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Posts Tagged ‘consumer’
Jun 03
2016

What the Payday Proposal Would Do

The Consumer Financial Protection Bureau (CFPB) has proposed a new rule to regulate payday lending and auto-title loan companies. Right now, it is merely a proposal, meant to undergo the notice and comment period until September 14, 2016. But if the rule goes into effect, it would be a significant imposition on the lending business.

The CFPB has been studying the effects of payday lending on consumers for years and found that many consumers struggle. They cannot repay their loans, so they take out new ones and incur significant penalties and fees. Or, they default on repayment altogether. The new rule tries to reduce this by regulating the people who issue those loans.

In theory, the rule would affect two types of loans: those with a term of 45 days or less, and those with a term of more than 45 days but with certain specifications, like an all-in annual percentage rate above 36% and a consumer’s bank account or vehicle for collateral. Before issuing either loan, a lender would have to determine if the borrower can repay it without re-borrowing in the following 30 days. To determine this, a lender would assess the borrower’s income, debt obligations, and housing costs; project them over the life of the loan; and forecast non-housing living costs.

The rule would also restrict how lenders can collect repayment. Today, lenders are allowed unlimited tries to withdraw from an indebted borrower’s bank account, but the new rule would stop them after the second attempt that fails due to insufficient funds.

Because the rule has not been approved yet, affected borrowers and lenders can speak out against or in favor of it. Richard Cordray, the director of the CFPB, has promised that the Bureau “will continue to listen and learn” as comments come in. Sourcing from the industry is the best way to create a rule that protects consumers and helps lenders continue to provide so vital a lifeline.

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May 05
2016

CFPB Scare Tactics: The New Arbitration Rules

Closeup of torn legal contract

Recently, I wrote about the CFPB’s plans to issue new regulations restricting arbitration clauses in certain consumer contracts.  Today, the agency announced those new rules and CFPB Director Richard Cordray is expected to discuss them at the agency’s field hearing in Albuquerque, New Mexico.  As expected, the new rules eliminate the use of class action waivers and otherwise restrict the availability of arbitration in consumer contracts, including those involving credit transactions, automobile leases, debt relief services, consumer depository accounts, check cashing, credit monitoring/reporting, and debt collection.  The CFPB admits that it intends to “incentivize” greater legal compliance through the “in terrorem” deterrent impact of the new rules.   In other words, the CFPB wants the prospect of increased class action litigation to scare companies into treating consumers better.

The new proposed rules are available at the CFPB’s website along with over 350 pages of supplementary information explaining the proposed rulemaking.  The CFPB proposal prohibits “companies from putting mandatory arbitration clauses in new contracts that prevent class action lawsuits.”  See Proposed § 1040.4(a).  Companies would still be able to include arbitration clauses in their contracts, but could not restrict access to class litigation and the arbitration provisions must include specific language provided by the CFPB.

In addition, in practical terms, the CFPB has just designated itself as the overseer of U.S. arbitral bodies in direct contrast to existing laws and rules that provide very limited court oversight and review of arbitration decisions.[1]  The proposed rules would require covered companies to submit detailed information about any of their consumer arbitrations to the CFPB.  See Proposed § 1040.4(b).  The CFPB states that it will gather, and may publish, this data so that it may gain “insight into whether companies are abusing arbitration or whether the process itself is fair.”  Although the rule provides for redaction of personal information, this new practice threatens to undermine the confidential nature of arbitrations and thereby limit one of arbitration’s principle benefits.  It is not yet clear how the CFPB might conclude that consumer arbitrations are “unfair” or what they might do in response to such a determination.

Regardless of whether the proposed regulations will succeed in scaring companies into greater legal compliance, if the rules become effective, companies should expect a marked increase in consumer class action litigation.  The newly announced regulations are not final, however, and interested parties will have an opportunity to comment before the rules become effective.   Interested parties have 90 days from the publication of the proposed rule in the Federal Register to comment and we expect multiple objections from the financial industry this summer.  The comments likely will include practical examples of the benefits of consumer arbitration provisions, critiques of the agency’s study of consumer arbitration that formed the basis of the proposed regulations, and proof of the detrimental impact that an increase in class actions will have on the business community, especially on smaller businesses.  Any potentially covered company should consider commenting on the CFPB proposed regulations, either directly or through trade associations.

Once the rules are final, companies will only need to comply with the new regulations prospectively; the provisions of the Dodd-Frank Act authorizing the CFPB to regulate arbitration provide that any new rules will be binding 180 days after their effective date.  So any arbitration agreement entered into prior to, or within six months of, the new rule’s effective date is not subject to the new restrictions.  This gives potentially covered companies some breathing space to review and, if necessary, modify their existing contracts.

Although many in Congress do not support the newly proposed rules, given current political realities, there are unlikely to be any legislative changes to the proposed rules or the CFPB’s authority.  As a result, we expect that something close to the proposed rule will become effective later this year.  Following that, there likely will be multiple court challenges to the new rules and the CFPB’s authority to issue them.  In the meantime, all potentially affected companies should:

  • Review their existing contracts and arbitration programs to determine whether their existing contract forms would violate the proposed regulations;
  • Prepare alternative contract language if existing forms will no longer be permitted; and
  • Consider whether their existing pricing structure and litigation positions make sense in the coming world.[2]

Whatever the goal, companies are unlikely to be scared into greater legal compliance; most companies already strive to comply with the law.  We anticipate that the CFPB’s proposed rules will have many unintended consequences.  In the short term, the increase in class action litigation will be a boon for many lawyers.  Consumers with legitimate claims, however, may find that the class action process results in smaller payouts over which they have less control.  And as companies adjust to this new environment, they will pass on the increased costs of increased class litigation to customers and likely will further tighten credit standards and product availability to reduce potential claims.

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[1] Under Section 9 of the Federal Arbitration Act, a court must confirm an arbitration award unless it is vacated, modified, or corrected in accordance with Sections 10 and 11.5 of the FAA, i.e. where the award was procured by corruption, fraud, or undue means or there was an evident material miscalculation or mistake in the award.

[2] For example, companies may wish to withdraw from the American Arbitration Association’s Consumer Clause Registry.  For that matter, the AAA and similar arbitral organizations are sure to lose significant business as the consumer arbitration market is sure to shrink significantly if the new rules become effective.

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About Ifrah Law

FTC Beat is authored by the Ifrah Law Firm, a Washington DC-based law firm specializing in the defense of government investigations and litigation. Our client base spans many regulated industries, particularly e-business, e-commerce, government contracts, gaming and healthcare.

Ifrah Law focuses on federal criminal defense, government contract defense and procurement, health care, and financial services litigation and fraud defense. Further, the firm's E-Commerce attorneys and internet marketing attorneys are leaders in internet advertising, data privacy, online fraud and abuse law, iGaming law.

The commentary and cases included in this blog are contributed by founding partner Jeff Ifrah, partners Michelle Cohen and George Calhoun, counsels Jeff Hamlin and Drew Barnholtz, and associates Rachel Hirsch, Nicole Kardell, Steven Eichorn, David Yellin, and Jessica Feil. These posts are edited by Jeff Ifrah. We look forward to hearing your thoughts and comments!

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