The Consumer Financial Protection Bureau (“CFPB”) released a final rule that prohibits certain financial service companies from blocking class action lawsuits with pre-dispute arbitration clauses and class action waiver clauses in consumer financial services contracts. The final rule requires arbitration clauses to contain a provision that explains that the arbitration clause cannot be invoked in a class action proceeding and requires parties to submit certain arbitration records to the CFPB whenever an arbitration claim is filed in relation to a consumer that entered a pre-dispute arbitration agreement after the rule’s compliance date.
The rule is a consequence of the Dodd-Frank Act of 2010, in which Congress authorized the CFPB to issues regulations that limit or prohibit the use of arbitration agreements in the financial industry. However, it is unclear whether the broad scope may adversely impact smaller entities that cannot afford to defend themselves against a class action lawsuit.
The rule is set to become effective on September 17, 2017 and applies to consumer financial services contracts that are entered into 180 days after September 17, 2017. Thus, the rule does not affect existing contracts, except when a new financial services entity becomes a party to an older contract. Institutions should prepare to review and update their contract provisions to comply with the final rule.
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