Debt Relief Industry Regulation / Legislation

CFPB Proposes New Rules to Prevent Arbitration in Debt Relief

Written by Steve Rhode

The Consumer Financial Protection Bureau has published a request for public comment to prevent arbitration clauses from debt relief company contracts.

Summary

The proposed rule would prohibit covered providers of certain consumer financial products and services from using an agreement with a consumer that provides for arbitration of any future dispute between the parties to bar the consumer from filing or participating in a class action with respect to the covered consumer financial product or service.

Rule Particulars

The new proposed rules appear to prohibit debt relief and credit counseling organizations from using pre-dispute arbitration agreements in client contracts. The proposed rule states, “a provider shall not seek to rely in any way on a pre-dispute arbitration agreement entered into after the compliance date set forth in § 1040.5(a) with respect to any aspect of a class action concerning any of the consumer financial products or services covered by § 1040.3.”

In addition, the proposed rules appear to invalidate any covered service provider who has previously used contract language to prevent arbitration or class action language in contracts.

“Notice to consumers. Section 1040.4(a)(2)(iii) requires a provider that enters into a pre-dispute arbitration agreement that does not contain the provision required by § 1040.4(a)(2)(i) or (ii) to either ensure the agreement is amended to contain a specified provision or to provide any consumers to whom the agreement applies with written notice stating the provision. The notice may be provided in any way that the provider communicates with the consumer, including electronically. The notice may be provided either as a standalone document or included in another notice that the customer receives, such as a periodic statement, to the extent permitted by other laws and regulations.”

Here is what 4(a)1 says:

“1. Reliance on a pre-dispute arbitration agreement. Section 1040.4(a)(1) provides that a provider shall not seek to rely in any way on a pre-dispute arbitration agreement entered into after the compliance date set forth in § 1040.5(a) with respect to any aspect of a class action concerning any of the consumer financial products or services covered by § 1040.3. Reliance on a pre-dispute arbitration agreement with respect to any aspect of a class action includes, but is not limited to, any of the following:

i. Seeking dismissal, deferral, or stay of any aspect of a class action;

ii. Seeking to exclude a person or persons from a class in a class action;

iii. Objecting to or seeking a protective order intended to avoid responding to discovery in a class action;

iv. Filing a claim in arbitration against a consumer who has filed a claim on the same issue in a class action;

v. Filing a claim in arbitration against a consumer who has filed a claim on the same issue in a class action after the trial court has denied a motion to certify the class but before an appellate court has ruled on an interlocutory appeal of that motion, if the time to seek such an appeal has not elapsed or the appeal has not been resolved; and

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vi. Filing a claim in arbitration against a consumer who has filed a claim on the same issue in a class action after the trial court in that class action has granted a motion to dismiss the claim and, in doing so, the court noted that the consumer has leave to refile the claim on a class basis, if the time to refile the claim has not elapsed.”

The proposed new rules specifically state:

“The Bureau believes that the proposed rule should cover debt relief services, such as services that offer to renegotiate, settle, or modify the terms of a consumer’s debt. Proposed § 1040.3(a)(3) would include in the coverage of proposed Part 1040 providing services to assist a consumer with debt management or debt settlement, modifying the terms of any extension of consumer credit covered by proposed § 1040.3(a)(3)(i), or avoiding foreclosure. With the exception of the reference to an extension of consumer credit covered by proposed § 1040.3(a)(3)(i), these terms derive directly from the definition of this consumer financial product or service in Dodd-Frank section 1002(15)(A)(viii)(II). [458] The Bureau notes that the term debt is broader than the credit the Bureau proposes to cover in proposed § 1040.3(a)(1)(i). As a result, as explained in proposed comment 3(a)(3)-1, this proposed coverage would reach debt relief services for all types of consumer debts, whether arising from secured or unsecured consumer credit transactions, or consumer debts that do not arise from credit transactions.

In its SBREFA Outline, the Bureau considered defining debt relief coverage more narrowly by reference to the definition of “debt relief services” under the FTC’s Telemarketing Sales Rule, 16 CFR part 310. [459] However, in further considering this approach, the Bureau has determined that definition may be too narrow, as it does not expressly cover debt relief services for secured credit products, such as mortgages, or for debts that do not arise from credit transactions, such as tax debts, or debts in other contexts (ranging from the health to the utilities sectors) which may or may not arise from credit transactions, depending on the facts or circumstances. [460] The Bureau believes the scope of coverage in proposed § 1040.3(a)(3) would be appropriate because, as noted, debt relief services are not only focused on credit transactions. Moreover, debt relief services provided for other types of debts can affect a consumer’s credit report because the person to whom the debt is owed may furnish information to a consumer reporting agency, [461] and by extension, the consumer’s access to credit can be affected. The Bureau seeks comment on proposed § 1040.3(a)(3), including whether the Bureau should consider alternatives, and if so, which alternatives.

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Another consumer financial product or service, which is listed in Dodd-Frank section 1002(15)(A)(viii)(I), is providing credit counseling to a consumer. Credit counseling can include counseling on consumer credit that would be covered by the proposed rule, including but not limited to credit repair services that may also be subject to the Credit Repair Organizations Act, 15 U.S.C. 1679, et seq. The Bureau seeks comment on whether proposed Part 1040 also should apply to credit counseling services, and if so, what types of services should be covered.”

Submit Comments

Anyone desiring to submit comments in response to the proposed rules may use any of the following methods.

You may submit comments, identified by Docket No. CFPB-2016-0020 or RIN 3170-AA51, by any of the following methods:

  • Email: [email protected] Include Docket No. CFPB-2016-0020 or RIN 3170-AA51 in the subject line of the email.
  • Electronic: http://www.regulations.gov. Follow the instructions for submitting comments.
  • Mail: Monica Jackson, Office of the Executive Secretary, Consumer Financial Protection Bureau, 1700 G Street NW., Washington, DC 20552.
  • Hand Delivery/Courier: Monica Jackson, Office of the Executive Secretary, Consumer Financial Protection Bureau, 1275 First Street NE., Washington, DC 20002.

Instructions: All submissions should include the agency name and docket number or Regulatory Information Number (RIN) for this rulemaking. Because paper mail in the Washington, DC area and at the Bureau is subject to delay, commenters are encouraged to submit comments electronically. In general, all comments received will be posted without change to http://www.regulations.gov. In addition, comments will be available for public inspection and copying at 1275 First Street NE., Washington, DC 20002, on official business days between the hours of 10 a.m. and 5 p.m. eastern time. You can make an appointment to inspect the documents by telephoning (202) 435-7275.

All comments, including attachments and other supporting materials, will become part of the public record and subject to public disclosure. Sensitive personal information, such as account numbers or Social Security numbers, should not be included. Comments generally will not be edited to remove any identifying or contact information.


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About the author

Steve Rhode

Steve Rhode is the Get Out of Debt Guy and has been helping good people with bad debt problems since 1994. You can learn more about Steve, here.

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