Consumer Financial Protection Bureau Issues Proposed Rule to Prohibit Class Action Waivers in Arbitration Agreements
The federal Consumer Financial Protection Bureau (CFPB) has issued a proposed regulation, 12 C.F.R. part 1040, that would ban the enforcement of class action waivers in most consumer financial contracts.
The new regulation does not apply to employment contracts. Moreover, the new regulation will only apply prospectively to arbitration agreements formed more than 180 days after the regulation becomes effective. However, it will inevitably stir up some interesting legal and political issues surrounding the enforcement of class action waivers.
The new rule amounts to a regulatory reversal of the landmark 2011 U.S. Supreme Court decision in AT&T v. Concepcion, which held that the Federal Arbitration Act ("FAA"), requires states to enforce class action waivers even if they would be illegal under state law. Indeed, the new regulation would prohibit states from enforcing class action waivers even if they would be legal under state law.
The elephant in the room, however, is whether the CFPB actually has the authority to do any of this. Section 128(b) of the Dodd-Frank Act purportedly gives the CFPB authority to prohibit arbitration agreements containing class action waivers. However, the FAA already contains a statutory mandate that private arbitration agreements are to be deemed “valid, irrevocable, and enforceable," and are to be enforced "according to their terms."
Denying enforcement of class action waiver provisions is arguably a partial repeal of the FAA, at least as it was interpreted in AT&T v. Concepcion. It is therefore dubious that Congress can constitutionally delegate this legislative function to an administrative agency.