Fifth Circuit Pumps The Brakes On Arbitration

In a recent appeal directly to the Fifth Circuit from a Southern District of Texas Bankruptcy Court, the court affirmed the bankruptcy court’s denial of a motion to compel arbitration. In Henry v. Educational Financial Service, the Chapter 13 debtor initiated an adversary proceeding against her creditor asserting the creditor violated the discharge injunction by attempting to collect a discharged debt.  Relying upon an arbitration provision in the underlying credit application that stated that “[a]ny controversy or claim arising out of or related to this Note or an alleged breach of this Note, shall be settled by arbitration,” the creditor moved to compel arbitration,  The bankruptcy court denied the motion and certified its order for an interlocutory appeal directly to the Fifth Circuit in light of the US Supreme Court’s recent ruling in Epic Systems Corp. v. Lewis, 138 S. Ct. 1612 (2018).


While the Federal Arbitration Act (the “FAA”) requires courts to enforce arbitration provisions in accordance with their terms, the Court addressed the question of what happens when there are two competing federal statutes – in this case, the FAA and the Bankruptcy Code. In those instances, where the statutes cannot be harmonized and one must displace the other, the court looks to congressional intent.  Relying upon its prior decisions in the context of discharge injunctions, the Court noted that bankruptcy courts have discretion to decline to enforce arbitration agreements when: (a) the proceeding adjudicates statutory rights provided by the Bankruptcy Code; and (b) if requiring arbitration would conflict with the purposes of the Bankruptcy Code.  Because a debtor’s right to be free from collection efforts after discharge is a creature of the Bankruptcy Code and an action to enforce that right implicates an important bankruptcy policy - specifically, the ability of the bankruptcy court to enforce its own orders, the Court concluded that based upon its prior precedent, the bankruptcy court had discretion to deny the motion to compel arbitration.  


The Court further looked at what impact, if any, the Supreme Court’s 2018 decision in Epic Systems v. Lewis, 138 S. Ct. 1612 (2018) might cast upon the existing Fifth Circuit precedent and determined that in this instance, there was none.  In Epic Systems, the Court stated that

When confronted with two Acts of Congress allegedly touching on the same topic, this Court is not at liberty to pick and choose among congressional enactments and must instead strive to give effect to both.  A party seeking to suggest that two statutes cannot be harmonized, and that one displaces the other, bears the heavy burden of showing a clearly expressed congressional intention that such a result should follow.  The intention must be clear and manifest.

Epic Sys., 138 S. Ct. at 1623-24.   The Fifth Circuit determined that Epic did not change the existing Fifth Circuit precedent and affirmed the bankruptcy court’s denial of the motion to compel.  The case serves as a reminder for creditors attorneys that at least in the bankruptcy setting, arbitration provisions are not necessarily a trump card.

Congress Continues To Examine Forced Arbitration

By Anna Claire Turpin


An historic piece of legislation was passed in the U.S. House of Representatives on September 20, 2019. The Forced Arbitration Injustice Repeal (FAIR) Act, (HR 1423) was introduced by Rep. Johnson (D-GA-4). The FAIR Act applies to individual actions as well as joint, class, or collective actions and proposes to end forced arbitration of employment, consumer, civil rights, and antitrust disputes.  Pre-dispute arbitration agreements in the above-mentioned types of cases will not be valid or enforceable.


Should this Bill pass in the Senate, the landscape of litigation in antitrust, consumer, employment, and civil rights disputes will drastically change.  The potential ramifications include more rights and opportunities for individuals to bring actions against corporations as well as a potentially dramatic increase in the caseloads of court systems as more actions are brought within the judicial process.


The Senate received this Bill on September 24, 2019 and referred it to the Committee on the Judiciary.


Anna Claire Turpin practices in Smith Debnam’s Consumer Financial Services Litigation and Compliance Group.

Congress Votes to Repeal CFPB’s Arbitration Rule

By Zachary Dunn
October 26, 2017

The Senate voted on Tuesday, October 24, to repeal the CFPB’s Arbitration Rule first proposed in May of 2016 and issued in its final form in July. The rule would have imposed limitations on the use of pre-dispute arbitration agreements by covered providers of consumer financial products and services. 

Under the Congressional Review Act, 5 U.S.C. § 801 et seq, Congress had 60 legislative days from the date of final rule enactment to pass a joint resolution of disapproval to block the rule from taking effect.  The House of Representatives passed its resolution of disapproval on July 25, 2017 by a vote of 231-190, and the Senate passed its resolution on Tuesday by a vote of 51-50.  Senators Lindsay Graham of South Carolina and John Kennedy of Louisiana broke away from their Republican colleagues to vote against the measure, and Vice President Mike Pence cast the deciding vote in favor of the resolution.

Due to this vote, the Rule may not be reissued in the substantially same form, and a new rule that is substantially the same may not be issued.  See 5 U.S.C. § 801(b)(2).

Zachary Dunn is an attorney practicing in Smith Debnam's Consumer Financial Services Litigation and Compliance Group. 

A Look Back and 2016 and a Look Ahead at 2017

The end of the year is always a time for reflection for me.  As we kick 2016 to the curb, I thought I'd take this opportunity to look back at 2016 and look ahead to 2017. 

2016: A Look Back

Looking back at 2016, the first things that come to my mind are the aggressive rule making agenda undertaken by the CFPB and their struggle to implement rules based upon a less than full understanding of the industries they attempt to regulate.  With 2016 came proposed rules on arbitration and payday lending, adjustments and clarification to the mortgage servicing rules and TRID, as well as an unwieldy and incomplete proposal on debt collection.  The year also saw the CFPB continued to flex its muscle expanding its reach into data privacy and fintech , as well as to inthe way attorneys litigate collection law suits (covered in our prior edition).  Continuing its infatuation with technology, the CFPB also introduced new data tools including its ”Consumer Credit Trends” tools.  In many ways, it was the most ambitious of years for the CFPB. 

As we look forward to 2017, we will closely follow the D.C. Circuit’s en banc review of the CFPB’s jurisdiction.  Coupled with the election of Donald Trump and a Republican majority in Congress here are a couple of things ) think we can expect to see in 2017:

• Reform of the CFPB:  It would not be surprising to see the makeup of the CFPB change to a five person commission and/or to see the CFPB lose its designation as an independent agency.  Challenges have come from the judiciary and legislative branches of government in recent months and we can expect to see reform from the Trump administration. The Financial Services Committee of the House attempted last year to replace Cordray with a bipartisan commission through introduced legislation.  Similarly, the incoming administration has echoed a desire to reign in the Bureau.  Finally, the D.C. Circuit has weighed in on the constitutionality of the CFPB and its ruling is now being considered en banc by its entire panel of judges. Depending upon the outcome of the D.C. Circuit’s en banc review of the PHH decision, the CFPB may become an executive agency vs. an independent agency.  The net result may be that the CFPB and its regulations become subject to the regulatory review process of the Office of Management and Budget. 
• Pending Rules. The CFPB’s pay day and arbitration rules are in jeopardy and may never see the light of the day if the PHH holding is upheld and the CFPB loses its status as an independent agency or if any of the other forces outlined above come to play.
• When all else fails, UDAAP Carries the Day. The CFPB will continue to regulate through enforcement using the UDAAP provisions of Dodd Frank when regulatory authority does not otherwise exist.
• Debt Collection: the CFPB will continue to struggle with the two ton gorilla of debt collection by first putting forward a proposal for first party collections.  We expect to see a SBREFA panel scheduled for some time in the first half of 2017.  Looking further forward, we are likely to see a proposed rule on debt collection by the end of 2017.
• Marketing and Sales. Regulators will continue to focus on marketing and sales aspects of consumer financial service products and continue to emphasize comprehensive compliance management systems.
• Status Quo. Institutions subject to enforcement need to continue to do business under the assumption that nothing will change and remain vigilant in their compliance.  As we sit here today, the status quo remains the order of business.

I'm looking forward to see what's next. On a more personal note,thanks to all who continue to support this blog.  What started out as a six month experiment has become a passion.  This blog has brought new people and opportunities into my life and continues to make me a better lawyer.  I'm grateful to my law firm for supporting me in this endeavor, to my good friends Jerry Myers and Mark Dobosz for their guest posts and to NARCA, WebRecon and the many other blogs and trade associations who continue to pass on my posts to others.  We continue to look for guest posts and I invite anyone with an interest in writing on consumer financial service issues to reach out to me.  Happy New Year!

CFPB Issues Fall Agenda

The CFPB published its Fall 2016 Rulemaking Agenda last week. The Agenda, which is a federal requirement, was issued in the “early fall” and therefore does not take into account the effect the election may have on the CFPB or its current configuration. While the Agenda is worth monitoring and provides insight into the CFPB’s hot button issues, there is no certainty as to what the next six months will hold.

Payday Lending: As most know, the CFPB published its proposed rule on July 22, 2016. The Comment period ended on October 7, 2016. The rule has met significant opposition and it is telling that no further estimation or target dates have been set by the CFPB for a final rule.

TRID: The CFPB published its proposed amendments to TRID in the form of a Notice of Public Rulemaking in July 2016.The proposed amendments “memorialize the Bureau’s informal guidance on various issues and include clarifications and technical amendments.” The comment period expired October 18, 2016 and the Bureau has set a target date of March 2017 for publication of the Final Rule.


Overdrafts: Since at least the spring of 2015, the CFPB has indicated that they are conducting research to assess whether rulemaking is warranted. Since then, the CFPB does not appear to have made much public headway. The Fall Agenda, like its recent predecessors, indicates the Bureau is still engaged in pre rule making activities. The Rulemaking Agenda bumps the target date for further activity from August 2016 to January 2017 for further pre-rule making activity.

Debt Collection: One of the biggest stories that remains is when a proposed rule as to debt collection will be issued. The CFPB has not committed to a time line but has made progress. In a surprise to many, the CFPB has bifurcated the process by addressing third party and first party collections separately. A SBREFA Panel was convened as to the CFPB’s third party debt proposal in August 2016 and the CFPB continues to meet with interested parties. A proposal as to first party collections is the next likely step. The CFPB estimates further pre-rule activities in February 2017.

Arbitration: The CFPB published its proposed Arbitration Rule in the form of a Notice of Public Rulemaking in May 2016 and has targeted February 2017 for a final rule.

Women owned, Minority owned and Small Business Data Collection: The CFPB is in the early stages of developing rules to require financial institutions to report information about their lending to women-owned, minority owned and small businesses. The CFPB has indicated a desire to model any data collection after their recently released HMDA Rules. Pre-rule activities are expected to continue in the first part of 2017.

Supervision of Larger Participants in Installment Loan and Vehicle Title Loan Markets: The CFPB is considering rules expanding its larger participants supervision to include consumer installment loans and vehicle title loan markets. The Bureau is also considering “whether rules to require registration of these or other non-depository lenders would facilitate supervision”. The CFPB has targeted May 2017 for pre-rule activities.

House Passes Budget Bill Containing Restraints on the CFPB

Last week, the House passed its 2017 appropriations bill.  The bill contains a number of provisions which are designed to place additional controls on the CFPB and signals the House’s concerns with the unbridled power currently harnessed by the CFPB.  Specifically:

• The bill funds the CFPB through the annual congressional appropriations process rather than allowing it to make transfers from the Federal Reserve;
• The bill restructures the leadership of the CFPB into a bipartisan five person commission; and
• The bill prohibits the use of funds to regulate pre-dispute arbitration agreements and delays the effective date of any regulation finalized by the Bureau regarding arbitration unless and until the CFPB has fulfilled certain specified reporting requirements.

A Senate Appropriations bill has not yet been passed, but the current Senate bill under consideration does not contain similar restraints on the CFPB.   A final congressional budget is not expected until later this year. 

CFPB Arbitration Rule: What You Need to Know

Last month, the CFPB issued its much anticipated and much dreaded proposed arbitration rules. In its own words, the CFPB proposes “rules that would prohibit mandatory arbitration clauses that deny groups of consumers their day in court.” The proposed rule includes 355 pages of justification prior to presenting the rule in a concise 10 pages. The content of the supplementary information appears to be a lengthy attempt to justify the rule as being in the “public interest” and “the protection of consumers”. The proposal bans covered entities from including arbitration clauses which ban class actions in contracts entered into 211 days after the publication of the final rule. 

The proposed rule comes as no surprise to anyone who read the CFPB’s 2015 arbitration report which was hugely critical of class action bans in arbitration clauses. The 2015 report attempted to make a case that few consumers ever bring individual actions against financial service institutions and that class actions provide a more effective means to challenge and deter prohibited financial service practices. Before publishing the proposed rule, the CFPB convened a Small Business Regulatory Enforcement Fairness Act (“SBREFA”) panel where it outlined its proposal. The proposed rule is virtually identical to the SBREFA proposal and ignores concerns raised by small entity representatives, including the concern that the proposed rule will encourage lengthy and expensive class actions over faster, less costly individual actions (a finding supported by the CFPB’s own 2015 Arbitration Report).

What You Need to Know
The Rule in a Nutshell. While the rule does not outlaw arbitration clauses in their entirety, it makes them considerably less desirable by prohibiting class action waivers and by requiring providers to report individual arbitration results to the CFPB. In a nutshell, the proposed rule has two parts. First, it prohibits covered providers of certain consumer financial products and services from using arbitration clauses to bar consumers from initiating or participating in class actions after the compliance date. Secondly, it places onerous reporting requirements on covered providers regarding their participation in arbitration proceedings and requires them to submit to the CFPB certain documentation, including: the initial claim and any counterclaim, a copy of the arbitration clause filed with the arbitrator, the judgment or award, if any, issued by the arbitrator, and certain communications with the arbitrator. The CFPB makes it clear it intends to “use the information it collects to continue monitoring arbitral proceedings to determine whether there are developments that raise consumer protection concerns that may warrant further Bureau action” and that it intends to publish the information on its website in some form.

What’s Covered? Contracts entered into 211 days after the final rule is published.

Who’s Covered? Almost all service products and services regulated by the CFPB would be subject to the new rules. Proposed 12 CFR 1040.3 includes consumer financial products including broadly the “extension of consumer credit”, as well as automobile leases, deposit accounts, debt management and settlement, check cashing and payment processing services, debt collection, credit reporting, and remittance transfers subject to the Electronic Funds Transfer Act. The rules do carve out certain exceptions for certain products provided by governmental entities, tribal governments providing products to consumers who reside in the tribe’s territorial jurisdiction and merchants and retailers under certain conditions when they are not acting as creditors.

Limitations on the use of Pre-Dispute Arbitration Agreements.  

• General Rule: Providers may not seek to rely in any way on a pre-dispute arbitration agreement entered into after the compliance date (more about that later) with respect to any aspect of a class action, including seeking a stay or dismissal unless and until the court has ruled that the case may not proceed as a class action and the decision of the court is final. Proposed 12 CFR 1040.4(a)(1).
  

• Required Language: To the extent providers continue to use arbitration clauses, they must contain the following provision in new contracts: “We agree that neither we nor anyone else will use this agreement to stop you from being part of a class action case in court. You may file a class action in court or you may be a member of a class action even if you do not file it.” Proposed 12 CFR 1040.4(a)(2)(i). Where the arbitration agreement covers multiple products, some of which may not be covered by the Rules, the provider may include this provision in place of the previous set forth clause: “We are providing you with more than one product or service, only some of which are covered by the Arbitration Agreements Rule issued by the Consumer Financial Protection Bureau. We agree that neither we nor anyone else will use this agreement to stop you from being part of a class action case in court. You may file a class action in court or you may be a member of a class action even if you do not file it. This provision applies only to class action claims concerning the products or services covered by the Rules.” Proposed 12 CFR 1040.4(a)(2)(ii).

• Pre-existing Arbitration Clauses: The proposed rule only applies to agreements entered into 211 days after the publication of the final rules; however, contracts that are transferred to third parties (for instance, portfolio sales) after the effective date of the rule would be covered. Additionally, there is a limited exception for general purpose reloadable prepaid cards that are on the shelf when the rule takes effect.  

With regard to assignees/transferees of accounts, they will be covered by the rule and required to amend the arbitration clause to include the required language or a standalone notice communicating the same information as set forth specifically in the regulations. See Proposed 12 CFR 1040.4(a)(2)(iii).

With regard to general purposes reloadable prepaid cards that are on store shelves as of the compliance date, the providers are bound by the class action waiver but may not be required to provide the notice if they provider does not have a means to communicate with the consumer. See Proposed 12 CFR 1040.5(b).

Reporting Requirements. For entities that continue to use arbitration agreements for individual actions, the proposed rule subjects them to onerous reporting requirements. Proposed 12 CFR 1040.4(b).

The proposed rules require the provider to submit copies of the following documents to the CFPB: 

• The arbitration demand and any counterclaim;
• The pre-dispute arbitration agreement filed with the arbitrator or arbitration administrator;
• The judgment or award, if any, issued by the arbitrator;
• If the arbitrator or arbitration administrator refuses to administer or dismissed the claim due to the provider’s failure to pay any required filing or administrative fees, a copy of the relevant communications received by the provider from the arbitrator or arbitration administrator;
• Any communications related to a determination that the arbitration agreement does not comply with the administrator’s fairness principles, rules or similar requirements.

Additionally, the provider is required to redact non- public personal information from the records prior to submission.

The CFPB also has indicated that it intends to use the collected information for further analysis and will publish it in some form.

Implications of the Rule.  

It is likely the rule will be challenged under Dodd Frank and early indications are that a fight may come from within Congress as well as private litigation. Section 1028(b) of Dodd Frank authorizes the CFPB to prohibit or impose conditions or limitations on the use of agreements between consumers and covered persons providing arbitration only if the CFPB finds that such a prohibition or limitation is in the public interest and for the protection of consumers. The problem for the CFPB is that its own study does not substantiate either finding. In its Report, the CFPB acknowledged that its analysis of arbitration outcomes was subject to certain limitations which “made it quite challenging to attempt to answer even the simple question of how well do consumers (or companies) fare in arbitration. See Arbitration Study: Report to Congress, pursuant to Dodd-Frank Wall Street Reform and Consumer Protection Act 1028(a), Section 5, p. 7. Moreover, the CFPB Report supported a finding that arbitration is quicker and cheaper than class actions.

What should Covered Entities Do?
Taking in account the administrative procedures required, it is unlikely that a final rule will take effect until the second or third quarter of 2017. In the meantime, covered entities should review their loan products and assess the extent they rely upon arbitration clauses and prepare for a bifurcated system where existing contracts may have arbitration clauses which include class waivers and future contracts will not. Entities relying on arbitration clauses, with or without class waivers, should begin considering a compliance management system to insure all reporting requirements are met. To the extent covered entities are not employing arbitration provisions with class waivers and desire to do so, they should consider amending their contracts prior to the effective date of the final rule since agreements entered into prior to the effective date will be grandfathered under existing law. Finally, covered entities have until August 22, 2016 to submit comments regarding the rule. To the extent entities use arbitration provisions, with or without class waivers, they should consider commenting on the rule.

 

Cordray Confirms Activity in Rulemaking

In his prepared remarks to the Consumer Bankers Association last week, Richard Cordray provided a laundry list of regulatory and rulemaking activities currently being undertaken by the CFPB.  For those keeping track:

• Cordray's remarks suggest that a final proposed rule regarding prepaid accounts in imminent;
• Likewise, a notice of proposed rule concerning pay day loans and other small dollar loans will be published in the coming moths;
• Likewise, the CFPB is preparing to issue a notice of proposed rulemaking on the use of arbitration clauses in consumer finance contracts;
• Cordray's remarks also confirmed activity regarding the incidence and transparency of overdraft fees;
• Cordray acknowledged that the CFPB is focused on debt collection but his remarks were oddly silent as to the status of the CFPB's efforts in that regard;
• Cordray also acknowledged that the CFPB has begun working to establish a rule governing the collection and publication of data on small business lending;
• Cordray's remarks also confirmed the CFPB is actively engaged in working to improve the credit reporting market and more specifically, is focused on the accuracy of screening processes used  by depository institutions; and
• Finally, Cordray confirmed the CFPB's continued partnership with the Department of Justice to "identify and stamp out discrimination in auto lending practices."

While providing no hard timelines, Cordray at least confirmed the current priorities of the CFPB regulatory agenda.  For those keeping track, the CFPB's fall rulemaking agenda had anticipated a Notice of Proposed Rulemaking concerning payday lending in early 2016 with a target date of February. 

CFPB Pushes Back its Timetable for Debt Collection Rulemaking

Last week, the CFPB published its Fall 2015 Rulemaking Agenda.  While very few definitive dates were provided, the Agenda does give some insight as to an expected time frame for several hot button issues:


 Arbitration:  In the spring, the CFPB has not committed to rule making only indicating that they were reviewing feedback that they have received and “considering whether rules governing arbitration clauses may be warranted.”  It now appears that rulemaking is imminent as the CFPB acknowledges that it is “beginning a rulemaking process to address concerns related to the use of arbitration agreements in connection with credit cards, deposit accounts, payday loans, and various other consumer financial products or services.  The CFPB recently convened a Small Business Advisory Review Panel to discuss potential rulemaking and indicates that the prerule activities are expected to be completed by the end of the year.


 Payday Lending:   The CFPB remains on target to release a proposed rule soon and indicates that it will issue a Notice of Proposed Rulemaking in early 2016 and has provided a target date of February 2016.


Prepaid Financial Products:  The CFPB remains on target to issue a final rule in early 2016.


 Overdrafts:  In the spring, the CFPB indicated that they were continuing to conduct additional research to assess whether rulemaking is warranted and did not issue a time table for rulemaking.  The CFPB ow anticipates continuing its prerule activities through at least the first part of 2016.

Debt Collection:  One of the bigger stories that remains is when a proposed rule as to debt collection will be issued in 2015.  The CFPB has not committed to a time line. Prerule activities are now anticipated to continue into the first quarter of 2016. The CFPB indicates that they are engaged in consumer testing initiatives to “determine what information would be useful to consumers to have about debt collection and their debts and how that information should be provided to them.”

Women owned, Minority owned and Small Business Data Collection: The CFPB is in the early stages of developing rules to require financial institutions to report information about their lending to women-owned, minority owned and small businesses.  The CFPB has indicated a desire to model any data collection after their recently released HMDA Rules.  Prerule activities are in the initial stage and expected to continue through the third quarter of 2016.


 





 

District Court Grants Debt Buyer’s Motion to Compel Arbitration

A California District Court has granted a debt buyer’s motion to compel arbitration of the FDCPA claims brought against it by a consumer.  In James v. Portfolio Recovery Associates, C.A. No. 14-cv-03889 (N.D. Cal. Feb. 20, 2015),  James brought a putative class action suit alleging the debt buyer violated the FDCPA by making deceptive and misleading representations in its collection suit against James.  The debt buyer, Portfolio Recovery Associates (“PRA”), moved to compel arbitration, relying upon the original creditors’ card member services agreement.

 In granting the motion to compel arbitration, the court determined that PRA had standing to enforce the arbitration agreement.  While the covered parties’ provision did not expressly include assignees within the covered parties, the court looked to other provisions of the agreement, as well as the scope of PRA’s purchase, to determine that PRA was indeed covered.  Key considerations for the court were as follows:

·       As part of the sale, PRA received all right, title and interest in the account;

·       The agreement specifically provided that the arbitration clause “shall apply to any Claim…by or against us, or you, or any other Covered Person”

·       The agreement further provided that “[w]e may sell assign or transfer your Agreement and Account or any portion thereof without notice to you…If we assign the Account, the assignee shall have the same rights as we do under this Agreement.”

The court concluded that the assigned rights included the right to arbitrate. 

The court further determined that PRA had not waived its right to arbitrate by bring the prior collection action against James.  “[B]ringing a lawsuit for debt collection may result in defendants’ waiver of arbitration for that case, but it does not bar plaintiffs from compelling arbitration in that action or bar defendants from invoking arbitration in all future separate causes of action that plaintiffs assert against them.”