includes a The Bureau also estimates 121 not have a significant economic impact reporting requirement when covered additional Federal cases filed as class on a substantial number of small entities entities exercise their arbitration litigation that would end up not settling within the meaning of the RFA; agreements in individual lawsuits and on class basis, resulting in an additional however, the Bureau requests comment in several other circumstances. Given $2 million in fees per year. These on that preliminary conclusion. the small number of individual aggregate $8 million per year for Federal The Bureau notes that the estimates arbitrations in the Study, the Bureau class litigation should be juxtaposed are higher for small debt collectors than believes that there would be at most a with an estimated 51,000 providers for other categories: Small debt few hundred small covered entities below the SBA thresholds that use collectors account for 22 of the 25 affected by this requirement each year, arbitration agreements, resulting in well Federal settlements estimated above for and most likely considerably fewer under a 1 percent chance per year of small providers overall, and $5 million since most defendants that participated those entities being subject to a putative (out of $8 million for small providers) in arbitrations analyzed by the Study Federal class litigation, a much lower in costs combined. With about 4,400 were large repeat players.660 Each chance of any of those cases resulting in debt collectors below the SBA instance of reporting consists of sending a class settlement, and an expected cost thresholds, the estimates suggest a the Bureau already existing documents, of about $200 per year from Federal roughly 2 percent chance per year of potentially redacting specified class cases per entity. being subject to an additional putative categories of personally identifiable While the expected cost per provider Federal class litigation, a lower than 1 information pursuant to proposed rule. that the Bureau can monetize is about percent chance of that resulting in a As discussed above, the Bureau believes $200 per year from Federal class cases, Federal class settlement, and an that fulfilling the requirement would these costs would not be evenly expected cost of about $1,100 per year not require any specialized skills and distributed across small providers. In from these additional settlements. The would require minimal time. particular, the estimates above suggest same State class litigation assumptions The Bureau requests comment on that about 25 providers per year would outlined above apply to smaller debt whether there are any additional costs be involved in an additional Federal collectors. or skills required to comply with class settlement—a considerably higher As evident from the data and from reporting, recordkeeping, and other expense than $200 per year, as noted in feedback received during the SBREFA compliance requirements of the the Section 1022(b)(2) Analysis above. process, providers that are debt proposed rule that the Bureau had not In addition, the additional Federal cases collectors might be the most affected mentioned here. As noted in its Section filed as class litigation that would end relative to providers in other markets, 1022(b)(2) Analysis above, the Bureau up not settling on class basis (121 per despite the fact that debt collectors do believes that the vast majority of the year according to the estimates above) not enter into arbitration agreements proposed rule’s impact is due to are also likely to result in a considerably directly and already frequently collect additional exposure to class litigation higher expense that $200. However, the on debt without an arbitration and to any voluntary investment vast majority of the 51,000 providers agreement in the original contract. (spending) in reducing that exposure would not experience any of these However, for the reasons described that providers might undertake. The effects. above, the Bureau believes it is unlikely Bureau believes that neither of these As discussed above, these entities that class settlement amounts would in categories is a reporting, recordkeeping, would also face increased exposure to fact drive companies out of business. or other compliance requirement; state class litigation. While the Study’s Indeed, as discussed above, debt however, the Bureau discusses them Section 6 reports similar numbers for collectors already face class litigation below. State and Federal cases, it is likely that exposure in connection with a The costs and types of additional significant proportion of debt they investment to reduce additional 661 The Bureau attempted to classify defendants collect. Much of that debt comes from exposure to class litigation and the of the class settlements from the Study on whether creditors that do not have arbitration they meet the SBA threshold for a small business components of the cost of additional in the defendant’s market. Some of the markets agreements, and even where the credit class litigation itself are described above were relatively easy to classify; for example, the contract includes an arbitration in the Section 1022(b)(2) Analysis. As Bureau has the data on depository institutions’ agreement, collectors are not always noted above, it is difficult to quantify assets and that is the only data necessary to determine whether depository institutions are SBA able to invoke the agreements how much all covered providers, small. Other markets were considerably more successfully. including small entities, would invest in difficult, in particular debt collectors. The Bureau 4. Identification, to the Extent additional compliance; that applies to used trade publications and internal expertise to the extent possible to classify debt collectors into large Practicable, of All Relevant Federal all covered providers. and small; however, it is likely that the Bureau Rules Which May Duplicate, Overlap, or With respect to additional class made mistakes in this classification in at least litigation exposure, using the same several cases. The mistakes were likely made in Conflict With the Proposed Rule calculation as in the Section 1022(b)(2) both directions: Some debt collectors that were SBA Several other Federal laws and small at the time of the settlement were classified regulations address the use of Analysis, limited to providers below the as large, and other debt collectors that were not SBA small at the time of the settlement were arbitration agreements. For example, 660 See Study, supra note 2, section 5 at 59. classified as small. arbitration agreements that apply to

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class litigation have been prohibited in proposed rulemaking with substantially would be difficult, if not impossible, for securities contracts between broker less regulatory burden. Unless otherwise a disclosure to cause even a significant dealers and their customers since noted, the Bureau discusses these percentage of consumers to factor the 1992.662 The Military Lending Act and alternatives both for SBA small presence of an arbitration agreement its implementing regulations, which providers and for larger providers as into their shopping behavior,671 let were recently expanded by the well. The Bureau requests comment on alone to address the market failure Department of Defense to reach most these and other potential alternatives discussed above. forms of credit accessed by and on their further quantification. Similar concerns arise with regard to servicemembers and their families, opt-in and opt-out regimes. An opt-out Potential Alternatives Involving prohibit arbitration agreements in regime would require providers to give Disclosure, Consumer Education, Opt- consumer credit contracts with certain consumers an option to opt out of the In, or Opt-Out Requirements covered servicemembers or their arbitration agreement when the dependents.663 In principle, effective disclosures consumer signs the contract or for some In addition to providing the Bureau coupled with consumer education could additional period. An opt-in regime the authority to regulate the use of make consumers more cognizant in would presume that a consumer is not arbitration agreements in consumer selecting a financial product or service, bound by the arbitration agreement, financial contracts, the Dodd-Frank Act of the existence and consequences of an unless a consumer affirmatively prohibited all arbitration agreements in arbitration provision in the standard indicates otherwise. Many providers consumer mortgages664 and authorized form contract and, ex post, could make currently offer arbitration agreements the Securities and Exchange consumers who have a dispute with the that allow consumers to opt out at the Commission to regulate arbitration provider cognizant of the option of point of contract formation or for a agreements in contracts between pursuing the dispute in arbitration. But limited period afterward.672 In contrast, consumers and securities broker-dealers the market failure this proposal seeks to the Bureau is unaware of a significant or investment advisers.665 The address arises from the fact that number of providers offering opt-in Department of Health and Human consumers often lack awareness that agreements. Services also recently proposed they have a legal claim and, moreover, Much as with disclosures, the Bureau regulations that would regulate the use that even when they are aware of such believes that opt-in and opt-out of arbitration agreements in long-term claims, many are negative-value claims arrangements would not meet the care contracts with consumers.666 so that it is not practical for them to be objectives of the proposed rule because Finally, the Department of Education pursued in any formal forum on an neither would alleviate the market released a proposal that, among other individual basis. Accordingly, failure that the proposed rule is things, ‘‘would protect students from individual enforcement mechanisms designed to address. Further, and again the use of mandatory arbitration provide insufficient incentives to similar to disclosures, the fact that opt- provisions in enrollment agreements’’ comply with the law. Thus, while a out agreements are already used by a for postsecondary schools.667 hypothetical perfect disclosure might number of providers in markets for give consumers an informed choice of consumer financial services today but 5. Description of Any Significant whether to patronize a provider with an that very few consumers are aware Alternatives to the Proposed Rule Which arbitration agreement, providers with whether they have arbitration Accomplish the Stated Objectives of arbitration agreements would still have agreements in their contracts suggest Applicable Statutes and Minimize Any a lower incentive to comply with the that such regimes are subject to many of Significant Economic Impact of the law under a disclosure intervention the same awareness and effectiveness Proposed Rule on Small Entities approach. The Bureau notes that in issues discussed above with regard to The Bureau describes several addition to not meeting the goals of this disclosures. Finally, economic theory potential alternatives below. The Bureau proposed rulemaking, all of the suggests that even with regard to a more believes that none of these are potential alternatives in this subsection consumer-friendly ‘‘opt-in’’ system, an significant alternatives insofar as they would also impose costs on individual consumer would not have a would not accomplish the goal of the providers.668 sufficient incentive, from the market Furthermore, there is reason to doubt perspective, to refuse an opt-in offer.673 662 Financial Industry Regulatory Authority that disclosures would be very effective Consider an individual consumer’s (FINRA) Rule 2268(f). in raising consumer awareness in any decision to opt-in. First, suppose that 663 10 U.S.C. 987, as implemented by 32 CFR event. The Study indicates that the this consumer expects other consumers 232.8(c). current consumer understanding of to opt-in. In this case, this individual 664 Dodd-Frank section 1414(a). That prohibition arbitration agreement is low,669 and the consumer does not benefit from refusing was implemented in Regulation Z by the Bureau’s Loan Originator Compensation Rule. 12 CFR Bureau believes that even with the most an opt-in offer: The option of class 1026.36(h). effective disclosures and education it is 665 Dodd-Frank section 921. unlikely that many consumers would, at 671 Economic theory suggests that even that might 666 Reform of Requirements for Long-Term Care the outset of a customer relationship, not be sufficient. See, e.g., R. Ted Cruz & Jeffrey Facilities, 80 FR 42168, 42264–65 (July 16, 2015) anticipate that the provider will act Hinck, Not My Brother’s Keeper: The Inability of an (proposing to require that arbitration agreements be Informed Minority to Correct for Imperfect explained in understandable language, unlawfully and assess the value of these Information, 47 Hastings L.J. 635 (1995) and Mark acknowledged by the resident, provide for a dispute-resolution rights in a Armstrong, Search and Ripoff Externalities, 47 Rev. convenient venue and a neutral arbiter, entered into hypothetical future scenario.670 Indus. Org. 273 (2015). on a voluntary basis, not be made a condition of Therefore, the Bureau believes that it 672 See Study, supra note 2, section 2 at 31. admission, and not restrict or discourage 673 An opt-in offer would involve a consumer communication with government authorities). entering an arbitration agreement only if the 667 Press Release, U.S. Department of Education, 668 See Omri Ben-Shahar & Carl Schneider, The consumer were given the choice to enter the U.S. Department of Education Takes Further Steps Failure of Mandated Disclosure, 159 U. Pa. L. Rev. agreement (unconditional on the provision of the to Protect Students from Predatory Higher 647 (2011) on disclosures. consumer financial product or service), followed by Education Institutions (Mar. 11, 2016), https:// 669 Despite contract language and placement that the consumer explicitly agreeing to the arbitration www.ed.gov/news/press-releases/us-department- is not dramatically different from that of other agreement. For example, this could be education-takes-further-steps-protect-students- contract provisions. accomplished by having a checkbox in the contract predatory-higher-education-institutions. 670 See Study, supra note 2, section 3 at 16–23. by the arbitration agreement.

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litigation is not valuable if there are not presence of the collective action differences between individual enough consumers that could be in the problem discussed directly above shows arbitration and litigation would have to potential class. Instead, suppose that that resolving these current issues, such be implausibly large to result in even a this consumer expects other consumers as lack of consumer awareness, would noticeable difference between benefits to refuse the opt-in. In this case, the still not get to the core of the public and costs, either to consumers or to provider has a sufficient incentive to good/collective action market failure. providers, of this potential alternative comply, and this individual consumer relative to the proposed rule. The Total Ban of Pre-Dispute Arbitration still does not benefit from refusing an Bureau does not possess any evidence Agreements opt-in offer.674 In short, regardless of that shows that the per-case differences whether other consumers opt-in or Under this potential alternative, are indeed that large. Thus, the Bureau refuse to opt-in, this individual arbitration would only occur if parties does not believe a total ban to be consumer’s choice does not matter for agree to it after a dispute arises. The preferable with regard to regulatory the provider’s compliance incentives, so primary difference between this option burden. and the proposed rule is that individual this individual consumer will not take Various Specific Exceptions to the disputes would not be subject to even the minimal effort (or forgo even Proposed Rule a minimal incentive) to refuse an opt-in mandatory pre-dispute arbitration offer: Consumers free-ride on other agreements. The Study could not During the SBREFA process, some of consumers.675 Other consumers will determine empirically whether the SERs stated that some of the statutes think similarly, and thus an insufficient individual arbitration is more beneficial (for example, TCPA) are particularly number of consumers will refuse an opt- to consumers than individual problematic and onerous if arbitration in offer. Similar incentives are at play litigation.678 Compared with the agreements cannot be used to block with an opt-out requirement. In general, proposed rule, this potential alternative class litigation. The Bureau understands a similar problem arises in provision of would result in approximately the same the SERs’ argument that cases putatively public goods and in other collective cost to providers (either large or small), seeking very large amounts of damages action settings.676 since providers rarely, if ever, face any have a potential to amplify SERs’ costs. The Bureau’s analysis of this The Study shows that, currently, individual arbitration currently. In argument is discussed in greater detail consumers are unlikely to even attempt addition, if providers were not allowed above in Part VI. From an economic such a calculation. Most, if not virtually to maintain individual pre-dispute theory perspective, the potential for all, consumers do not realize the arbitration programs for consumers, these cases to be filed seeking very large significance of an arbitration agreement then there is a risk that individual dispute resolution costs could increase; damages also amplifies the incentive to that can block class litigation, most comply with the law (for example, consumers do not have an option to opt however, given the low number of such disputes, this cost increase would not be TCPA), and thus amplifies the benefits out of the agreement (though in some to consumers, even if providers pass on markets such as payday loans and noticeable. This potential alternative alleviates some of the costs to consumers in terms private student loans opt-outs appear to of higher prices. Thus, unless there is be the norm), and in many markets the the market failure discussed in the Section 1022(b)(2) Analysis above and considerable evidence that compliance vast majority of providers use with or the remedial scheme established arbitration agreements.677 However, the gives the providers same incentives to comply with the law as the proposed by a particular statute is against the public good the Bureau believes this 674 Assuming the consumer is indifferent between rule. However, this potential alternative individual arbitration and individual litigation. could be more costly if individual issue, for the reasons discussed in Part 675 It is likely that there is some inertia in arbitration proceedings are less VI, may be more appropriately consumer’s choice of whether to opt-in: If not expensive than individual litigation and addressed by Congress, state prompted by the provider, the consumer is unlikely legislatures, and the courts.680 to opt-in by him or herself. However, even parties do not voluntarily agree to post- suggestions by providers’ employees, let alone dispute individual arbitration. Small Entity Exemption monetary incentives, while signing the contract The Bureau believes that the current As outlined above in the Section-by- could reverse this inertia. level of individual arbitrations, summed 676 Section analysis to proposed § 1040.4(a), See, e.g., Paul Samuelson, The Pure Theory of over all affected consumer financial Public Expenditure, 36 Rev. of Econ. & Stat. 387 the Bureau requests comment on a small (1954); Mancur Olson, The Logic of Collective products or services providers, is 679 entity exemption, including which Action (Harv. Univ. Press 1965); Elinor Ostrom, hundreds of arbitrations per year. thresholds could be used for such an How Types of Goods and Property Rights Jointly The Study does not identify a exemption for each market covered. The Affect Collective Action, 15 J. of Theo. Pol. 239 quantifiable comparison of the relative (2003). See also Eric Rasmusen, J. Mark Ramseyer Bureau’s estimates, based on current & John Wiley, Jr., Naked Exclusion, 81 Am. Econ. benefits and costs of individual litigation levels, suggest that small Rev. 1137; Ilya Segal & Michael Whinston, Naked arbitration relative to individual providers would not be particularly Exclusion: Comment, 90 Am. Econ. Rev. 296 (2000) litigation. However, given the number of affected by this proposed rule. However, (treatment of a similar problem in industrial such arbitrations relative to the organization); Keith Hylton, The Economics of Class a handful of small providers would Actions and Class Action Waivers (Forthcoming, magnitude of quantifiable impacts of likely face a Federal class action Sup. Ct. Econ. Rev., 2015), available at http:// class litigation in the Section 1022(b)(2) settlement due to this rule (and slightly papers.ssrn.com/sol3/papers.cfm?abstract_ Analysis (ignoring those impacts that higher numbers for providers who are id=2277562; David Rosenberg & Kathryn Spier, are not quantifiable), the per-case Incentives to Invest in Litigation and the Superiority of the Class Action, 6 J. of Legal Analysis 305 680 The Bureau has also heard from stakeholders (2014); Eric Posner, Kathryn Spier & Adrian of arbitration agreements might be due to several that other statutes with statutory damages should be Vermeule, Divide and Conquer, 2 J. of Legal reasons. This could either be due to behavioral or exempted from the proposal. For example, some Analysis 417 (2010). The case of this rulemaking is cognitive biases, rational inattention due to the argue that allowing consumers to bring class actions somewhat more complicated than the standard issue not being sufficiently important to invest in pursuant to the Credit Repair Organizations Act underprovision of public goods, since there are learning, or it could be rational consumers with (CROA) against providers that offer credit strategic providers that react to the public good correct expectations not investing into learning the monitoring products could threaten the availability underprovision. issue due to the collective action problem. of those products due to the challenge of complying 677 See generally Study, supra note 2, sections 2 678 See Part VI.A. with CROA (to the extent it applies to those and 3. Consumers failing to realize the importance 679 See Study, supra note 2, section 5 at 20. products).

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debt collectors), and all small providers class action is filed can already (and impacted. The Bureau also is not aware that have arbitration agreements would sometimes do) submit a description of of any significant alternatives that incur a cost of changing these the compliance issue to their regulator would minimize the impact on small agreements.681 Thus, a small entity and attempt to work out a solution (that debt collectors’ cost of credit while exemption would barely change the may or may not involve fines and accomplishing the objectives of the aggregate monetized costs and benefits, payments to consumers). If consumers proposed rule. The Bureau notes that both to consumers and to providers. are compensated during the process, any alternatives would be particularly The Bureau is concerned, however, then there is less potential recovery for complicated with regard to application that an exemption would eliminate the any following private litigation. to smaller debt collectors, as they additional incentives to comply with Moreover, as the Study demonstrates, typically use the contract of another the law provided by the exposure to such private litigation following the firm, for example a credit card issuer. class litigation. This is a particular same matter decided by public 8. Description of the Advice and concern for markets such as payday enforcement is rare.682 Given that the Recommendations of Representatives of loans, where the vast majority of the suggested mechanisms could be used by Small Entities relating to Issues market currently uses arbitration providers today if they felt sufficient Described in 6 and 7 Above agreements, and thus it is harder to incentive to reduce compliance and estimate the impact of the proposed rule litigation risk, the Bureau does not As noted in the SBREFA Panel and this potential alternative. Moreover, believe that these options could be Report, the small entity representatives the Bureau is concerned that smaller relied upon to achieve the policy goals (SERs) expressed concerns about how providers without arbitration of the proposed rule. the proposals under consideration agreements might not be representative would affect their borrowing costs. One of small providers with arbitration Request for Comment SER believed his business would lose its agreements: In other words, that the The Bureau requests comment on line of credit if it could not use providers that currently might not be these and any other alternative policy arbitration agreements to block class complying with the law to the full options that may accomplish the goals actions. Another SER stated that the extent might self-select into inserting of the proposed rulemaking with class proposal under consideration arbitration agreements in their contracts. substantially less regulatory burden, would increase her business’s At the same time, the Bureau including a detailed description of the borrowing costs, and also that drawing acknowledges that, as discussed above, option and any evidence that would on its credit to pay litigation costs based on the evidence from providers indicate that the option could achieve related to a class action would ‘‘raise that do not currently have arbitration such goals. warning signs’’ for her business’s agreements, the low monetized impact lender. Another SER stated that mere of class litigation estimated for small 6. Discussion of Impact on Cost of exposure to class action liability would providers might suggest that the Credit for Small Entities cause his business’s lender to ‘‘raise an proposed rule would create weaker Although SERs expressed concern eyebrow.’’ One debt collector SER stated incentives to comply than for larger that the proposed rule could affect costs that his company’s bank had closed its providers, since a given small provider that they bear when they seek out line of credit in recent years due to is highly unlikely to face a class action. business credit to facilitate their concerns over the industry but that the Moreover, as noted by the SERs during operations, the Bureau believes based company was able to obtain a line of the SBREFA process, many small on its estimates derived from current credit at another bank relatively quickly. providers believe that they are already litigation levels as discussed above that None of these SERs reported that they complying with the law to the fullest the vast majority of small providers’ cost actually had spoken with their lender or extent, notwithstanding the presence of of credit would not be impacted by the that, when they sought credit in the arbitration agreements in their contracts. proposed rule. However, given a higher past, their lender inquired as to whether As discussed above, the Bureau is likelihood that a smaller debt collector they used arbitration agreements in their seeking comment on all issues relating would be subject to incremental class consumer contracts. to a small entity exemption. litigation at any given time, it is possible In general, SERs in the business of extending credit stated that the proposal Public Options that a fraction of small debt collectors might experience an adverse impact on under consideration regarding class Various stakeholders suggested their cost of credit if they were subject actions might cause them to increase the alternatives related to public to ongoing class litigation at a time cost of credit they offer to their enforcement. Aside from an alternative when they were seeking credit. consumers. One of these SERs stated that the Bureau does not have the power However, the Study indicated that the that the proposal may increase his to accomplish—sizably increasing majority of cases filed as class actions business’s expenses overall—such as enforcement at all regulators of the are resolved within a few months, such insurance premiums, compliance providers affected by the proposed that any such adverse impact is likely to investment, and exposure to class rule—most of these suggestions would be only temporary. actions for which his business is mostly duplicate what the providers can uninsured—and, due to that SER’s thin do already. For example, providers that 7. Description of Any Significant margins, such increases may require his discover a compliance issue before a Alternatives to the Proposed Rule Which business to increase the cost of Accomplish the Stated Objectives of consumer credit. However, another 681 The Bureau notes again that the vast majority Applicable Statutes and Which SER—a short-term, small-dollar of the estimated additional Federal class action Minimize Any Increase in the Cost of lender—stated that he would be unable settlements in this Section 1022(b)(2) Analysis Credit for Small Entities would be class action settlements with debt to increase the cost of his business’s collectors. A small entity exemption would be As stated above, the Bureau does not consumer loans due to limitations unlikely to change that, as even small debt believe that the vast majority of the imposed by state law. Another SER, a collectors would likely be collecting on debt of larger credit card issuers whose arbitration small providers’ cost of credit will be buy-here-pay-here auto dealer, stated agreements, if existent, could not be used to invoke that, in addition to potentially raising in class litigation. See proposed § 1040.4(a)(1). 682 See Study, supra note 2, section 9 at 13–16. the cost of credit, his business could

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recoup costs by increasing its debt as described below.686 The specified arbitration agreement complies with the collection and collateral recovery provision would effectively state that no requirements of proposed § 1040.4(a)(2) efforts. person can use the agreement to stop the by providing an amended arbitration Three SERs predicted that, if the class consumer from being part of a class agreement to the consumer.691 proposal under consideration goes into action case in court.687 The Bureau The second information collection effect, some small entities would reduce proposed this language and, if the rule requirement relates to proposed their product offerings. One of these is adopted as proposed, providers reporting requirements. The proposal SERs speculated that products designed would be required to use it unless an would require providers to submit for underserved groups may be enumerated exception applies. The specified arbitral records to the Bureau especially vulnerable because cases Bureau is also proposing to permit relating to any arbitration agreement involving such products are more providers to use an alternative provision entered into after the compliance attractive to plaintiff’s attorneys. in connection with arbitration date.692 The proposal would require the submission of two general categories of X. Paperwork Reduction Act agreements in contracts for multiple products or services, some of which are documents to the Bureau. The first Under the Paperwork Reduction Act not covered by the proposed rule.688 category would require providers to of 1995 (PRA), Federal agencies are The proposed rule contains two submit certain records in connection generally required to seek the Office of exceptions to this first information with any claim filed in arbitration by or Management and Budget’s (OMB) collection requirement. Under the first against the provider concerning a approval for information collection exception, if a provider enters into an covered consumer financial product or requirements prior to implementation. arbitration agreement that existed service. In particular, providers would Under the PRA, the Bureau may not previously (and was entered into by be required to submit the following four conduct or sponsor—and, another person after the compliance types of documents in connection with notwithstanding any other provision of date),689 and the agreement does not any claim filed in arbitration: (1) The law, a person is not required to respond already contain the provision required initial claim and any counterclaim; (2) to—an information collection unless the by proposed § 1040.4(a)(2)(i) (or the the arbitration agreement filed with the information collection displays a valid alternative provision permitted by arbitrator or arbitration administrator; control number assigned by OMB.683 proposed § 1040.4(a)(2)(ii)), the provider (3) the judgment or award, if any, issued As part of its continuing effort to must either ensure that the agreement is by the arbitrator or arbitration reduce paperwork and respondent amended to contain a specified administrator; and (4) if an arbitrator or burden, the Bureau conducts a provision or send any consumer to arbitration administrator refuses to preclearance consultation program to whom the agreement applies a written administer or dismisses a claim due to provide the general public and Federal notice containing specified language. the provider’s failure to pay required agencies with an opportunity to The provider is required to ensure the filing or administrative fees, any comment on new information collection agreement is amended or provide the communication the provider receives requirements in accordance with the written notice within 60 days of from the arbitrator or an arbitration 684 PRA. This helps ensure that the entering into the agreement.690 Under administrator related to such a public understands the Bureau’s the second exception, the requirement refusal.693 The second category would requirements or instructions; to ensure that an arbitration agreement require providers to submit any respondents can provide the requested entered into after the compliance date communications the provider receives data in the desired format; reporting contains the provision required by from an arbitrator or arbitration burden (time and financial resources) is proposed § 1040.4(a)(2)(i) (or the administrator related to a determination minimized; collection instruments are alternative provision permitted by that an arbitration agreement covered by clearly understood; and the Department proposed § 1040.4(a)(2)(ii)) would not the proposed rule does not comply with can properly assess the impact of apply to an arbitration agreement for a the administrator’s fairness principles, collection requirements on respondents. general-purpose reloadable prepaid card rules, or similar requirements.694 The Bureau believes that this if certain conditions are satisfied with The proposal would require providers proposed rule would impose the respect to when the card was packaged to submit any record described above to following two new information and purchased in relation to the the Bureau within 60 days of filing by collection requirements (recordkeeping, compliance date. For a prepaid card the provider or, in the case of records reporting, or disclosure requirements) provider that has the ability to contact filed by other persons (such as on covered entities or members of the the consumer in writing, the provider arbitrators, arbitration administrators, or public that would constitute collections must also, within 30 days of obtaining consumers), receipt by the provider.695 of information requiring OMB approval the consumer’s contact information, The proposal would further require that, under the PRA. Both information notify the consumer in writing that the before submitting these records to the collections would apply to agreements Bureau, a provider must redact any of entered into after the compliance date of 686 See proposed § 1040.4(a)(2). In addition to the nine specific types of information to the 685 the rule. one-time change described directly above, some extent such information appears in any The first information collection providers could be affected on an ongoing basis or of these documents.696 requirement relates to proposed sporadic basis in the future as they acquire existing contracts as the result of regular or occasional The estimated burden on Bureau disclosure requirements. The proposal activity, under proposed § 1040.4(a)(2). As noted respondents from the proposed would require providers that enter into above in the Section 1022(b)(2) Analysis, the adoption of part 1040 are summarized arbitration agreements with consumers Bureau believes that this requirement does not below. A complete description of the to ensure that these arbitration impose a material burden, and thus the Bureau does not further discuss it in this Section 1022(b)(2) agreements contain a specified Analysis. 691 See proposed § 1040.5(b). provision, with two limited exceptions 687 See proposed § 1040.4(a)(2)(i). 692 See proposed § 1040.4(b). 688 See proposed § 1040.4(a)(2)(ii). 693 See proposed § 1040.4(b)(1)(i). 683 44 U.S.C. 3507(a). 689 See proposed comment 4(a)(2)–2 for an 694 See proposed § 1040.4(b)(1)(ii). 684 44 U.S.C. 3506(c)(2)(A). example of when this could occur. 695 See proposed § 1040.4(b)(2). 685 See proposed § 1040.5(a). 690 See proposed § 1040.4(a)(2)(iii). 696 See proposed § 1040.4(b)(3).

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information collection requirements, is provided in the information has submitted to OMB under the including the burden estimate methods, collection request (ICR) that the Bureau requirements of the PRA.

Please send your comments to the other forms of information technology. 1040.4 Limitations on the use of pre- Office of Information and Regulatory Comments submitted in response to this dispute arbitration agreements. Affairs, OMB, Attention: Desk Officer notice will be summarized and/or 1040.5 Compliance date and temporary for the Bureau of Consumer Financial included in the request for OMB exception. Supplement I to Part 1040—Official Protection. Send these comments by approval. All comments will become a Interpretations. email to [email protected] matter of public record. or by fax to (202) 395–6974. If you wish Authority: 12 U.S.C. 5512(b) and (c) and If applicable, in any notice of final 5518(b). to share your comments with the rule the Bureau would display the Bureau, please send a copy of these control number assigned by OMB to any § 1040.1 Authority, purpose, and comments to the docket for this information collection requirements enforcement. proposed rule at www.regulations.gov. proposed herein and adopted in any (a) Authority. The regulation in this The ICR submitted to OMB requesting final rule. If the OMB control number part is issued by the Bureau of approval under the PRA for the has not been assigned prior to Consumer Financial Protection (Bureau) information collection requirements publication of any final rule in the pursuant to sections 1022(b)(1) and (c) contained herein is available at Federal Register, the Bureau would and 1028(b) of the Dodd-Frank Act (12 www.regulations.gov as well as OMB’s publish a separate notice in the Federal U.S.C. 5512(b) and (c) and 5518(b)). public-facing docket at www.reginfo.gov. Register prior to the effective date of (b) Purpose. The purpose of this part Title of Collection: Arbitration any final rule. is the furtherance of the public interest Agreements, Disclosure and Reporting and the protection of consumers Requirements. List of Subjects in 12 Part 1040 regarding the use of agreements for OMB Control Number: 3170–XXXX. consumer financial products and Type of Review: New collection Banks, banking, Business and industry, Claims, Consumer protection, services providing for arbitration of any (Request for a new OMB control future dispute. number). Contracts, Credit, Credit unions, Affected Public: Private Sector. Finance, National banks, Reporting and § 1040.2 Definitions. Comments are invited on: (1) Whether recordkeeping requirements, Savings (a) Class action means a lawsuit in the collection of information is associations. which one or more parties seek class necessary for the proper performance of Authority and Issuance treatment pursuant to Federal Rule of the functions of the Bureau, including Civil Procedure 23 or any State process whether the information will have For the reasons set forth above, the analogous to Federal Rule of Civil practical utility; (2) the accuracy of the Bureau proposes to add part 1040 to Procedure 23. Bureau’s estimate of the burden of the chapter X in title 12 of the Code of (b) Consumer means an individual or collection of information, including the Federal Regulations, as set forth below: an agent, trustee, or representative validity of the methods and the acting on behalf of an individual. assumptions used; (3) ways to enhance PART 1040—ARBITRATION (c) Provider means: the quality, utility, and clarity of the AGREEMENTS (1) A person as defined by 12 U.S.C. information to be collected; and (4) Sec. 5481(19) that engages in offering or ways to minimize the burden of the 1040.1 Authority, purpose, and providing any of the consumer financial collection of information on enforcement. products or services covered by respondents, including through the use 1040.2 Definitions. § 1040.3(a) to the extent that the person of automated collection techniques or 1040.3 Coverage. is not excluded under § 1040.3(b); or

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(2) An affiliate of a provider as (5) Providing accounts subject to the (ii) A State, local, or tribal defined in paragraph (c)(1) of this Truth in Savings Act, 12 U.S.C. 4301 et government, and any affiliate of a State, section when that affiliate is acting as a seq., as implemented by 12 CFR part local, or tribal government, to the extent service provider to the provider as 707, and Regulation DD, 12 CFR part it is providing any product or service defined in paragraph (c)(1) of this 1030; described in paragraph (a) of this section with which the service provider (6) Providing accounts or remittance section directly to a consumer who is affiliated consistent with 12 U.S.C. transfers subject to the Electronic Fund resides in the government’s territorial 5481(6)(B). Transfer Act, 15 U.S.C. 1693 et seq., as jurisdiction; (d) Pre-dispute arbitration agreement implemented by Regulation E, 12 CFR (3) Any person when providing a means an agreement between a provider part 1005; product or service described in and a consumer providing for (7) Transmitting or exchanging funds paragraph (a) of this section that the arbitration of any future dispute as defined by 15 U.S.C. 5481(29) except person and any of its affiliates between the parties. when integral to another product or collectively provide to no more than 25 service that is not covered by this consumers in the current calendar year § 1040.3 Coverage. section; and to no more than 25 consumers in (a) Covered consumer financial (8) Accepting financial or banking the preceding calendar year; products and services. This part data or providing a product or service to (4) Merchants, retailers, or other generally applies to pre-dispute accept such data directly from a sellers of nonfinancial goods or services arbitration agreements for the following consumer for the purpose of initiating a to the extent they: products or services when they are payment by a consumer via any (i) Provide an extension of consumer consumer financial products or services payment instrument as defined by 15 credit covered by paragraph (a)(1)(i) of as defined by 12 U.S.C. 5481(5): U.S.C. 5481(18) or initiating a credit this section that is of the type described (1)(i) Providing an ‘‘extension of card or charge card transaction for the in 12 U.S.C. 5517(a)(2)(A)(i) and they credit’’ that is ‘‘consumer credit’’ as consumer, except when the person would be subject to the Bureau’s defined in Regulation B, 12 CFR 1002.2; accepting the data or providing the authority only under 12 U.S.C. (ii) Acting as a ‘‘creditor’’ as defined product or service to accept the data 5517(a)(2)(B)(i) but not 12 U.S.C. by 12 CFR 1002.2(l) by regularly also is selling or marketing the 5517(a)(2)(B)(ii) or (iii); or participating in a credit decision nonfinancial good or service for which (ii) Purchase or acquire an extension consistent with its meaning in 12 CFR the payment or credit card or charge of consumer credit excluded by 1002.2(l) concerning ‘‘consumer credit’’ card transaction is being made; paragraph (b)(4)(i) of this section; or as defined by 12 CFR 1002.2(h); (9) Check cashing, check collection, or (5) Any person to the extent the (iii) Acting, as a person’s primary check guaranty services; or limitations in 12 U.S.C. 5517 or 5519 business activity, as a ‘‘creditor’’ as (10) Collecting debt arising from any apply to the person or a product or defined by 12 CFR 1002.2(l) by referring of the consumer financial products or service described in paragraph (a) of this applicants or prospective applicants to services described in paragraphs (a)(1) section that is offered or provided by the creditors, or selecting or offering to through (9) of this section by: person. select creditors to whom requests for (i) A person offering or providing the credit may be made consistent with its product or service giving rise to the debt § 1040.4 Limitations on the use of pre- meaning in 12 CFR 1002.2(l); being collected, an affiliate of such dispute arbitration agreements. (iv) Acquiring, purchasing, or selling person, or, a person acting on behalf of (a) Use of pre-dispute arbitration an extension of consumer credit covered such person or affiliate; agreements in class actions—(1) General by paragraph (a)(1)(i) of this section; or (ii) A person purchasing or acquiring rule. A provider shall not seek to rely in (v) Servicing an extension of an extension of consumer credit covered any way on a pre-dispute arbitration consumer credit covered by paragraph by paragraph (a)(1)(i) of this section, an agreement entered into after the date set (a)(1)(i) of this section; or affiliate of such person, or, a person forth in § 1040.5(a) with respect to any (2) Extending automobile leases as acting on behalf of such person or aspect of a class action that is related to defined by 12 CFR 1090.108 or affiliate; or any of the consumer financial products brokering such leases; (iii) A debt collector as defined by 15 or services covered by § 1040.3 (3) Providing services to assist with U.S.C. 1692a(6). including to seek a stay or dismissal of debt management or debt settlement, (b) Excluded persons. This part does particular claims or the entire action, modify the terms of any extension of not apply to the following persons to the unless and until the presiding court has consumer credit covered by paragraph extent they are offering or providing any ruled that the case may not proceed as (a)(1)(i) of this section, or avoid of the following products and services: a class action and, if that ruling may be foreclosure; (1) Broker dealers to the extent that subject to appellate review on an (4) Providing directly to a consumer a they are providing products or services interlocutory basis, the time to seek consumer report as defined by the Fair described in paragraph (a) of this such review has elapsed or the review Credit Reporting Act, 15 U.S.C. section that are subject to rules has been resolved. 1681a(d), a credit score, or other promulgated or authorized by the U.S. (2) Provision required in covered pre- information specific to a consumer from Securities and Exchange Commission dispute arbitration agreements. Upon such a consumer report, except when prohibiting the use of pre-dispute entering into a pre-dispute arbitration such consumer report is provided by a arbitration agreements in class action agreement for a product or service user covered by 15 U.S.C. 1681m solely litigation and providing for making covered by § 1040.3 after the date set in connection with an adverse action as arbitral awards public; forth in § 1040.5(a): defined in 15 U.S.C. 1681a(k) with (2)(i) The federal government and any (i) Except as provided in paragraph respect to a product or service not affiliate of the Federal government (a)(2)(ii) or (iii) of this section or in covered by any of paragraphs (a)(1) providing any product or service § 1040.5(a), a provider shall ensure that through (3) or (a)(5) through (10) of this described in paragraph (a) of this the agreement contains the following section; section directly to a consumer; or provision:

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We agree that neither we nor anyone else with the requirements set forth in § 1040.5 Compliance date and temporary will use this agreement to stop you from paragraphs (b)(1) through (3) of this exception. being part of a class action case in court. You section. (a) Compliance date. Compliance with may file a class action in court or you may (1) Records to be submitted. A be a member of a class action even if you do this part is required for any pre-dispute not file it. provider shall submit a copy of the arbitration agreement entered into after following records to the Bureau, in the [DATE 211 DAYS AFTER DATE OF (ii) When the pre-dispute arbitration form and manner specified by the PUBLICATION OF THE FINAL RULE]. agreement is for multiple products or Bureau: (b) Exception for pre-packaged services, only some of which are (i) In connection with any claim filed covered by § 1040.3, the provider may general-purpose reloadable prepaid in arbitration by or against the provider card agreements. Section 1040.4(a)(2) include the following alternative concerning any of the consumer provision in place of the one otherwise shall not apply to a provider that enters financial products or services covered into a pre-dispute arbitration agreement required by paragraph 4(a)(2)(i) of this by § 1040.3; section: for a general-purpose reloadable prepaid (A) The initial claim and any card if the requirements set forth in We are providing you with more than one counterclaim; either paragraph (b)(1) or (2) of this (B) The pre-dispute arbitration product or service, only some of which are section are satisfied. covered by the Arbitration Agreements Rule agreement filed with the arbitrator or issued by the Consumer Financial Protection arbitration administrator; (1) For a provider that does not have Bureau. We agree that neither we nor anyone (C) The judgment or award, if any, the ability to contact the consumer in else will use this agreement to stop you from issued by the arbitrator or arbitration writing: being part of a class action case in court. You administrator; and (i) The consumer acquires a general- may file a class action in court or you may (D) If an arbitrator or arbitration purpose reloadable prepaid card in be a member of a class action even if you do person at a retail store; not file it. This provision applies only to administrator refuses to administer or class action claims concerning the products dismisses a claim due to the provider’s (ii) The pre-dispute arbitration or services covered by that Rule. failure to pay required filing or agreement was inside of packaging material when the general-purpose (iii) When the pre-dispute arbitration administrative fees, any communication reloadable prepaid card was acquired; agreement existed previously between the provider receives from the arbitrator and other parties and does not contain either or an arbitration administrator related to the provision required by paragraph such a refusal; and (iii) The pre-dispute arbitration (ii) Any communication the provider (a)(2)(i) of this section or the alternative agreement was packaged prior to [DATE receives from an arbitrator or an permitted by paragraph (a)(2)(ii) of this 211 DAYS AFTER DATE OF arbitration administrator related to a section, the provider shall either ensure PUBLICATION OF THE FINAL RULE]. determination that a pre-dispute the agreement is amended to contain the (2) For a provider that has the ability arbitration agreement for a consumer provision specified in paragraph to contact the consumer in writing: financial product or service covered by (a)(2)(iii)(A) of this section or provide (i) The provider meets the § 1040.3 does not comply with the any consumer to whom the agreement requirements set forth in paragraphs administrator’s fairness principles, applies with the written notice specified (b)(1)(i) through (iii) of this section; and rules, or similar requirements, if such a in paragraph (a)(2)(iii)(B) of this section. (ii) Within 30 days of obtaining the determination occurs. The provider shall ensure the agreement (2) Deadline for submission. A consumer’s contact information, the is amended or provide the notice to provider shall submit any record provider notifies the consumer in consumers within 60 days of entering required pursuant to paragraph (b)(1) of writing that the pre-dispute arbitration into the pre-dispute arbitration this section within 60 days of filing by agreement complies with the agreement. the provider of any such record with the requirements of § 1040.4(a)(2) by (A) Agreement provision. A pre- arbitrator or arbitration administrator providing an amended pre-dispute dispute arbitration agreement amended and within 60 days of receipt by the arbitration agreement to the consumer. pursuant to paragraph (a)(2)(iii) of this provider of any such record filed or sent section shall contain the following Supplement I to Part 1040—Official by someone other than the provider, provision: Interpretations such as the arbitration administrator or We agree that neither we nor anyone else the consumer. Section 1040.2—Definitions who later becomes a party to this pre-dispute (3) Redaction. Prior to submission of 2(c) Provider arbitration agreement will use it to stop you any records pursuant to paragraph (b)(1) from being part of a class action case in court. 1. Providers of multiple products or You may file a class action in court or you of this section, a provider shall redact the following information: services. A provider as defined in may be a member of a class action even if you § 1040.2(c) that also engages in offering do not file it. (i) Names of individuals, except for the name of the provider or the or providing products or services not (B) Notice. A notice provided arbitrator where either is an individual; covered by § 1040.3 must comply with pursuant to paragraph (a)(2)(iii) of this (ii) Addresses of individuals, this part only for the products or section shall state the following: excluding city, State, and zip code; services that it offers or provides that We agree not to use any pre-dispute (iii) Email addresses of individuals; are covered by § 1040.3. For example, a arbitration agreement to stop you from being (iv) Telephone numbers of merchant that transmits funds for its part of a class action case in court. You may individuals; customers would be covered pursuant to file a class action in court or you may be a (v) Photographs of individuals; § 1040.3(a)(6) with respect to the member of a class action even if you do not (vi) Account numbers; transmittal of funds. That same file it. (vii) Social Security and tax merchant generally would not be (b) Submission of arbitral records. For identification numbers; covered with respect to the sale of any pre-dispute arbitration agreement (viii) Driver’s license and other durable goods to consumers, except as entered into after the date set forth in government identification numbers; and provided in 12 U.S.C. 5517(a)(2)(B)(ii) § 1040.5(a), a provider shall comply (ix) Passport numbers. or (iii).

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2(d) Pre-Dispute Arbitration Agreement Paragraph (a)(1)(v) in the coverage of Part 1040 only the 1. Form of pre-dispute arbitration 1. Servicing of credit. Section collection of the consumer credit card agreements. A pre-dispute arbitration 1040.3(a)(1)(v) includes in the coverage debt. agreement for a consumer financial of part 1040 servicing of extensions of 2. Collection of debt by affiliates. product or service includes any consumer credit. Servicing of extensions Paragraphs (a)(10)(i) and (ii) of § 1040.3 agreement between a provider and a of consumer credit includes, but is not cover certain collection activities not consumer providing for arbitration of limited to, student loan servicing as only by providers themselves, but also any future disputes between the parties, defined in 12 CFR 1090.106 and by their affiliates. The term ‘‘affiliate’’ is regardless of its form or structure. mortgage loan servicing as defined in 12 defined in 12 U.S.C. 5481(1) as any Examples include a standalone pre- CFR 1024.2(b). person that controls, or is controlled by, or is under common control with dispute arbitration agreement that Paragraph (a)(3) applies to a product or service, as well another person. 1. Debt relief products and services. as a pre-dispute arbitration agreement 3(b) Excluded Persons that is included within, annexed to, Section 1040.3(a)(3) includes in the incorporated into, or otherwise made a coverage of Part 1040 services that offer Paragraph (b)(1) part of a larger agreement that governs to renegotiate, settle, or modify the 1. Exclusion for broker dealers to the the terms of the provision of a product terms of a consumer’s debt. Providers of extent they are subject to certain rules or service. these services would be covered by promulgated by the Financial Industry § 1040.3(a)(3) regardless of the source of Regulatory Authority. Section Section 1040.3—Coverage the debt, including but not limited to 1040.3(b)(1) excludes from the coverage 3(a) Covered Products or Services when seeking to relieve consumers of a of part 1040 broker dealers to the extent debt that does not arise from a consumer 1. Consumer financial products or they are subject to rules promulgated or credit transaction as described by authorized by the U.S. Securities and services pursuant to 12 U.S.C. 5481(5). § 1040.3(a)(1)(i) or from a consumer Section 1040.3(a) provides that the Exchange Commission (SEC) prohibiting financial product or service more the use of pre-dispute arbitration products or services listed in therein are generally. covered by part 1040 when they are agreements in class action litigation and consumer financial products or services Paragraph (a)(8) providing that arbitral awards be made as defined by 12 U.S.C. 5481(5). 1. Credit card and charge card public. Rules authorized by the SEC as Products or services generally meet this transactions. Section 1040.3(a)(8) referenced in § 1040.3(b)(1) include definition in either of two ways: they includes in the coverage of part 1040 those promulgated by the Financial are offered or provided for use by certain payment processing activities Industry Regulatory Authority (FINRA) consumers primarily for personal, involving the initiation of credit card or and authorized by the SEC, such as family, or household purposes, or they charge card transactions. The terms FINRA Rule 2268: Requirements When are delivered, offered, or provided in ‘‘credit card ‘‘and ‘‘charge card’’ are Using Predispute Arbitration connection with such products or defined in Regulation Z, 12 CFR Agreements for Customer Accounts, services. Examples of the second type of 1026.2(a)(15). For purposes of FINRA Rule 12204: Class Action Claims, consumer product or service include § 1040.3(a)(8), those definitions in and FINRA Rule 12904: Awards. debt collection, when the underlying Regulation Z apply. Paragraph (b)(2) loan that is the subject of collection is Paragraph (a)(10) a consumer financial product or service. 1. Exclusion only for governments and 1. Collection of debt by the same their affiliates. Section 1040.3(b)(2) Paragraph (a)(1)(i) person arising from covered and non- excludes from the coverage of part 1040 1. Coverage of extensions of consumer covered products and services. Section governments and their affiliates under credit by creditors. A transaction is only 1040.3(a)(10)(i) includes in the coverage certain circumstances. The term an extension of consumer credit, as of part 1040 the collection of debt by a ‘‘affiliate’’ is defined in 12 U.S.C. defined by Regulation B, if the credit is provider that arises from its providing 5481(1) as any person that controls, or extended by a ‘‘creditor.’’ Persons who any of the products and services is controlled by, or is under common do not regularly participate in credit described in paragraphs (a)(1) through control with another person. One of the decisions in the ordinary course of (9) of § 1040.3, including for example an requirements for this exclusion in business, for example, are not creditors extension of consumer credit described § 1040.3(b)(2) to apply to a government as defined by Regulation B. 12 CFR in § 1040.3(a)(1). If the person collecting or government affiliate is that the 1002.2(l). such debt also collects other debt that government or government affiliate does not arise from any of the products itself be providing the covered product Paragraph (a)(1)(iii) and services described in paragraphs or service directly to consumers. As a 1. Offering or providing referral or (a)(1) through (9) of § 1040.3, the result, the exclusion does not extend to creditor selection services. Section collection of that other debt is not an entity that may provide services on 1040.3(a)(1)(iii) includes in the coverage included in the coverage of behalf of a government or government of part 1040 providing referrals or § 1040.3(a)(10)(i). For example, if a affiliate, when the entity is not itself a providing or offering creditor selection creditor extended consumer credit to government or government affiliate. consistent with the meaning in 12 CFR consumers and business credit to other 2. Examples of consumer financial 1002.2(l) by a creditor as its primary persons, § 1040.3(a)(10)(i) would products or services provided directly by business. A person whose primary include in the coverage of part 1040 the a government or government affiliate to business is the sale of non-financial collection of the consumer credit but consumers who reside in the territorial goods or services that also provides or not the collection of the business credit. jurisdiction of the government. Section offers the services described in Similarly, if a debt buyer purchases a 1040.3(b)(2)(ii) excludes from the § 1040.3(a)(1)(iii) would not be covered portfolio of that coverage of part 1040 State, local, or under § 1040.4(a)(1)(iii) because the includes both consumer and business tribal governments and their affiliates referrals are not its primary business. debt, § 1040.3(a)(10)(ii) would include when directly providing a consumer

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financial product or service to for purposes of § 1040.4 include but are 4(a) Use of Pre-Dispute Arbitration consumers who reside in the not limited to when the provider: Agreements in Class Actions government’s territorial jurisdiction. A. Provides to a consumer a new 4(a)(1) General Rule i. Such products or services provided product or service that is subject to a to a consumer who resides in the pre-dispute arbitration agreement, and 1. Reliance on a pre-dispute territorial jurisdiction of the government the provider is a party to the pre-dispute arbitration agreement. Section may include, but are not limited to, the arbitration agreement; 1040.4(a)(1) provides that a provider following: B. Acquires or purchases a product shall not seek to rely in any way on a A. A bank that is an affiliate of a State covered by § 1040.3(a) that is subject to pre-dispute arbitration agreement government providing a student loan or a pre-dispute arbitration agreement and entered into after the compliance date directly to a resident of becomes a party to that pre-dispute set forth in § 1040.5(a) with respect to the State; or arbitration agreement, even if the person any aspect of a class action concerning B. A utility that is an affiliate of a selling the product is excluded from any of the consumer financial products State or municipal government coverage under § 1040.3(b); or or services covered by § 1040.3. providing credit or payment processing C. Adds a pre-dispute arbitration Reliance on a pre-dispute arbitration services directly to a consumer who agreement to an existing product or agreement with respect to any aspect of resides in the State or municipality to service. a class action includes, but is not allow a consumer to purchase energy ii. Examples of when a provider does limited to, any of the following: from an energy supplier that is not an not enter into a pre-dispute arbitration i. Seeking dismissal, deferral, or stay affiliate of the same State or municipal agreement for purposes of § 1040.4 of any aspect of a class action; ii. Seeking to exclude a person or government. include but are not limited to when the persons from a class in a class action; ii. Such products or services provided provider: to a consumer who does not reside in iii. Objecting to or seeking a A. Modifies, amends, or implements protective order intended to avoid the territorial jurisdiction of the the terms of a product or service that is government may include, but are not responding to discovery in a class subject to a pre-dispute arbitration action; limited to, the following: agreement that was entered into before A. A bank that is an affiliate of a State iv. Filing a claim in arbitration against the date set forth in § 1040.5(a); or government providing a student loan to a consumer who has filed a claim on the B. Acquires or purchases a product a student who resides in another State; same issue in a class action; that is subject to a pre-dispute or v. Filing a claim in arbitration against B. A tribal government affiliate arbitration agreement but does not a consumer who has filed a claim on the providing a short-term loan to a become a party to the pre-dispute same issue in a class action after the consumer who does not reside in the arbitration agreement. trial court has denied a motion to certify tribal government’s territorial 2. Application of § 1040.4 to providers the class but before an appellate court jurisdiction and completes the that do not enter into pre-dispute has ruled on an interlocutory appeal of transaction via the Internet. arbitration agreements. that motion, if the time to seek such an i. Pursuant to § 1040.4(a)(1), a appeal has not elapsed or the appeal has Paragraph (b)(3) provider cannot rely on any pre-dispute not been resolved; and 1. Including consumers to whom arbitration agreement entered into by vi. Filing a claim in arbitration against affiliates offer or provide a product or another person after the effective date a consumer who has filed a claim on the service toward the numerical threshold with respect to any aspect of a class same issue in a class action after the for exemption of a person under action concerning a product or service trial court in that class action has § 1040.4(b)(3). Section 1040.3(b)(3) covered by § 1040.3 and pursuant to granted a motion to dismiss the claim provides an exclusion to persons § 1040.4(b) may be required to submit and, in doing so, the court noted that offering or providing a service covered certain specified records related to the consumer has leave to refile the by § 1040.3(a) if no more than 25 claims filed in arbitration pursuant to claim on a class basis, if the time to consumers are offered the product or such pre-dispute arbitration agreements. refile the claim has not elapsed. service in the current and prior calendar See comment 4(a)(2)–1, however, which 2. Class actions concerning multiple years by the person and its affiliates. For clarifies that § 1040.4(a)(2) does not products or services. In a class action purposes of this test, the number of apply to providers that do not enter into concerning multiple products or consumers to whom affiliates of a pre-dispute arbitration agreements. services only some of which are covered person offer or provide a product or ii. For example, when a debt collector by § 1040.3, the prohibition in service is combined with the number of collecting on consumer credit covered § 1040.4(a)(1) applies only to claims that consumers to whom the person itself by § 1040.3(a)(1)(i) has not entered into concern the consumer financial offers or provides that product or a pre-dispute arbitration agreement, products or services covered by service. The term ‘‘affiliate’’ is defined § 1040.4(a)(1) nevertheless prohibits the § 1040.3. debt collector from relying on a pre- in 12 U.S.C. 5481(1) as any person that 4(a)(2) Required Provision controls, or is controlled by, or is under dispute arbitration agreement entered common control with another person. into by the creditor with respect to any 1. Application of § 1040.4(a)(2) to aspect of a class action filed against the providers that do not enter into pre- Section 1040.4 Limitations on the Use debt collector concerning its debt dispute arbitration agreements. Section of Pre-Dispute Arbitration Agreements collection products or services covered 1040.4(a)(2) sets forth requirements only 1. Enters into a pre-dispute arbitration by § 1040.3. Similarly, § 1040.4(a)(1) for providers that enter into pre-dispute agreement. Section 1040.4 applies to would also prohibit the debt collector arbitration agreements for a covered providers that enter into pre-dispute from relying with respect to any aspect product or service. Accordingly, the arbitration agreements after the date set of such a class action on a pre-dispute requirements of § 1040.4(a)(2) do not forth in § 1040.5(a). arbitration agreement entered into by a apply to a provider that does not enter i. Examples of when a provider enters merchant creditor who was excluded into a pre-dispute arbitration agreement into a pre-dispute arbitration agreement from coverage by § 1040.3(b)(5). with a consumer.

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2. Entering into a pre-dispute 4(b)(1) Records To Be Submitted arbitration administrator, or an agent of arbitration agreement that had existed Paragraph 4(b)(1)(ii) the provider, to redact the records. The previously between other parties. obligation to comply with § 1040.4(b) Section 1040.4(a)(2)(iii) requires a 1. Determinations that a pre-dispute nevertheless remains on the provider provider that enters into a pre-dispute arbitration agreement does not comply and thus the provider must ensure that arbitration agreement that had existed with an arbitration administrator’s the person redacts the records in previously as between other parties and fairness principles. Section accordance with § 1040.4(b). 1040.4(b)(1)(ii) requires submission to does not contain the provision required Section 1040.5 Compliance Date and by § 1040.4(a)(2)(i) or (ii), either to the Bureau of any communication the provider receives related to any Temporary Exception ensure the agreement is amended to arbitration administrator’s contain the required provision or to 5(b) Exception for Pre-Packaged determination that the provider’s pre- provide a written notice to any General-Purpose Reloadable Prepaid dispute arbitration agreement entered consumer to whom the agreement Card Agreements into after the date set forth in § 1040.5(a) applies. This could occur, when, for does not comply with the Paragraph 5(b)(2) example, Bank A is acquiring Bank B administrator’s fairness principles or after the compliance date specified in 1. Examples. Section 1040.5(b)(2)(ii) rules. The submission of such records is § 1040.5(a), and Bank B had entered into requires a provider that has the ability required both when the determination pre-dispute arbitration agreements to contact the consumer in writing to occurs in connection with the filing of before the compliance date specified in provide an amended pre-dispute a claim in arbitration as well as when § 1040.5(a). If, as part of the acquisition, arbitration agreement to the consumer it occurs if no claim has been filed. in writing within 30 days after the Bank A enters into the pre-dispute Further, when the determination occurs arbitration agreements of Bank B, Bank issuer has the ability to contact the with respect to a pre-dispute arbitration consumer. A provider is able to contact A would be required either to ensure the agreement that the provider does not account agreements were amended to the consumer when, for example, the enter into with a consumer, submission provider has the consumer’s mailing contain the provision required by of any communication related to that address or email address. § 1040.4(a)(2)(i), the alternative determination is not required. For Dated: May 3, 2016. permitted by § 1040.4(a)(2)(ii), or to example, if the provider submits a provide the notice specified in prototype pre-dispute arbitration Richard Cordray, § 1040.4(a)(2)(iii). See comment 4–1 for agreement for review by the arbitration Director, Bureau of Consumer Financial examples of when a provider enters into administrator and never includes it in Protection. a pre-dispute arbitration agreement. any consumer agreements, the pre- Note: The following appendixes will not 3. Notice to consumers. Section dispute arbitration agreement would not appear in the Code of Federal Regulations. 1040.4(a)(2)(iii) requires a provider that be entered into and thus submission to enters into a pre-dispute arbitration the Bureau of communication related to Appendix A to Section 1022(b)(2) agreement that does not contain the a determination made by the Analysis—Cases Analyzed provision required by § 1040.4(a)(2)(i) or administrator concerning the pre- As stated in the Bureau’s analysis of the (ii) to either ensure the agreement is dispute arbitration agreement would not costs, benefits, and impacts of the proposed amended to contain a specified be required. class rule under Dodd-Frank section provision or to provide any consumers 2. Examples of fairness principles, 1022(b)(2), the Bureau’s estimate of to whom the agreement applies with rules, or similar requirements. Section additional federal class litigation costs, written notice stating the provision. The 1040.4(b)(1)(ii) requires submission to benefits, and impacts seeks to use the federal notice may be provided in any way that the Bureau of records related to any class settlements identified in the Bureau’s Study to project the number and size of the provider communicates with the administrator’s determination that a provider’s pre-dispute arbitration incremental class action settlements expected consumer, including electronically. The to result if the proposal were finalized, as notice may be provided either as a agreement violates the administrator’s well as other additional costs associated with standalone document or included in fairness principles, rules, or similar incremental class litigation. To make that another notice that the customer requirements. What constitutes an projection the Bureau has sought to confine receives, such as a periodic statement, administrator’s fairness principles, its analysis to class settlements of class to the extent permitted by other laws rules, or similar requirements should be action cases of a type from which providers and regulations. interpreted broadly. Examples of such of consumer financial services are today able principles or rules include, but are not to insulate themselves by using an arbitration 4(b) Submission of Arbitral Records limited to: agreement but would not be able to do so i. The American Arbitration under the proposed rule. For that reason, in 1. Submission by entities other than Association’s Consumer Due Process making its projections the Bureau excluded providers. Section 1040.4(b) requires two types of federal class settlements that Protocol; or were analyzed in Section 8 of the Study: (1) providers to submit specified arbitral ii. JAMS Policy on Consumer records to the Bureau. Providers are not Class action settlements involving providers Arbitrations Pursuant to Pre-Dispute or financial products or services which fall required to submit the records Clauses Minimum Standards of outside the scope of the proposal so that themselves if they arrange for another Procedural Fairness. providers would still be able to insulate person, such as an arbitration themselves from such cases under the administrator or an agent of the 4(b)(3) Redaction proposal; 1 and (2) class action settlements provider, to submit the records on the 1. Redaction by entities other than involving claims of a type that could not providers’ behalf. The obligation to providers. Section 1040.4(b)(3) requires have been affected by the presence of an comply with § 1040.4(b) nevertheless providers to redact records before arbitration agreement because there was no remains on the provider and thus the submitting them to the Bureau. 1 provider must ensure that the person Providers are not required to perform Persons offering or providing similar products or services might be covered by the proposed rule submits the records in accordance with the redactions themselves and may in some circumstances; the Bureau’s estimates are § 1040.4(b). arrange for another person, such as an not a legal determination of coverage.

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contract or privity of contract between the docket numbers, but are consolidated under Caston-Palmer v. NCO Portfolio provider and the members of the class, or Docket 1:09–MD–2036–JLK in the U.S. Management, Inc., 1:08–CV–02818 (N.D. Ill.); because of legal constraints on use of District Court, Southern District of Florida; Catala v. Resurgent Capital Services L.P., arbitration agreements.2 Examples of the first these settlements are noted with ‘‘**.’’) 3:08–CV–02401 (S.D. Cal.); type include class settlements involving real Adams v. LVNV Funding L.L.C., 1:09–CV– Cervantes v. Pacific Bell L.L.C.*, 3:05–CV– estate settlement services, insurance firms 06469 (N.D. Ill.); 01469 (S.D. Cal.); providing ancillary (add-on) products which Ajiere v. Tressler, Soderstrom, Maloney & Cheney v. Tek-Collect Inc., 1:09–CV–08052 take the form of insurance, claims against Priess, L.L.P., 1:09–CV–06125 (N.D. Ill.); (N.D. Ill.); credit reporting agencies where the claims Anama v. AFNI, Inc., 1:07–CV–04251 (N.D. Chulsky v. Hudson Law Offices, P.C., 3:10– did not relate to the provision of a consumer Ill.); CV–03058 (D.N.J.); report or related information, and class Anderson v. Nationwide Credit, Inc., 2:10– Clendenin v. Carecredit, L.L.C., 1:08–CV– settlements by merchants of claims CV–03825 (E.D.N.Y.); 06559 (N.D. Ill.); concerning ATM ‘‘sticker’’ notice Anokhin v. Continental Service Group, Cole v. Portfolio Recovery Associates, requirements previously required by EFTA.3 Inc., 1:10–CV–02890 (E.D.N.Y.); L.L.C., 4:08–CV–00036 (D. Mont.); Examples of the second type include class Aramburu v. Healthcare Financial Cole v. Wells Fargo Bank N.A., 2:07–CV– settlements by financial institutions of claims Services, Inc., 1:02–CV–06535 (E.D.N.Y.); 00916 (W.D. Wash.); by non-customers concerning ATM ‘‘sticker’’ Arlozynski v. Rubin & Debski, P.A., 8:09– Colello v. Franklin Collection Service, Inc., notice requirements previously required by CV–02321 (M.D. Fla.); 1:10–CV–06229 (N.D. Ill.); EFTA, and class settlements of claims Arroyo v. Professional Recovery Services, Corsick v. West Asset Management, Inc., involving check cashing by merchants. In Inc., 1:09–CV–00750 (E.D. Cal.); 5:09–CV–03053 (N.D. Cal.); total 117 of the 419 federal class settlements Arthur v. SLM Corp., 2:10–CV–00198 (W.D. Cosgrove v. Citizens Automobile Finance, analyzed in Section 8 of the Study were not Wash.); Inc., 5:09–CV–01095 (E.D. Pa.); used for purposes of these projections. The Asch v. Teller Levit & Silvertrust, P.C., Cotton v. Asset Acceptance, L.L.C., 1:07– largest group excluded—over half of the 1:00–CV–03290 (N.D. Ill.); CV–05005 (N.D. Ill.); total—were EFTA ATM class settlements. Aspan v. Hudson & Keyse, L.L.C., 1:08– Cotton v. National Action Financial The 117 federal class settlements in the CV–02826 (N.D. Ill.); Services, Inc., 1:10–CV–04709 (N.D. Ill.); above categories are identified in Appendix Baron v. Direct Capital Corp., 2:09–CV– Cox v. Unifund CCR Partners, 1:08–CV– B to the proposed rule. 00669 (W.D. Wash.); 01005 (N.D. Ill.); Craddock v. Hayt, Hayt & Landau, L.L.C., In addition, to avoid potential Barrera v. Resurgence Financial, L.L.C., 3:09–CV–00595 (D.N.J.); underestimates of the costs of the proposal in 1:08–CV–03519 (N.D. Ill.); Craft v. North Seattle Community College the Bureau’s Section 1022(b)(2) Analysis, the Bennett v. Weltman Weinberg & Reis Co., Foundation, 3:07–CV–00132 (M.D. Ga.); Bureau included for purposes of its 1:07–CV–01818 (N.D. Ohio); Bertram Robison v. WFS Financial Inc., Cruz-Martinez v. Hellmuth & Johnson, calculations 10 federal class settlements that P.L.L.C., 0:08–CV–04289 (D. Minn.); were identified as part of the Study but were 8:06–CV–01072 (C.D. Cal.); Bibb v. Friedman & Wexler L.L.C., 2:07– Cyrus Ahmad Ebrahimi v. West Asset not include in the results reported in the Management Inc., 8:09–CV–01109 (C.D. Cal.); Study. Seven of these cases involve CV–02173 (C.D. Ill.); Bicking v. Law Offices of Rubenstein & Dalton v. Cardworks Services, L.L.C., 1:09– allegations of ‘‘cramming’’ of third-party CV–00563 (S.D. Ala); charges on consumer telecommunications Cogan, 3:11–CV–00078 (E.D. Va.); Blair v. Phillips & Cohen Associates, Ltd., Davis v. Riddle & Associates, P.C., 2:07– bills. One case involved long-term auto 1:09–CV–05271 (N.D. Ill.); CV–00284 (E.D. Pa.); leasing.4 The other two cases appeared to be Blake v. Smith Thompson Shaw & Day v. Persels & Associates, L.L.C., 8:10– companion class settlements to a payday loan Manausa P.A., 4:08–CV–00358 (N.D. Fla.); CV–02463 (M.D. Fla.); debt collection class settlement that was Dee v. Bank of The West (In re Checking 5 Blarek v. Encore Receivable Management included in Section 8 of the Study. Inc., 2:06–CV–00420 (E.D. Wis.); Account Overdraft Litig.)**, 4:10–CV–02736 After accounting for all of the foregoing Blodgett v. Regent Asset Management (N.D. Cal.); adjustments, the list below identifies the Solutions, Inc., 0:09–CV–03210 (D. Minn.); D’Elia v. First Capital, L.L.C., 1:07–CV– resulting set of 312 federal class settlements Blue v. Unifund CCR Partners, 1:09–CV– 06042 (N.D. Ill.); used in the Section 1022(b)(2) Analysis to 01777 (N.D. Ill.); Diangelo v. Unifund CCR Partners, 1:08– project the estimated impact of the proposed Boettger v. Sula, 1:12–CV–00002 (S.D. CV–03205 (N.D. Ill.); rule on federal class litigation against Iowa); Dobson v. Asset Acceptance L.L.C., 1:07– providers, with 10 added cases noted with a Bogner v. Masari Investments, L.L.C., 2:08– CV–06203 (N.D. Ill.); ‘‘*.’’ (Cases consolidated in the checking CV–01511 (D. Ariz.); Donahue v. Weltman, Weinberg & Reis Co., account overdraft reordering multidistrict Bradshaw v. Hilco Receivables, L.L.C., L.P.A., 1:10–CV–04619 (N.D. Ill.); litigation are listed under their original 1:10–CV–00113 (D. Md.); Douma v. Law Offices of Mitchell N. Kay Brown v. Syndicated Office Systems, Inc., P.C., 1:09–CV–09957 (S.D.N.Y); 2 In addition, two debt collection cases were 9:10–CV–80465 (S.D. Fla); Drinkman, Robert v. Encore Receivable inadvertently included in the set of cases analyzed Buchman v. Bray & Lunsford, P.A., 8:07– Management, Inc., 3:07–CV–00363 (W.D. in Section 8 twice. The Bureau therefore removed CV–01752 (M.D. Fla.); Wis.); the two duplicates from the set of cases analyzed Burton v. Northstar Location Services, Ducharme v. John C. Heath Attorney at in the Section 1022(b)(2) Analysis. L.L.C., 1:08–CV–05751 (N.D. Ill.); Law P.L.L.C., 3:10–CV–02763 (N.D. Cal.); 3 In addition, a class settlements of a dispute Cady v. Codilis & Associates, P.C., 1:08– Duffy v. Oliphant Financial L.L.C., 2:07– concerning a merchant’s disclosures on a prepaid funeral plan was analyzed in Section 8 of the Study, CV–01901 (N.D. Ill.); CV–03657 (E.D.N.Y.); but was not used as a basis for the Bureau’s estimate Cain v. Consumer Porfolio Services, Inc., Duhadway v. Credigy Receivables Inc., of impacts. As a result the Bureau did not find any 1:10–CV–02697 (N.D. Ill.); 1:08–CV–00852 (N.D. Ill.); merchant TILA creditor (based on allegations of Cain v. J.P.T. Automotive, Inc., 2:05–CV– Durham v. Continental, 3:07–CV–01763 consumer credit with a finance charge) federal class 03805 (E.D.N.Y.); (S.D. Cal.); settlements. Such settlements, however, may exist Calloway v. Cash America Net of Eason v. AFNI, Inc., 8:08–CV–00128 (D. in state courts. California, L.L.C., 5:09–CV–04858 (N.D. Cal.); Md.); 4 The case materials reviewed by the Bureau do Carlsen v. Freedom Debt Relief L.L.C., Eatmon v. Palisades Collection, L.L.C., not definitively establish whether the automobile 2:09–CV–00055 (E.D. Wash.); 2:08–CV–00306 (E.D. Tex.); leases at issue would be covered under proposed Carpenter v. Persolve, L.L.C., 3:07–CV– Eddie Wayne Hutchison v. Progressive § 1040.3(a)(2). 00633 (S.D. Ill.); Management Systems, Inc., 2:07–CV–07464 5 These settlements resolved alleged FDCPA violations asserted by the same consumer, in the Case v. Bank of Oklahoma, N.A. (In re (C.D. Cal.); same court, by the same law firm, in the same Checking Account Overdraft Litig.)**, 5:10– Elizabeth Lavalle v. Chex Systems, Inc., month, against a group of defendants involved in 00901–L (W.D. Okla.); 8:08–CV–01383 (C.D. Cal.); an apparently related set of activities in the payday Castellano v. Global Credit & Collection Elsey v. Pierce & Associates, P.C., 1:08– lending market. Corp., 2:10–CV–05898 (E.D.N.Y.); CV–02538 (N.D. Ill.);

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Esslinger v. HSBC Bank USA Inc., 2:10– Hall v. Capital One Auto Finance, Inc., King v. United SA Federal Credit Union, CV–03213 (E.D. Pa.); 1:08–CV–01181 (N.D. Ohio); 5:09–CV–00937 (W.D. Tex.); Fahme v. I.C. System, Inc., 1:08–CV–01487 Harris v. D. Scott Carruthers & Associates, Kiousis v. Encore Receivable Management, (E.D.N.Y.); 8:09–CV–00154 (D. Neb.); Inc., 1:11–CV–00033 (N.D. Ill.); Faloney v. Wachovia Bank, N.A., 2:07–CV– Hartt v. Flagship Credit Corp., 2:10–CV– Kirk v. Gobel, 2:08–CV–00344 (E.D. Wash.); 01455 (E.D. Pa.); 00822 (E.D. Pa.); Kish v. Suntrust Banks, Inc., 1:06–CV– Fike v. The Bureaus, Inc., 1:09–CV–02558 Hauk v. LVNV Funding, L.L.C., 1:09–CV– 00968 (N.D. Ga.); (N.D. Ill.); 03238 (D. Md.); Kistner v. Law Offices of Michael P. Flores v. OneWest Bank, F.S.B., d/b/a Hearsh v. OSI Collection Services, Inc., Margelefsky, L.L.C., 3:05–CV–07238 (N.D. IndyMac Federal Bank, 1:09–CV–04042 (N.D. 1:07–CV–00097 (N.D. Ill.); Ohio); Ill.); Henry Mcmullen v. Jennings & Valancy, Krech v. Efunds Corp., 1:08–CV–00985 Ford v. Verisign Inc.*, 3:05–CV–00819 P.A. v. Jennings & Valancy, P.A., 0:10–CV– (N.D. Ill.); (S.D. Cal.); 60050 (S.D. Fla); Lacour v. Whitney Bank, 8:11–CV–01896 Foster v. Velocity Investments, L.L.C., 1:07– Herkert v. Midland Funding NNC–2 Corp., (M.D. Fla.); CV–00824 (N.D. Ill.); 1:08–CV–00760 (N.D. Ill.); Lagana v. Stephen Einstein & Associates, Foster v. D.B.S. Collection Agency, 2:01– Holman v. Student Loan Xpress, Inc., 8:08– P.C., 1:10–CV–04456 (S.D.N.Y); CV–00514 (S.D. Ohio); CV–00305 (M.D. Fla.); Landrum v. Meadows Credit Union, 4:08– Foti v. NCO Financial Systems, Inc., 1:04– Horton v. IQ Telecom, Inc., 1:07–CV–02478 CV–00441 (W.D. Mo.); CV–00707 (S.D.N.Y); (N.D. Ill.); Langendorfer v. Kaufman, 1:10–CV–00797 Fragoso v. HBLC, Inc., 1:07–CV–05482 Housenkamp v. Weltman, Weinberg & Reis, (S.D. Ohio); (N.D. Ill.); Co. of Michigan, 1:09–CV–10613 (E.D. Lantrip v. Dodeka L.L.C., 2:08–CV–00476 Frances Anne Ramsey v. Prime Healthcare Mich.); (E.D. Tex.); Services Inc., 8:08–CV–00820 (C.D. Cal.); Howell v. Capital Management Services Larsen v. Union Bank, N.A. (In re Checking Francisco Marenco v. Visa Inc., 2:10–CV– L.P., 1:10–CV–00184 (N.D. Ind.); Account Overdraft Litig.)**, 4:09–CV–3250 08022 (C.D. Cal.); Huffman v. Zwicker & Associates, P.C., (N.D. Cal.); Friedrichs v. BMW Financial Services 1:07–CV–01369 (E.D. Cal.); Lau v. Arrow Financial Services, L.L.C., L.L.C., 4:08–CV–04486–PJH (C.D. Cal.); Hughes v. Harvest Credit Management VII, 1:06–CV–03141 (N.D. Ill.); Froumy v. Stark & Stark, 3:09–CV–04890 L.L.C., 1:08–CV–03685 (N.D. Ill.); Laura Hoffman v. Citibank (South Dakota) (D.N.J.); Hunt v. Check Recovery Systems, Inc., N.A., 8:06–CV–00571 (C.D. Cal.); Gaalswyk-Knetzke v. The Receivable 4:05–CV–04993 (N.D. Cal.); Layman v. Forster, 1:09–CV–00733 (S.D. Management Services Corp., 8:08–CV–00493 Hurwitz v. Ameriquest Recovery Services, Ind.); (M.D. Fla.); L.L.C., 1:06–CV–01440 (E.D.N.Y.); Lefoll v. Key Hyundai of Manchester L.L.C., Gail v. Law Offices of Weltman Weinberg In re: Chase Bank USA, N.A. ‘‘Check Loan’’ 3:08–CV–01593 (D. Conn.); & Reis Co. L.P.A, 2:05–CV–00721 (E.D. Wis.); Contract Litigation, 3:09–MD–02032 (N.D. Lemieux v. Global Credit & Collection Gailin R. Brown v. Dean J. Jungers, 8:08– Cal.); Corp., 3:08–CV–01012 (S.D. Cal.); CV–00451 (D. Neb.); In re: Currency Conversion Fee Antitrust Lewis v. Northeast Credit & Collections, Galbraith v. Resurgent Capital Services, Litigation, 1:01–MD–01409 (S.D.N.Y); Inc., 7:07–CV–11593 (S.D.N.Y); 2:05–CV–02133 (E.D. Cal.); In re: Lifelock, Inc., Marketing & Sales Lige v. Titanium Solutions Inc., 2:06–CV– Garland v. Cohen & Krassner, 1:08–CV– 00400 (N.D. Ind.); 04626 (E.D.N.Y.); Practices Litigation, 2:08–MD–01977 (D. Garland v. Greenberg, 1:09–CV–02643 Ariz.); Limpert v. Cambridge Credit Counseling (E.D.N.Y.); Jackson v. Metscheck, Inc., 1:11–CV–02735 Corp., 2:03–CV–05986 (E.D.N.Y.); Garnett v. Lasalle Bank Corp., 1:08–CV– (N.D. Ga.); Lofton v. Bank of America Corp., 3:07–CV– 01872 (N.D. Ill.); Jancik v. Cavalry Portfolio Services L.L.C., 05892 (N.D. Cal.); Garo v. Global Credit & Collection Corp., 0:06–CV–03104 (D. Minn.); Lopez v. JPMorgan Chase Bank (In re 2:09–CV–02506 (D. Ariz.); Janice J. Abat v. JPMorgan Chase & Co., Checking Account Overdraft Litig.)**, 1:09– Gaudalupe v. Miller Law Offices, P.L.L.C., 8:07–CV–01476 (C.D. Cal.); CV–23127–JLK (S.D. Fla); 1:06–CV–03044 (E.D.N.Y.); Jenkins v. Hyundai Motor Finance Co., Louie v. Weltman, Weinberg & Reis Co., Gillespie v. Equifax Inc., 1:05–CV–00138 2:04–CV–00720 (S.D. Ohio); L.P.A., 1:11–CV–01758 (N.D. Ill.); (N.D. Ill.); Johnson v. Kleinsmith & Associates P.C., Luxford v. Resurgent Capital Services, L.P., Goodie v. Weinstock, Friedman & 3:09–CV–00003 (D.N.D.); 4:09–CV–02809 (N.D. Cal.); Friedman, P.C., 1:10–CV–01870 (D. Md.); Johnson v. Law Offices of Brachfeld & Makson v. Portfolio Recovery Associates, Grannan v. Alliant Law Group, P.C., 5:10– Associates, 8:09–CV–00336 (D. Neb.); L.L.C., 3:07–CV–00582 (E.D. Va.); CV–02803 (N.D. Cal.); Johnson v. Midland Funding, 1:09–CV– Margulin v. Trojan Professional Services Gravina v. Client Services, Inc., 2:08–CV– 02391 (D. Md.); Inc., 1:08–CV–07052 (N.D. Ill.); 03634 (E.D.N.Y.); Jones v. Client Services, Inc., 2:10–CV– Markey v. Robert Joseph Williams Co., Gray v. Mobile Messenger*, 0:08–CV– 00343 (E.D. Pa.); L.L.C., 1:08–CV–04304 (D.N.J.); 61089 (S.D. Fla); Jones v. Hoffman Swartz*, 1:10–CV–07632 Marshall-Mosby v. Blitt & Gaines, P.C., Griffin v. Capital One Bank, 8:08–CV– (N.D. Ill.); 1:08–CV–00758 (N.D. Ill.); 00132 (M.D. Fla.); Jones v. National Credit Adjusters, L.L.C., Martin v. Cavalry Portfolio Services, L.L.C., Guidos v. Northstar Education Finance, 1:10–CV–08027 (N.D. Ill.); 1:07–CV–04745 (N.D. Ill.); Inc., 0:08–CV–04837 (D. Minn.); Jones v. Rory Vohwinkel*, 1:10–CV–07954 Martin v. J.C. Christensen & Associates, Gunther v. Capital One, N.A., 2:09–CV– (N.D. Ill.); Inc., 1:09–CV–05726 (N.D. Ill.); 02966 (E.D.N.Y.); Julks v. Atlantic Funding Group, L.L.C., Martinez v. Elite Recovery Services, Inc., Gutierrez v. LVNV Funding, L.L.C., 3:08– 1:06–CV–11704 (D. Mass.); 3:08–CV–00967 (D.N.J.); CV–00225 (W.D. Tex.); Kadlec v. Weltman, Weinberg & Reis Co., Martinez v. FMS, Inc., 3:07–CV–01157 Haidee Estrella v. Freedom Financial L.P.A., 3:10–CV–00223 (W.D. Tex.); (M.D. Fla.); Network L.L.C., 3:09–CV–03156 (N.D. Cal.); Kalish v. Kapp & Kalamotousakis, L.L.P., Martsolf v. JBC Legal Group, P.C., 1:04– Halbert v. Biehl & Biehl, Inc., 1:09–CV– 1:06–CV–04933 (S.D.N.Y); CV–01346 (M.D. Pa.); 06221 (N.D. Ill.); Keck v. Bank of America, 3:08–CV–01219 Mathena v. Webster Bank N.A., 3:10–CV– Halbert v. Creditors Interchange Receivable (N.D. Cal.); 01448 (D. Conn.); Management, L.L.C., 1:09–CV–06207 (N.D. Kern v. LVNV Funding L.L.C., 1:09–CV– Matthew v. Premium Asset Recovery Corp., Ill.); 02202 (N.D. Ill.); 1:07–CV–04306 (N.D. Ill.); Hale v. AFNI, Inc., 1:08–CV–03918 (N.D. Kight v. Eskanos & Adler, P.C., 3:05–CV– Mayfield v. Memberstrust Credit Union, Ill.); 01999 (S.D. Cal.); 3:07–CV–00506 (E.D. Va.); Hall v. Bronson & Migliaccio, L.L.P., 1:07– Kindler v. Mitsubishi Motors Credit of Mckenna v. Pollack & Rosen, P.A., 0:11– CV–00255 (S.D. Ohio); America, Inc., 4:09–CV–00315 (W.D. Mo.); CV–62134 (S.D. Fla);

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Mcnulty v. Edwin A. Abrahamsen & Ramirez v. Green Tree Servicing L.L.C., Slade v. Law Offices of Daniel C Consuegra Associates. P.C., 2:08–CV–00422 (W.D. Pa.); 1:09–CV–01195 (N.D. Ill.); P.L., 4:11–CV–00005 (N.D. Fla.); Meselsohn v. First National Collection Ramirez v. Palisades Collection, L.L.C., Smith v. Allied Interstate, Inc., 1:08–CV– Bureau, Inc., 1:06–CV–03324 (E.D.N.Y.); 1:07–CV–03840 (N.D. Ill.); 06986 (S.D.N.Y); Meselsohn v. Lerman, 2:06–CV–04115 Rayl v. Moores, 1:09–CV–00554 (S.D. Ind.); Smith v. GB Collects, L.L.C., 1:09–CV– (E.D.N.Y.); Reed v. Icon Fitness & Arvest Bank & Dent- 05917 (D.N.J.); Mesick v. Freedman, Anselmo, Lindberg & A-Med, 3:08–CV–00677 (E.D. Va.); Smith v. Lyons, Doughty & Veldhuis, P.C., Rappe, L.L.C., 1:08–CV–02695 (N.D. Ill.); Reeves v. New Horizons Financial Services, 1:07–CV–05139 (D.N.J.); Mikovic v. Financial Medical Systems, Inc., Inc., 0:08–CV–04866 (D. Minn.); Smith v. Professional Billing & 2:10–CV–02457 (E.D.N.Y.); Reichel v. Academy Collection Service Management Services, Inc., 1:06–CV–04453 Milam v. Credigy Receivables, Inc., 1:07– Management, L.L.C., n/k/a Monarch Recovery (D.N.J.); CV–04417 (N.D. Ill.); Management, Inc., 1:10–CV–01119 (C.D. Ill.); Smith v. Syndicated Office Systems, Inc., Miller v. Midland Credit Management, Inc., Rice v. Praxis Financial Solutions, Inc., 3:07–CV–00131 (W.D. Tex.); 1:08–CV–00780 (N.D. Ill.); 1:11–CV–08488 (N.D. Ill.); Soutter v. Equifax Information Services, Milo v. Barneys New York, Inc., 1:10–CV– Richard v. West Asset Management, Inc., L.L.C., 2:10–CV–03574 (E.D. Pa.); 03133 (S.D.N.Y); 1:09–CV–03864 (N.D. Ill.); Starzynski v. Friedman & Wexler, L.L.C., Mitchem v. Illinois Collection Service, Inc., Richardson v. Allied Interstate, Inc., 3:09– 1:07–CV–01254 (N.D. Ill.); 1:09–CV–07274 (N.D. Ill.); CV–02265 (D.N.J.); Steele v. Paypal, Inc., 1:05–CV–01720 Mitchem v. Northstar Location Services Ritthaler v. Riddle & Associates, P.C., 1:08– (E.D.N.Y.); L.L.C., 1:09–CV–06711 (N.D. Ill.); CV–06920 (N.D. Ill.); Stern v. Cingular*, 2:05–CV–08842 (C.D. Moorehead v. Franklin Collection Service, Robinson v. Thompson, 3:10–CV–04143 Cal.); Inc., 1:11–CV–05936 (N.D. Ill.); (D.N.J.); Swain v. Cach, L.L.C., 5:08–CV–05562 Muha v. Encore Receivable Management Rodriguez v. Sallie Mae (SLM) Corp., 3:07– (N.D. Cal.); Inc., 2:05–CV–00940 (E.D. Wis.); CV–01866 (D. Conn.); Sylverne v. Data Search N.Y., Inc., 1:08– Mund v. EMCC, Inc., 0:08–CV–00936 (D. Rosenau v. Unifund Corp., 2:06–CV–01355 CV–00031 (N.D. Ill.); Minn.); (E.D. Pa.); Sypniewski v. NCO Financial Systems, Murphy v. Capital One Bank, 1:08–CV– Rubinstein v. Department Stores National Inc., 1:08–CV–00239 (N.D. Ill.); 00801 (N.D. Ill.); Bank, 1:08–CV–01596 (S.D.N.Y); Taylor v. Apex Financial Management Navarrette v. TD Banknorth, N.A., 5:07– Russo v. Puckett & Redford P.L.L.C., 2:09– L.L.C., 2:09–CV–00229 (E.D. Tex.); CV–02767 (N.D. Cal.); CV–00433 (W.D. Wash.); Tenerelli v. Cardworks Servicing, L.L.C., Nobles v. MBNA Corp., 3:06–CV–03723 Ruth v. Triumph Partnerships L.L.C., 3:06– 1:09–CV–02651 (N.D. Ill.); (N.D. Cal.); CV–50042 (N.D. Ill.); Thomas v. CitiFinancial Auto Ltd., 1:07– Rutha Smith v. Heritage Financial Noel Frederick v. FIA Card Services, N.A., CV–00721 (D. Md.); 2:09–CV–03419 (C.D. Cal.); Recovery Services, 2:10–CV–03922 (D.N.J.); Thornton v. Belkin, Burden, Wenig & Norman v. Franklin Collection Services, Ryder v. Diversified Ambulance Billing Goldman, L.L.P., 1:09–CV–05901 (S.D.N.Y); Inc., 1:08–CV–00177 (N.D. Miss.); L.L.C., 8:09–CV–02058 (M.D. Fla.); Thornton v. Midland Credit Management, O’Connor v. AR Resources Inc, 3:08–CV– Ryder v. Equifax Information Services, Inc., 1:09–CV–05685 (N.D. Ill.); 01703 (D. Conn.); L.L.C., 1:09–CV–07626 (N.D. Ill.); Tidwell v. Asset Recovery Solutions, L.L.C., Pabon-Aponte v. Empresas Berrios, Inc., Sachar v. Iberiabank Corp. (In re Checking 1:09–CV–04022 (E.D.N.Y.); 3:06–CV–01865 (D.P.R.); Account Overdraft Litig.)**, 1:11–CV–22844– Palmer v. Far West Collection Services, JLK (S.D. Fla); Tornes v. Bank of America (In re: Checking Inc., 5:04–CV–03027 (N.D. Cal.); Sadler v. Midland Credit Management, Account Overdraft Litig)**, 1:08–CV–23323– Parlier v. LVNV Funding, L.L.C., 1:11–CV– Inc., 1:06–CV–05045 (N.D. Ill.); JLK (S.D. Fla); 01586 (N.D. Ill.); Sanchez v. Northstar Location Services, Trempe v. HBLC, Inc., 1:07–CV–05945 Pascal v. Feigelson, 7:08–CV–00550 L.L.C., 1:08–CV–04885 (N.D. Ill.); (N.D. Ill.); (S.D.N.Y); Santoro v. Aargon Agency, Inc., 2:07–CV– Trombley v. National City Bank, 1:10–CV– Passafiume v. National Recovery Agency, 01003 (D. Nev.); 00232 (D.D.C.); Inc., 2:10–CV–00796 (E.D.N.Y.); Sargent v. Hibbard, 1:08–CV–01463 (S.D. Urbaniak v. Asset Acceptance, L.L.C., Pawelczak v. Bureau of Collection Ind.); 1:08–CV–00551 (N.D. Ill.); Recovery, L.L.C., 1:11–CV–01415 (N.D. Ill.); Sargent v. St. Vincent Hospital & Health Urbaniak v. Credigy Receivables, Inc., Perez v. Complete Collection Service of Care Center, Inc., 1:08–CV–01464 (S.D. Ind.); 1:07–CV–06326 (N.D. Ill.); South Florida, Inc., 0:09–CV–61124 (S.D. Savedoff v. Access Group, Inc., 1:06–CV– Utility Consumers’ Action Network v. Fla); 00135 (N.D. Ohio); Sprint Solutions*, 3:07–CV–02231 (S.D. Cal.); Perry v. Harris Financial Management, Scally v. Hilco Receivables, 1:04–CV– Valdez v. Sprint Nextel*, 3:06–CV–07587 L.L.C., 1:07–CV–05177 (N.D. Ill.); 03035 (N.D. Ill.); (N.D. Cal.); Peterson v. Resurgent Capital Services L.P., Schulte v. Fifth Third Bank, 1:09–CV– Vallejo, Jr. v. National Credit Adjusters 2:07–CV–00251 (N.D. Ind.); 06655 (N.D. Ill.); L.L.C., 2:10–CV–00103 (N.D. Ind.); Philip Rannis v. Fair Credit Lawyers Inc., Seawell v. Universal Fidelity Corp., 2:05– Varela v. Moskowitz, Mandell, Salim & 5:06–CV–00373 (C.D. Cal.); CV–00479 (E.D. Pa.); Simowitz, P.A., 0:07–CV–61143 (S.D. Fla); Poet v. Security Credit Systems, Inc., 1:10– Sergio Cedeno v. Bureau of Collection Vasilas v. Subaru of America*, 1:07–CV– CV–01068 (D.N.J.); Recovery Inc., 8:10–CV–01960 (C.D. Cal.); 02374 (S.D.N.Y); Powell v. Procollect, Inc., 3:11–CV–00846 Serren v. LVNV Funding, L.L.C., 1:06–CV– Villaflor v. Equifax Information Services, (N.D. Tex.); 03574 (N.D. Ill.); L.L.C., 3:09–CV–00329 (N.D. Cal.); Pozzuolo v. NCO Financial Systems, Inc., Shane v. Ferrucci, 1:11–CV–00946 (S.D. Villasenor v. American Signature, Inc., 2:07–CV–01295 (E.D. Pa.); Ind.); 1:06–CV–05493 (N.D. Ill.); Prescott v. Autovest, L.L.C., 2:11–CV– Shelton v. Crescent Bank & Trust, 1:08– Vincent v. Wolpoff & Abramson, L.L.P., 00219 (E.D. Tex.); CV–01799 (D. Md.); 2:08–CV–00423 (W.D. Pa.); Prieto v. HBLC, Inc., 1:08–CV–02718 (N.D. Shippey v. Weltman, Weinberg & Reis Co., Voris v. Resurgent Capital Services L.P., Ill.); L.P.A., 3:10–CV–00303 (W.D. Pa.); 3:06–CV–02253 (S.D. Cal.); Quesenberry v. Alliant Law Group P.C., Short v. Anastasi & Associates, 0:11–CV– Walker v. Discover Financial Services, Inc., 4:09–CV–00414 (E.D. Tex.); 01612 (D. Minn.); 1:10–CV–06994 (N.D. Ill.); Quinones-Malone v. Pellegrino & Feldstein, Silva v. Patenaude & Felix, 5:08–CV–03019 Wang v. Asset Acceptance L.L.C., 3:09– L.L.C., 2:08–CV–03295 (D.N.J.); (N.D. Cal.); CV–04797 (N.D. Cal.); Quiroz v. Revenue Production Sims v. Cellco Partnership*, 3:07–CV– Wanty v. Messerli & Kramer P.A., 2:05–CV– Management, Inc., 1:08–CV–00879 (N.D. Ill.); 01510 (N.D. Cal.); 00350 (E.D. Wis.); Radicchi v. Palisades Collection L.L.C., Skusenas v. Linebarger, Goggan, Blair & Washington v. Unifund CCR Partners, 1:08–CV–02607 (E.D.N.Y.); Sampson, L.L.P., 1:10–CV–08119 (N.D. Ill.); 1:07–CV–00150 (N.D. Ill.);

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Watts v. Capital One Auto Finance, Inc., Dover v. GNC Community Federal Credit Louisma v. Automated Financial, LLC, 1:07–CV–03477 (D. Md.); Union, 2:09–CV–00810 (W.D. Pa.); 1:11–CV–02104 (N.D. Ill.); Weinstein v. Asset Acceptance L.L.C., Dragotta v. Northwest Bancorp, Inc., 2:09– Mains v. DB Direct, 2:07–CV–02037 (C.D. 1:07–CV–05967 (N.D. Ill.); CV–00632 (W.D. Pa.); Ill.); Werts v. Midland Funding, L.L.C., 1:09– Dragotta v. West View Savings Bank, 2:09– Markoff v. Independent Bank Corp., 2:09– CV–02311 (D.D.C.); CV–00627 (W.D. Pa.); CV–12639 (E.D. Mich.); Wess v. Storey, 2:08–CV–00623 (S.D. Drexler v. George Loukas Real Estate, Inc., Marsh v. ATM Capital Management, Inc., Ohio); 1:07–CV–05471 (N.D. Ill.); 1:07–CV–05808 (N.D. Ill.); Whelan v. Keybank U.S.A., N.A., 1:03–CV– Ellens v. Genworth Life & Annuity Marsi Zintel v. Pacific Community Federal 01118 (N.D. Ohio); Insurance Co., 1:08–CV–02640 (N.D. Ohio); Credit Union, 2:09–CV–05517 (C.D. Cal.); Whitehead-Bey v. Advantage Assets II, Inc., Escalante v. Lincoln Park Savings Bank, Mathias v. Carver Federal Savings Bank, 2:11–CV–05199 (E.D. Pa.); 1:08–CV–06152 (N.D. Ill.); 1:08–CV–05041 (E.D.N.Y.); Wilfong v. National Capital Management, Escalante v. Travelex Currency Services, McCormick v. 7–11, Inc., 3:06–CV–00127 L.L.C., 1:12–CV–02979 (N.D. Ill.); Inc., 1:09–CV–02209 (N.D. Ill.); (N.D. Tex.); Wilhelm v. Allied Interstate, Inc., 1:07–CV– Estate of Frank Townsend v. Protective Life McGill v. Parker Centennial Assurance Co., 01497 (N.D. Ill.); Insurance Co., 1:10–CV–02365 (N.D. Ohio); 1:08–CV–02766 (N.D. Ohio); Williams v. Brock & Scott, P.L.L.C., 1:09– Evans & Green, L.L.P. v. Mortgage Depot, McKinnie v. JP Morgan Chase Bank N.A., CV–00722 (M.D.N.C.); L.L.C., 6:07–CV–03275 (W.D. Mo.); 2:07–CV–00774 (E.D. Wis.); Williamson v. Unifund CCR Partners, 8:08– Ewing v. Administrative Systems Inc., Mendelovits v. Albany Bank & Trust Co., CV–00218 (D. Neb.); 2:08–CV–00797 (W.D. Wash.); N.A., 1:08–CV–03870 (N.D. Ill.); Wilson v. Cybrcollect, Inc., 5:09–CV–00963 Flores v. Bank, 1:07–CV–06403 (N.D. Ill.); Mills v. HEB Grocery Co., L.P., 4:10–CV– (N.D. Cal.); Gaylor v. Comala Credit Union, 2:10–CV– 04974 (S.D. Tex.); Woldman v. Chase Bank U.S.A., N.A., 00725 (M.D. Ala.); Neals v. Mortgage Guarantee Insurance 1:10–CV–00865 (N.D. Ill.); Gendernalik v. Fred Hunter Memorial Corp., 2:10–CV–01291 (W.D. Pa.); Wysocki v. City National Bank, 1:10–CV– Sevices, Inc., 0:08–CV–60274 (S.D. Fla); Nguyen v. South Central Bank, 1:11–CV– 03850 (N.D. Ill.); Gibilante v. Wachovia Mortgage Corp., 02612 (N.D. Ill.); Ybarrondo v. NCO Financial Systems, 2:07–CV–02236 (E.D. Pa.); Nicholas v. RBS Citizens, N.A., 2:09–CV– 3:05–CV–02057 (S.D. Cal.); Goldshteyn v. Argonne Credit Union, 1:10– 01697 (E.D.N.Y.); Zirogiannis v. Professional Recovery CV–05402 (N.D. Ill.); Nolf v. Allegheny Valley Bank of Consultants, Inc., 2:11–CV–00887 (E.D.N.Y.); Greiff v. First Commonwealth Bank, 2:10– Pittsburgh, 2:09–CV–00645 (W.D. Pa.); Zugay v. Professional Recovery CV–01224 (W.D. Pa.); Ori v. Fifth Third Bank, 2:08–CV–00432 Consultants, Inc., 1:10–CV–01944 (E.D.N.Y.). Greiff v. Jamestown Area Community (E.D. Wis.); Federeal Credit Union, 1:10–CV–00404 Orser v. Select Portfolio Servicing Inc., Appendix B to Section 1022(b)(2) (W.D.N.Y); 2:05–CV–01507 (W.D. Wash.); Analysis—Cases Not Used in Projecting Hall v. Vitran Express, Inc., 1:09–CV– Pamela Phillips v. Accredited Home Incremental Costs From Proposal 00800 (N.D. Ohio); Lenders Holding Co., 2:06–CV–00057 (C.D. Hamilton v. Wells Fargo Bank, N.A., 4:09– Cal.); Adighibe v. Clifton Telecard Alliance CV–04152 (N.D. Cal.); Parker v. First-Citizens Bank & Trust Co., (CTA), 2:07–CV–01250 (D.N.J.); Hansen v. Monumental Life Insurance Co., 3:09–CV–00588 (M.D. Tenn.); Angela Minor v. Real Page, Inc., 4:09–CV– 3:05–CV–01905 (D. Conn.); Patrick Mahoney v. Fidelity National Title 00439 (E.D. Tex.); Harrison v. First Independence Bank, 5:09– Co., 8:08–CV–00561 (C.D. Cal.); Anthony v. Fifth Third Bank, 1:08–CV– CV–12684 (E.D. Mich.); Paul Zintel v. Ironstone Bank, 8:09–CV– 04359 (N.D. Ill.); Harrison v. Flagstar Bank F.S.B., 5:09–CV– 00867 (C.D. Cal.); Barandas v. Old Republic National Title 12687 (E.D. Mich.); Pavle v. Arizona Central Credit Union, Insurance Co., 2:06–CV–01750 (D.N.J.); Hart v. Guardian Credit Union, 2:10–CV– 4:10–CV–00234 (D. Ariz.); Barlo v. First Financial Bank N.A., 2:10– 00855 (M.D. Ala.); Perez v. First American Title Insurance CV–00235 (N.D. Ind.); Hays v. Commonwealth Land Title Co., 2:08–CV–01184 (D. Ariz.); Barreto v. Center Bank, 1:10–CV–06554 Insurance Co., 3:10–CV–05336 (N.D. Cal.); Piontek v. Baltimore County Savings Bank, (N.D. Ill.); Helkowski v. Clearview Federal Credit F.S.B., 1:10–CV–03101 (D. Md.); Bernal v. American Money Centers Inc., Union, 2:09–CV–00609 (W.D. Pa.); Piontek v. CU Service Network, L.L.C., 2:05–CV–01327 (E.D. Wis.); Howard v. Canandaigua National Bank & 8:10–CV–01202 (D. Md.); Blaylock v. First American Title Insurance Trust, 6:09–CV–06513 (W.D.N.Y); Piontek v. Frederick County Bank, 8:10– Co., 2:06–CV–01667 (W.D. Wash.); Hrnyak v. Mid-West National Life CV–01912 (D. Md.); Boecherer v. Burling Bank, 1:08–CV–01332 Insurance Co. of Tennessee, 1:08–CV–02642 Piontek v. VIST Financial Corp., 5:10–CV– (N.D. Ill.); (N.D. Ohio); 02715 (E.D. Pa.); Bowen v. Groome, 3:11–CV–00139 (S.D. In Re: Trans Union Corp. v. Trans Union Polevoy v. Devon Bank, 1:08–CV–04822 Ill.); L.L.C., 1:00–CV–04729 (N.D. Ill.); (N.D. Ill.); Brake v. Highland Corp., 3:11–CV–00620 Jackman v. Global Cash Access Holdings, Popovic v. Dollar Bank, 2:10–CV–00432 (M.D. Tenn.); Inc., 2:09–CV–00897 (W.D. Pa.); (W.D. Pa.); Bruner v. America United Bank & Trust Katz v. Palisades Federal Credit Union, Popovic v. USX Federal Credit Union, Co., 1:08–CV–00124 (N.D. Ill.); 7:09–CV–01745 (S.D.N.Y); 2:09–CV–00631 (W.D. Pa.); Castro v. Old Republic National Title Kinder v. Elga Credit Union, 5:10–CV– Press v. Catskill Hudson Bank, 7:08–CV– Insurance Co., 3:06–CV–00784 (D. Conn.); 11549 (E.D. Mich.); 11335 (S.D.N.Y); Charles v. Lawyers Title Insurance Corp., Kinder v. Lenco Credit Union, 5:11–CV– Reich v. GCM Federal Credit Union, 0:10– 2:06–CV–02361 (D.N.J.); 11655 (E.D. Mich.); CV–00606 (D. Minn.); Chernyavsky v. Inland Bank & Trust, 1:08– Kistner v. Corus Bank, N.A., 1:08–CV– Richardson v. Harris County Federal Credit CV–04009 (N.D. Ill.); 02797 (N.D. Ill.); Union, 4:11–CV–01550 (S.D. Tex.); Clay William Fisher v. Finance America, Lengrand v. Wellpoint, Inc., 3:11–CV– Richardson v. Houston Federal Credit 8:05–CV–00888 (C.D. Cal.); 00333 (E.D. Va.); Union, 4:10–CV–03768 (S.D. Tex.); Cole v. Automated Financial, L.L.C., 1:11– Lentini v. Fidelity National Title Insurance Rodriguez v. Corus Bank, N. A., 1:08–CV– CV–03299 (N.D. Ill.); Co. of New York, 3:06–CV–00572 (D. Conn.); 03511 (N.D. Ill.); Couch v. Indians, Inc., 1:11–CV–00963 Lindsey v. American Security Insurance Rodriguez v. United Title Co., 3:05–CV– (S.D. Ind.); Co., 2:08–CV–00126 (E.D. Ky.); 01019 (S.D. Cal.); Cummings v. Resource Federal Credit Lindsey v. Unitrin Auto & Home Insurance Rushton v. First National Bank in Cooper, Union, 1:10–CV–01309 (W.D. Tenn.); Co., 2:08–CV–00127 (E.D. Ky.); 4:11–CV–00038 (E.D. Tex.); Donald R Chastain v. Union Security Life Lockwood v. Certegy Check Services, Inc., Ryals v. Hireright Solutions, Inc., 3:09–CV– Insurance Co., 2:06–CV–05885 (C.D. Cal.); 8:07–CV–01434 (M.D. Fla.); 00625 (E.D. Va.);

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Ryan v. ATM Link, Inc., 1:09–CV–07747 Stone v. Corus Bank, N.A., 1:08–CV–01746 Vasuki Parthiban v. GMAC Mortgage Corp., (N.D. Ill.); (N.D. Ill.); 8:05–CV–00768 (C.D. Cal.); Sebrow v. HSBC Bank, U.S.A., N.A., 2:08– Stone v. Marquette Bank, 1:08–CV–06388 Webb v. Cleverbridge, Inc., 1:11–CV–04141 CV–03162 (E.D.N.Y.); (N.D. Ill.); (N.D. Ill.); Shaked v. Wachovia Bank, N.A., 7:08–CV– Syran v. LexisNexis Group, 3:05–CV–00909 Wike v. Vertrue, Inc., 3:06–CV–00204 06984 (S.D.N.Y); (S.D. Cal.); Shelton v. Crescent Bank & Trust, 1:08– Taylor v. Apex Financial Management (M.D. Tenn.); CV–01799 (D. Md.); L.L.C., 2:09–CV–00229 (E.D. Tex.); Williams v. Staffing Solutions Southeast, Siragusa v. Advance Financial Federal Tedrow v. Cowles, 2:06–CV–00637 (S.D. Inc., 1:10–CV–00956 (N.D. Ill.); Credit Union, 2:09–CV–00328 (N.D. Ind.); Ohio); Witriol v. LexisNexis Group, 3:06–CV– Siragusa v. Corporate America Family Thomas v. Investex Credit Union, 4:11– 02360 (S.D. Cal.). Credit Union, 1:08–CV–04007 (N.D. Ill.); CV–00354 (S.D. Tex.); [FR Doc. 2016–10961 Filed 5–23–16; 8:45 am] Siragusa v. North Community Bank, 1:09– Thomas v. Mid-Missouri Bank, 6:10–CV– CV–02687 (N.D. Ill.); 03139 (W.D. Mo.); BILLING CODE 4810–AM–P Smith v. Credit Union 1, 1:07–CV–05939 Tovar v. Plaza Bank, 1:08–CV–04008 (N.D. (N.D. Ill.); Ill.);

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