[Federal Register Volume 81, Number 100 (Tuesday, May 24, 2016)]
[Proposed Rules]
[Pages 32830-32934]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-10961]



[[Page 32829]]

Vol. 81

Tuesday,

No. 100

May 24, 2016

Part II





Bureau of Consumer Financial Protection





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12 CFR Part 1040





 Arbitration Agreements; Proposed Rule

  Federal Register / Vol. 81 , No. 100 / Tuesday, May 24, 2016 / 
Proposed Rules  

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BUREAU OF CONSUMER FINANCIAL PROTECTION

12 CFR Part 1040

[Docket No. CFPB-2016-0020]
RIN 3170-AA51


Arbitration Agreements

AGENCY: Bureau of Consumer Financial Protection.

ACTION: Proposed rule with request for public comment.

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SUMMARY: Pursuant to section 1028(b) of the Dodd-Frank Wall Street 
Reform and Consumer Protection Act (Pub. L. 111-203), the Bureau of 
Consumer Financial Protection (Bureau) is proposing to establish 12 CFR 
part 1040, which would contain regulations governing two aspects of 
consumer finance dispute resolution. First, 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. Second, the proposal 
would require a covered provider that is involved in an arbitration 
pursuant to a pre-dispute arbitration agreement to submit specified 
arbitral records to the Bureau. The Bureau proposes that the rulemaking 
would apply to certain consumer financial products and services. The 
Bureau is also proposing to adopt official interpretations to the 
proposed regulation.

DATES: Comments must be received on or before August 22, 2016.

ADDRESSES: 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.

FOR FURTHER INFORMATION CONTACT: Owen Bonheimer, Benjamin Cady, 
Lawrence Lee, Nora Rigby, Counsels; Eric Goldberg, Senior Counsel, 
Office of Regulations, Consumer Financial Protection Bureau, at 202-
435-7700.

SUPPLEMENTARY INFORMATION:

I. Summary of the Proposed Rule

    The Bureau of Consumer Financial Protection (Bureau) is proposing 
regulations governing agreements that provide for the arbitration of 
any future disputes between consumers and providers of certain consumer 
financial products and services. Congress directed the Bureau to study 
these pre-dispute arbitration agreements in the Dodd-Frank Wall Street 
Reform and Consumer Protection Act (Dodd-Frank or Dodd-Frank Act).\1\ 
In 2015, the Bureau published and delivered to Congress a study of 
arbitration.\2\ In the Dodd-Frank Act, Congress also authorized the 
Bureau, after completing the Study (hereinafter Study), to issue 
regulations restricting or prohibiting the use of arbitration 
agreements if the Bureau found that such rules would be in the public 
interest and for the protection of consumers.\3\ Congress also required 
that the findings in any such rule be consistent with the Bureau's 
Study.\4\
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    \1\ Public Law 111-203, 124 Stat. 1376 (2010), section 1028(a).
    \2\ Bureau of Consumer Fin. Prot., Arbitration Study: Report to 
Congress, Pursuant to Dodd-Frank Wall Street Reform and Consumer 
Protection Act Sec.  1028(a) (2015), available at http://files.consumerfinance.gov/f/201503_cfpb_arbitration-study-report-to-congress-2015.pdf. Specific portions of the Study are cited in this 
proposal where relevant, and the entire Study will be included in 
the docket for this rulemaking at www.regulations.gov. See Bureau of 
Consumer Fin. Prot., Request for Information Regarding Scope, 
Methods and Data Sources for Conducting Study of Pre-Dispute 
Arbitration Agreements, 77 FR 25148 (Apr. 27, 2012) (hereinafter 
Arbitration Study RFI). Before releasing the Study, the Bureau 
released preliminary results in late 2013. Bureau of Consumer Fin. 
Prot., Arbitration Study Preliminary Results (Dec. 12, 2013) 
(hereinafter Preliminary Results), available at http://files.consumerfinance.gov/f/201312_cfpb_arbitration-study-preliminary-results.pdf.
    \3\ Dodd-Frank section 1028(b).
    \4\ Id.
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    In accordance with this authority, the Bureau is now issuing this 
proposal and request for public comment. The proposed rule would impose 
two sets of limitations on the use of pre-dispute arbitration 
agreements by covered providers of consumer financial products and 
services. First, it would prohibit providers from using a pre-dispute 
arbitration agreement to block consumer class actions in court and 
would require providers to insert language into their arbitration 
agreements reflecting this limitation. This proposal is based on the 
Bureau's preliminary findings--which are consistent with the Study--
that pre-dispute arbitration agreements are being widely used to 
prevent consumers from seeking relief from legal violations on a class 
basis, and that consumers rarely file individual lawsuits or 
arbitration cases to obtain such relief.
    Second, the proposal would require providers that use pre-dispute 
arbitration agreements to submit certain records relating to arbitral 
proceedings to the Bureau. The Bureau 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. The Bureau intends to publish 
these materials on its Web site in some form, with appropriate 
redactions or aggregation as warranted, to provide greater transparency 
into the arbitration of consumer disputes.
    The proposal would apply to providers of certain consumer financial 
products and services in the core consumer financial markets of lending 
money, storing money, and moving or exchanging money, including most 
providers that are engaged in:
     Extending or regularly participating in decisions 
regarding consumer credit under Regulation B implementing the Equal 
Credit Opportunity Act (ECOA), engaging primarily in the business of 
providing referrals or selecting creditors for consumers to obtain such 
credit, and the acquiring, purchasing, selling, or servicing of such 
credit;

[[Page 32831]]

     extending or brokering of automobile leases as defined in 
Bureau regulation;
     providing services to assist with debt management or debt 
settlement, modify the terms of any extension of consumer credit, or 
avoid foreclosure;
     providing directly to a consumer a consumer report as 
defined in the Fair Credit Reporting Act, a credit score, or other 
information specific to a consumer from a consumer report, except for 
adverse action notices provided by an employer;
     providing accounts under the Truth in Savings Act and 
accounts and remittance transfers subject to the Electronic Fund 
Transfer Act;
     transmitting or exchanging funds (except when integral to 
another product or service not covered by the proposed rule), certain 
other payment processing services, and check cashing, check collection, 
or check guaranty services consistent with the Dodd-Frank Act; and
     collecting debt arising from any of the above products or 
services by a provider of any of the above products or services, their 
affiliates, an acquirer or purchaser of consumer credit, or a person 
acting on behalf of any of these persons, or by a debt collector as 
defined by the Fair Debt Collection Practices Act.
    Consistent with the Dodd-Frank Act, the proposed rule would apply 
only to agreements entered into after the end of the 180-day period 
beginning on the regulation's effective date.\5\ The Bureau is 
proposing an effective date of 30 days after a final rule is published 
in the Federal Register. To facilitate implementation and ensure 
compliance, the Bureau is proposing language that providers would be 
required to insert into such arbitration agreements to explain the 
effect of the rule. The proposal would also permit providers of 
general-purpose reloadable prepaid cards to continue selling packages 
that contain non-compliant arbitration agreements, if they give 
consumers a compliant agreement as soon as consumers register their 
cards and the providers comply with the proposed rule's requirement not 
to use an arbitration agreement to block a class action.
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    \5\ Dodd-Frank section 1028(d).
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II. Background

    Arbitration is a dispute resolution process in which the parties 
choose one or more neutral third parties to make a final and binding 
decision resolving the dispute.\6\ Parties may include language in 
their contracts, before any dispute has arisen, committing to resolve 
future disputes between them in arbitration rather than in court or 
allowing either party the option to seek resolution of a future dispute 
in arbitration. Such pre-dispute arbitration agreements--which this 
proposal generally refers to as ``arbitration agreements'' \7\--have a 
long history, primarily in commercial contracts, where companies 
typically bargain to create agreements tailored to their needs.\8\ In 
1925, Congress passed what is now known as the Federal Arbitration Act 
(FAA) to require that courts enforce agreements to arbitrate, including 
those entered into both before and after a dispute has arisen.\9\
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    \6\ Arbitration, Black's Law Dictionary (10th ed. 2014).
    \7\ Proposed Sec.  1040.2(d) would define the phrase ``pre-
dispute arbitration agreement.'' When referring to the definition, 
in proposed Sec.  1040.2(d), this proposal will use the full term or 
otherwise clarify the intended usage.
    \8\ See infra Part II.C.
    \9\ 9 U.S.C. 1 et seq.
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    In the last few decades, companies have begun inserting arbitration 
agreements in a wide variety of standard-form contracts, such as in 
contracts between companies and consumers, employees, and investors. 
The use of arbitration agreements in such contracts has become a 
contentious legal and policy issue due to concerns about whether the 
effects of arbitration agreements are salient to consumers, whether 
arbitration has proved to be a fair and efficient dispute resolution 
mechanism, and whether arbitration agreements effectively discourage 
the filing or resolution of certain claims in court or in arbitration.
    In light of these concerns, Congress has taken steps to restrict 
the use of arbitration agreements in connection with certain consumer 
financial products and services and other consumer and investor 
relationships. Most recently, in the 2010 Dodd-Frank Act, Congress 
prohibited the use of arbitration agreements in connection with 
mortgage loans,\10\ authorized the Securities and Exchange Commission 
(SEC) to regulate arbitration agreements in contracts between consumers 
and securities broker-dealers or investment advisers,\11\ and 
prohibited the use of arbitration agreements in connection with certain 
whistleblower proceedings.\12\
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    \10\ Dodd-Frank section 1414(e) (codified as 15 U.S.C. 
1639c(e)).
    \11\ Dodd-Frank sections 921(a) and 921(b) (codified as 15 
U.S.C. 78o(o) and 15 U.S.C. 80b-5(f)).
    \12\ Dodd-Frank section 922(b) (codified as 18 U.S.C. 1514A(e)).
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    In addition, and of particular relevance here, Congress directed 
the Bureau to study the use of arbitration agreements in connection 
with other, non-mortgage consumer financial products and services and 
authorized the Bureau to prohibit or restrict the use of such 
agreements if it finds that such action is in the public interest and 
for the protection of consumers.\13\ Congress also required that the 
findings in any such rule be consistent with the Study.\14\ The Bureau 
solicited input on the appropriate scope, methods, and data sources for 
the Study in 2012\15\ and released results of its three-year study in 
March 2015.\16\ Part III of this proposed rule summarizes the Bureau's 
process for completing the Study and its results. To place these 
results in greater context, this Part provides a brief overview of: (1) 
Consumers' rights under Federal and State laws governing consumer 
financial products and services; (2) court mechanisms for seeking 
relief where those rights have been violated, and, in particular, the 
role of the class action device in protecting consumers; and (3) the 
evolution of arbitration agreements and their increasing use in markets 
for consumer financial products and services.
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    \13\ Dodd-Frank section 1028(b).
    \14\ Id.
    \15\ Arbitration Study RFI, supra note 2.
    \16\ Study, supra note 2. The Bureau also delivered the Study to 
Congress. See also Letter from Catherine Galicia, Ass't Dir. of 
Legis. Aff., Bureau of Consumer Fin. Prot. to Hon. Jeb Hensarling, 
Chairman, Comm. on Fin. Serv. (Mar. 10, 2015) (on file with the 
Bureau).
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A. Consumer Rights Under Federal and State Laws Governing Consumer 
Financial Products and Services

    Companies often provide consumer financial products and services 
under the terms of a written contract. In addition to being governed by 
such contracts and the relevant State's contract law, the relationship 
between a consumer and a financial service provider is typically 
governed by consumer protection laws at the State level, Federal level, 
or both, as well as by other State laws of general applicability (such 
as tort law). Collectively, these laws create legal rights for 
consumers and impose duties on the providers of financial products and 
services that are subject to those laws.
Early Consumer Protection in the Law
    Prior to the twentieth century, the law generally embraced the 
notion of caveat emptor or ``buyer beware.'' \17\ State

[[Page 32832]]

common law afforded some minimal consumer protections against fraud, 
usury, or breach of contract, but these common law protections were 
limited in scope. In the first half of the twentieth century, Congress 
began passing legislation intended to protect consumers, such as the 
Wheeler-Lea Act of 1938.\18\ The Wheeler-Lea Act amended the Federal 
Trade Commission Act of 1914 (FTC Act) to provide the FTC with the 
authority to pursue unfair or deceptive acts and practices.\19\ These 
early Federal laws did not provide for private rights of action, 
meaning that they could only be enforced by the government.
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    \17\ Caveat emptor assumed that buyer and seller conducted 
business face to face on roughly equal terms (much as English common 
law assumed that civil actions generally involved roughly equal 
parties in direct contact with each other). J.R. Franke & D.A. 
Ballam, New Applications of Consumer Protection Law: Judicial 
Activism or Legislative Directive?, 32 Santa Clara L. Rev. 347, 351-
55 (1992).
    \18\ Wheeler-Lea Act of 1938, Public Law 75-447, 52 Stat. 111 
(1938).
    \19\ See FTC Act section 5. Prior to the Wheeler-Lea Act, the 
FTC had the authority to reach ``unfair methods of competition in 
commerce'' but only if they had an anticompetitive effect. See FTC 
v. Raladam Co., 283 U.S. 643, 649 (1931).
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Modern Era of Federal Consumer Financial Protections
    In the late 1960s, Congress began passing consumer protection laws 
focused on financial products, beginning with the Consumer Credit 
Protection Act (CCPA) in 1968.\20\ The CCPA included the Truth in 
Lending Act (TILA), which imposed disclosure and other requirements on 
creditors.\21\ In contrast to earlier consumer protection laws such as 
the Wheeler-Lea Act, TILA permits private enforcement by providing 
consumers with a private right of action, authorizing consumers to 
pursue claims for actual damages and statutory damages and allowing 
consumers who prevail in litigation to recover their attorney's fees 
and costs.\22\
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    \20\ Public Law 90-321, 82 Stat. 146 (1968).
    \21\ Id. at Title I.
    \22\ 15 U.S.C. 1640(a).
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    Congress followed the enactment of TILA with several other consumer 
financial protection laws, many of which provided private rights of 
action for at least some statutory violations. For example, in 1970, 
Congress passed the Fair Credit Reporting Act (FCRA), which promotes 
the accuracy, fairness, and privacy of consumer information contained 
in the files of consumer reporting agencies, as well as providing 
consumers access to their own information.\23\ In 1976, Congress passed 
ECOA to prohibit creditors from discriminating against applicants with 
respect to credit transactions.\24\ In 1977, Congress passed the Fair 
Debt Collection Practices Act (FDCPA) to promote the fair treatment of 
consumers who are subject to debt collection activities.\25\
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    \23\ Public Law 91-508, 84 Stat. 1114-2 (1970).
    \24\ Public Law 94-239, 90 Stat. 251 (1976).
    \25\ Public Law 95-109, 91 Stat. 874 (1977). Other such Federal 
consumer protection laws include those enumerated in the Dodd-Frank 
Act and made subject to the Bureau's rulemaking, supervision, and 
enforcement authority: Alternative Mortgage Transaction Parity Act 
of 1982, 12 U.S.C. 3801; Consumer Leasing Act of 1976, 15 U.S.C. 
1667; Electronic Fund Transfer Act (EFTA), 15 U.S.C. 1693 (except 
with respect to Sec.  920 of that Act); Fair Credit Billing Act, 15 
U.S.C. 1666; Home Mortgage Disclosure Act of 1975, 12 U.S.C. 2801; 
Home Owners Protection Act of 1998, 12 U.S.C. 4901; Federal Deposit 
Insurance Act, 12 U.S.C. 1831t (b)-(f); Gramm-Leach-Bliley Act 15 
U.S.C. 6802-09 (except with respect to section 505 as it applies to 
section 501(b) of that Act); Home Ownership and Equity Protection 
Act of 1994 (HOEPA), 15 U.S.C. 1601; Interstate Land Sales Full 
Disclosure Act, 15 U.S.C. 1701; Real Estate Settlement Procedures 
Act of 1974 (RESPA), 12 U.S.C. 2601; S.A.F.E. Mortgage Licensing Act 
of 2008, 12 U.S.C. 5101; Truth in Savings Act (TISA), 12 U.S.C. 
4301, and section 626 of the Omnibus Appropriations Act of 2009, 15 
U.S.C. 1638. Federal consumer protection laws also include the 
Bureau's authority to take action to prevent a covered person or 
service provider from committing or engaging in an unfair, 
deceptive, and abusive acts or practices, Dodd-Frank section 1031, 
and its disclosure authority, Dodd-Frank section 1032.
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    Also in the 1960s, States began passing their own consumer 
protection statutes modeled on the FTC Act to prohibit unfair and 
deceptive practices. Unlike the Federal FTC Act, however, these State 
statutes typically provide for private enforcement.\26\ The FTC 
encouraged the adoption of consumer protection statutes at the State 
level and worked directly with the Council of State Governments to 
draft the Uniform Trade Practices Act and Consumer Protection Law, 
which served as a model for many State consumer protection 
statutes.\27\ Currently, forty-nine of the fifty States and the 
District of Columbia have State consumer protection statutes modeled on 
the FTC Act that allow for private rights of action.\28\
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    \26\ Victor E. Schwartz & Cary Silverman, Common-Sense 
Construction of Consumer Protection Acts, 54 U. Kan. L. Rev. 1, 15-
16 (2005).
    \27\ Id.
    \28\ Id. at 16. Every State that adopted a version of FTC Act 
prohibits deception; some prohibit unfair practices as well. See 
Carolyn L. Carter, Consumer Protection in the States, Nat'l Consumer 
L. Ctr. (2009) at 5, available at https://www.nclc.org/images/pdf/udap/report_50_states.pdf.
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Class Actions Pursuant to Federal Consumer Protection Laws
    In 1966, shortly before Congress first began passing consumer 
financial protection statutes, the Federal Rules of Civil Procedure 
(Federal Rules or FRCP) were amended to make class actions 
substantially more available to litigants, including consumers. The 
class action procedure in the Federal Rules, as discussed in detail in 
Part II.B below, allows a representative individual to group his or her 
claims together with those of other, absent individuals in one lawsuit 
under certain circumstances. Because TILA and the other Federal 
consumer protection statutes discussed above permitted private rights 
of action, those private rights of action were enforceable through a 
class action, unless the statute expressly prohibited it.\29\
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    \29\ See, e.g., Wilcox v. Commerce Bank of Kansas City, 474 F.2d 
336, 343-44 (10th Cir. 1973).
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    Congress calibrated enforcement through private class actions in 
several of the consumer protection statutes by specifically referencing 
class actions and adopting statutory damage schemes that are pegged to 
a percentage of the defendants' net worth.\30\ For example, when 
consumers initially sought to bring TILA class actions, a number of 
courts applying Federal Rule 23 denied motions to certify the class 
because of the prospect of extremely large damages resulting from the 
aggregation of a large number of claims for statutory damages.\31\ 
Congress addressed this by amending TILA in 1974 to cap class action 
damages in such cases to the lesser of 1 percent of the defendant's 
assets or $100,000.\32\ Congress has twice increased the cap on class 
action damages in TILA: To $500,000 in 1976 and $1,000,000 in 2010.\33\ 
Many other statutes similarly cap damages in class actions.\34\ 
Further, the legislative history of other statutes indicates a 
particular intent to permit class actions given the

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potential for a small recovery in many consumer finance cases for 
individual damages.\35\ Similarly, many States permit class action 
litigation to vindicate violations of their versions of the FTC 
Act.\36\ A minority of States expressly prohibit class actions to 
enforce their FTC Acts. \37\
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    \30\ A minority of Federal statutes provide private rights of 
action but do not cap damages in class action cases. For example, 
the Telephone Consumer Protection Act (47 U.S.C. 227(b)(3)), the 
FCRA (15 U.S.C. 1681n, 1681o), and the Credit Repair Organizations 
Act (15 U.S.C. 1679g) do not cap damages in class action cases.
    \31\ See, e.g., Ratner v. Chem. Bank N.Y. Trust Co., 54 FRD. 
412, 416 (S.D.N.Y. 1972).
    \32\ See Public Law 93-495, 88 Stat. 1518, section 408(a).
    \33\ Truth in Lending Act Amendments, Public Law 94-240, 90 
Stat. 260 (1976); Dodd-Frank section 1416(a)(2).
    \34\ For example, ECOA provides for the full recovery of actual 
damages on a class basis and caps punitive damages to the lesser of 
$500,000 or 1 percent of a creditor's net worth; RESPA limits total 
class action damages (including actual or statutory damages) to the 
lesser of $1,000,000 or 1 percent of the net worth of a mortgage 
servicer; the FDCPA limits class action recoveries to the lesser of 
$500,000 or 1 percent of the net worth of the debt collector; and 
EFTA provides for a cap on statutory damages in class actions to the 
lesser of $500,000 or 1 percent of a defendant's net worth and lists 
factors to consider in determining the proper amount of a class 
award. See 15 U.S.C. 1691e(b) (ECOA), 12 U.S.C. 2605(f)(2) (RESPA), 
15 U.S.C. 1692k(a)(2)(B) (FDCPA), and 15 U.S.C. 1693m(a)(2)(B) 
(EFTA).
    \35\ See, e.g., Electronic Fund Transfer Act, H. Rept. No. 95-
1315, at 15 (1978). The Report stated: ``Without a class-action suit 
an institution could violate the title with respect to thousands of 
consumers without their knowledge, if its financial impact was small 
enough or hard to discover. Class action suits for damages are an 
essential part of enforcement of the bill because, all too often, 
although many consumers have been harmed, the actual damages in 
contrast to the legal costs to individuals are not enough to 
encourage a consumer to sue. Suits might only be brought for 
violations resulting in large individual losses while many small 
individual losses could quickly add up to thousands of dollars.''
    \36\ The laws of at least 14 States expressly permit class 
action lawsuits. See, e.g., Cal. Bus. & Professions Code 17203 
(2016); Haw. Rev. Stat. Ann. sec. 480-13.3 (2015); Idaho Code Ann. 
sec. 48-608(1) (2015); Ind. Code Ann. sec. 24-5-0.5-4(b) (2015); 
Kan. Stat. Ann. sec. 50-634(c) and (d) (2012); Mass. Gen. Laws ch. 
93A, sec. 9(2) (2016); Mich. Comp. Laws sec. 445.911(3) (2015); Mo. 
Rev. Stat. sec. 407.025(2) and (3) (2015); N.H. Rev. Stat. sec. 358-
A:10-a (2015); N.M. Stat. sec. 57-12-10(E) (2015); Ohio Rev. Code 
sec. 1345.09(B) (2016); R.I. Gen. Laws sec. 6-13.1-5.2(b) (2015); 
Utah Code sec. 13-11-19 and 20 (2015); Wyo. Stat. sec. 40-12-108(b) 
(2015).
    \37\ See, e.g., Ala. Code sec. 8-19-10(f) (2002); Ga. Code Ann. 
sec. 10-1-399 (2015); La. Rev. Stat. Ann. sec. 51:1409(A) (2006); 
Mont. Code Ann. sec. 30-14-133(1) (2003); S.C. Code Ann. sec. 37-5-
202(1) (1999).
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B. History and Purpose of the Class Action Procedure

    The default rule in United States courts, inherited from England, 
is that only those who appear as parties to a given case are bound by 
its outcome.\38\ As early as the medieval period, however, English 
courts recognized that litigating many individual cases regarding the 
same issue was inefficient for all parties and thus began to permit a 
single person in a single case to represent a group of people with 
common interests.\39\ English courts later developed a procedure called 
the ``bill of peace'' to adjudicate disputes involving common questions 
and multiple parties in a single action. The process allowed for 
judgments binding all group members--whether or not they were 
participants in the suit--and contained most of the basic elements of 
what is now called class action litigation.\40\
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    \38\ Ortiz v. Fibreboard Corp., 527 U.S. 815, 832-33 (1999).
    \39\ For instance, in early English cases, a local priest might 
represent his parish, or a guild might be represented by its formal 
leadership. Samuel Issacharoff, Assembling Class Actions, 90 Wash U. 
L. Rev. 699, 704 (2014) (citing Stephen C. Yeazell, From Medieval 
Group Litigation to the Modern Class Action 40 (1987)).
    \40\ Wright, Miller & Kane, 7A Fed. Prac. & Proc. Civ. 1751 (3d. 
ed.).
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    The bill of peace was recognized in early United States case law 
and ultimately adopted by several State courts and the Federal 
courts.\41\ Nevertheless, the use and impact of that procedure remained 
relatively limited through the nineteenth and into the twentieth 
centuries. In 1938, the Federal Rules were adopted to govern civil 
litigation in Federal court, and Rule 23 established a procedure for 
class actions.\42\ That procedure's ability to bind absent class 
members was never clear, however.\43\
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    \41\ Id. Federal Equity Rule 48, in effect from 1842 to 1912, 
officially recognized representative suits where parties were too 
numerous to be conveniently brought before the court, but did not 
bind absent members to the judgment. Id. In 1912, Federal Equity 
Rule 38 replaced Rule 48 and allowed absent members to be bound by a 
final judgment. Id.
    \42\ See Fed. R. Civ. P. 23 (1938).
    \43\ See American Pipe & Constr. Co. v. Utah, 414 U.S. 538, 545-
46 (1974) (``The Rule [prior to its amendment] . . . contained no 
mechanism for determining at any point in advance of final judgment 
which of those potential members of the class claimed in the 
complaint were actual members and would be bound by the 
judgment.'').
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    That changed in 1966, when Rule 23 was amended to create the class 
action mechanism that largely persists in the same form to this 
day.\44\ Rule 23 was amended at least in part to promote efficiency in 
the courts and to provide for compensation of individuals when many are 
harmed by the same conduct.\45\ The 1966 revisions to Rule 23 prompted 
similar changes in most States. As the Supreme Court has since 
explained, class actions promote efficiency in that ``the . . . device 
saves the resources of both the courts and the parties by permitting an 
issue potentially affecting every [class member] to be litigated in an 
economical fashion under Rule 23.'' \46\ As to small harms, class 
actions provide a mechanism for compensating individuals where ``the 
amounts at stake for individuals may be so small that separate suits 
would be impracticable.'' \47\ Class actions have been brought not only 
by individuals, but also by companies, including financial 
institutions.\48\
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    \44\ See, e.g., Robert H. Klonoff, The Decline of Class Actions, 
90 Wash. U. L. Rev. 729, 746-47 (2013) (``The Rule 23(a) and (b) 
criteria, by their terms, have not changed in any significant way 
since 1966, but some courts have become increasingly skeptical in 
reviewing whether a particular case satisfies those requirements'').
    \45\ See American Pipe, 414 U.S. at 553 (``A contrary rule 
allowing participation only by those potential members of the class 
who had earlier filed motions to intervene in the suit would deprive 
Rule 23 class actions of the efficiency and economy of litigation 
which is a principal purpose of the procedure.'').
    \46\ Califano v. Yamasaki, 442 U.S. 682, 701 (1979).
    \47\ Amchem Prod., Inc. v. Windsor, 521 U.S. 591, 616 (1997), 
citing Fed. R. Civ. P. 23 advisory committee's note, 28 U.S.C. app. 
at 698 (stating that a class action may be justified under Rule 23 
where ``the class may have a high degree of cohesion and prosecution 
of the action through representatives would be quite 
unobjectionable, or the amounts at stake for individuals may be so 
small that separate suits would be impracticable''). See also id. at 
617 (citing Mace v. Van Ru Credit Corp., 109 F.3d 338, 344 (7th Cir. 
1997) (``The policy at the very core of the class action mechanism 
is to overcome the problem that small recoveries do not provide the 
incentive for any individual to bring a solo action prosecuting his 
or her own rights. A class action solves this problem by aggregating 
the relatively paltry potential recoveries into something worth 
someone's (usually an attorney's) labor.'').
    \48\ See, e.g., Financial Institution Plaintiffs' Consol. Class 
Action Compl. at 1, 5, In re: The Home Depot, Inc. Customer Data 
Breach Litig., MDL No. 14-02583 (N.D. Ga. May 27, 2015), Dkt. No. 
104 (complaint filed on behalf of putative class of ``similarly 
situated banks, credit unions, and other financial institutions'' 
that had ``issued and owned payment cards compromised by the Home 
Depot data breach''); Mem. & Order at 2, 14, In re: Target Corp. 
Customer Data Security Breach Litig., MDL No. 14-2522 (D. Minn. 
Sept. 15, 2015), Dkt No. 589 (granting certification to plaintiff 
class made up of banks, credit unions, and other financial 
institutions that had ``issued payment cards such as credit and 
debit cards to consumers who, in turn, used those cards at Target 
stores during the period of the 2013 data breach,'' noting that 
``given the number of financial institutions involved and the 
similarity of all class members' claims, Plaintiffs have established 
that the class action device is the superior method for resolving 
this dispute''); In re TJX Cos. Retail Security Breach Litig., 246 
FRD. 389 (D. Mass. 2007) (denying class certification in putative 
class action by financial institutions).
---------------------------------------------------------------------------

Class Action Procedure Pursuant to Rule 23
    A class action can be filed and maintained under Rule 23 in any 
case where there is a private right to bring a civil action, unless 
otherwise prohibited by law. Pursuant to Rule 23(a), a class action 
must meet all of the following requirements: (1) A class of a size such 
that joinder of each member as an individual litigant is impracticable; 
(2) questions of law or fact common to the class; (3) a class 
representative whose claims or defenses are typical of those of the 
class; and (4) that the class representative will adequately represent 
those interests.\49\ The first two prerequisites--numerosity and 
commonality--focus on the absent or represented class, while the latter 
two tests--typicality and adequacy--address the desired qualifications 
of the class representative. Pursuant to Rule 23(b), a class action 
also must meet one of the following requirements: (1) Prosecution of 
separate actions risks either inconsistent adjudications that would 
establish incompatible standards of

[[Page 32834]]

conduct for the defendant or would, as a practical matter, be 
dispositive of the interests of others; (2) defendants have acted or 
refused to act on grounds generally applicable to the class; or (3) 
common questions of law or fact predominate over any individual class 
member's questions, and a class action is superior to other methods of 
adjudication.
---------------------------------------------------------------------------

    \49\ Fed. R. Civ. P. 23(a)(1) through (4).
---------------------------------------------------------------------------

    These and other requirements of Rule 23 are designed to ensure that 
class action lawsuits safeguard absent class members' due process 
rights because they may be bound by what happens in the case.\50\ 
Further, the courts may protect the interests of absent class members 
through the exercise of their substantial supervisory authority over 
the quality of representation and specific aspects of the litigation. 
In the typical Federal class action, an individual plaintiff (or 
sometimes several individual plaintiffs), represented by an attorney, 
files a lawsuit on behalf of that individual and others similarly 
situated against a defendant or defendants.\51\ Those similarly 
situated individuals may be a small group (as few as 40 or even less) 
or as many as millions that are alleged to have suffered the same 
injury as the individual plaintiff. That individual plaintiff, 
typically referred to as a named or lead plaintiff, cannot properly 
proceed with a class action unless the court certifies that the case 
meets the requirements of Rule 23, including the requirements of Rule 
23(a) and (b) discussed above. If the court does certify that the case 
can go forward as a class action, potential class members who do not 
opt out of the class are bound by the eventual outcome of the case.\52\ 
If not certified, the case proceeds only to bind the named plaintiff.
---------------------------------------------------------------------------

    \50\ See, e.g., Amchem Prod., Inc., 521 U.S. at 619-21.
    \51\ Rule 23 also permits a class of defendants.
    \52\ In some circumstances, absent class members are not given 
an opportunity to opt out. E.g., Fed. R. Civ. P. 23(b)(1)(B) 
(providing for ``limited fund'' class actions when claims are made 
by numerous persons against a fund insufficient to satisfy all 
claims); Fed. R. Civ. P. 23(b)(2) (providing for class actions in 
which the plaintiffs are seeking primarily injunctive or 
corresponding declaratory relief).
---------------------------------------------------------------------------

    A certified class case proceeds similarly to an individual case, 
except that the court has an additional responsibility in a class case, 
pursuant to Rule 23 and the relevant case law, to actively supervise 
classes and class proceedings and to ensure that the lead plaintiff 
keeps absent class members informed.\53\ Among its tasks, a court must 
review any attempts to settle or voluntarily dismiss the case on behalf 
of the class,\54\ may reject any settlement agreement if it is not 
``fair, reasonable and adequate,'' \55\ and must ensure that the 
payment of attorney's fees is ``reasonable.'' \56\ The court also 
addresses objections from class members who seek a different outcome to 
the case (e.g., lower attorney's fees or a better settlement). These 
requirements are designed to ensure that all parties to class 
litigation have their rights protected, including defendants and absent 
class members.
---------------------------------------------------------------------------

    \53\ Fed. R. Civ. P. 23(g).
    \54\ See, e.g., Fed. R. Civ. P. 23(e) (``The claims, issues, or 
defenses of a certified class may be settled, voluntarily dismissed, 
or compromised only with the court's approval.''). This does not 
apply to settlements with named plaintiffs reached prior to the 
certification of a class.
    \55\ Fed. R. Civ. P. 23(e)(2).
    \56\ Fed. R. Civ. P. 23(h).
---------------------------------------------------------------------------

Developments in Class Action Procedure Over Time
    Since the 1966 amendments, Rule 23 has generated a significant body 
of case law as well as significant controversy.\57\ In response, 
Congress and the Advisory Committee on the Federal Rules of Civil 
Procedure (which has been delegated the authority to change Rule 23 
under the Rules Enabling Act) have made a series of targeted changes to 
Rule 23 to calibrate the equities of class plaintiffs and defendants. 
Meanwhile, the courts have also addressed concerns about Rule 23 in the 
course of interpreting the rule and determining its application in the 
context of particular types of cases.
---------------------------------------------------------------------------

    \57\ See, e.g., David Marcus, The History of the Modern Class 
Action, Part I: Sturm und Drang, 1953-1980, 90 Wash. U. L. Rev. 587, 
610 (participants in the debate ``quickly exhausted virtually every 
claim for and against an invigorated Rule 23'').
---------------------------------------------------------------------------

    For example, Congress passed the Private Securities Litigation 
Reform Act (PSLRA) in 1995. Enacted partially in response to concerns 
about the costs to defendants of litigating class actions, the PSLRA 
reduced discovery burdens in the early stages of securities class 
actions.\58\ In 2005, Congress again adjusted the class action rules 
when it adopted the Class Action Fairness Act (CAFA) in response to 
concerns about abuses of class action procedure in some State 
courts.\59\ Among other things, CAFA expanded the subject matter 
jurisdiction of Federal courts to allow them to adjudicate most large 
class actions.\60\ The Advisory Committee also periodically reviews and 
updates Rule 23. In 1998, the Advisory Committee amended Rule 23 to 
permit interlocutory appeals of class certification decisions, given 
the unique importance of the certification decision, which can 
dramatically change the dynamics of a class action case.\61\ In 2003, 
the Advisory Committee amended Rule 23 to require courts to define 
classes that they are certifying, increase the amount of scrutiny that 
courts must apply to class settlement proposals, and impose additional 
requirements on class counsel.\62\ In 2015, the Advisory Committee 
further identified several issues that ``warrant serious examination'' 
and presented ``conceptual sketches'' of possible further 
amendments.\63\
---------------------------------------------------------------------------

    \58\ Private Securities Litigation Reform Act of 1995, Public 
Law 104-67, 109 Stat. 737 (1995).
    \59\ Class Action Fairness Act of 2005, Public Law 109-2, 119 
Stat. 4 (2005).
    \60\ 28 U.S.C. 1332(d), 1453, and 1711-15.
    \61\ Fed. R. Civ. P. 23(f). See also Newberg on Class Actions 
Sec.  7:41; Committee Notes on Rules, 1998 Amendment (``This 
permissive interlocutory appeal provision is adopted under the power 
conferred by 28 U.S.C. 1292(e). Appeal from an order granting or 
denying class certification is permitted in the sole discretion of 
the court of appeals. No other type of Rule 23 order is covered by 
this provision.''). See 28 U.S.C. app. at 163 (2014).
    \62\ Fed. R. Civ. P. 23(c)(2)(B). See also 28 U.S.C. app. at 168 
(2014) (``Rule 23(c)(2)(B) is revised to require that the notice of 
class certification define the certified class in terms identical to 
the terms used in (c)(1)(B).'').
    \63\ See, e.g., Rule 23 Subcomm. Rept., in Adv. Comm. on Civil 
Rules Agenda Book for April 9-10, 2015 at 243-97, available at 
http://www.uscourts.gov/rules-policies/archives/agenda-books/advisory-committee-rules-civil-procedure-april-2015.
---------------------------------------------------------------------------

    Federal courts have also shaped class action practice through their 
interpretations of Rule 23. In the last five years, the Supreme Court 
has decided several major cases refining class action procedure. In 
Wal-Mart Stores, Inc. v. Dukes, the Court interpreted the commonality 
requirement of Rule 23(a)(2) to require that the common question that 
is the basis for certification be central to the disposition of the 
case.\64\ In Comcast Corp. v. Behrend, the Court reaffirmed that 
district courts must undertake a ``rigorous analysis'' of whether a 
putative class satisfies the predominance requirements in Rule 23(b)(3) 
and reinforced that individual damages issues may foreclose class 
certification altogether.\65\ In Campbell-Ewald Co. v. Gomez, decided 
this term, the Court held that a defendant cannot moot a class action 
by offering complete relief to an individual plaintiff before class 
certification (unless the individual plaintiff agrees to accept that 
relief).\66\ In Tyson Foods, Inc. v. Bouaphakeo, the Court held that 
statistical techniques presuming that all class members are identical 
to the average observed in a sample can be used to establish

[[Page 32835]]

classwide liability where each class member could have relied on that 
sample to establish liability had each brought an individual 
action.\67\ Finally, in a case not yet decided as of the date of this 
proposal with implications for certain types of class actions, Spokeo, 
Inc. v. Robins, the Court is considering whether a plaintiff has 
standing to sue if they allege a violation of a Federal statute that 
allows for statutory damages--in this case, FCRA--and claim only those 
damages without making a claim for actual damages.\68\
---------------------------------------------------------------------------

    \64\ 564 U.S. 338, 131 S. Ct. 2541 (2011); see also Klonoff, 
supra note 44, at 775.
    \65\ 133 S. Ct. 1426 (2013).
    \66\ Campbell-Ewald Co. v. Gomez, 136 S. Ct. 1036, 1046-48 (Jan. 
20, 2016).
    \67\ Tyson Foods, Inc. v. Bouaphakeo, 136 S. Ct. 663, 670 (Mar. 
22, 2016).
    \68\ Spokeo Inc. v. Robins, 135 S. Ct. 1892 (2015) (noting that 
the question before the court is ``[w]hether Congress may confer 
Article III standing upon a plaintiff who suffers no concrete harm, 
and who therefore could not otherwise invoke the jurisdiction of a 
Federal court, by authorizing a private right of action based on a 
bare violation of a Federal statute'').
---------------------------------------------------------------------------

C. Arbitration and Arbitration Agreements

    As described above at the beginning of Part II, arbitration is a 
dispute resolution process in which the parties choose one or more 
neutral third parties to make a final and binding decision resolving 
the dispute.\69\ The typical arbitration agreement provides that the 
parties shall submit any disputes that may arise between them to 
arbitration. Arbitration agreements generally give each party to the 
contract two distinct rights. First, either side can file claims 
against the other in arbitration and obtain a decision from the 
arbitrator.\70\ Second, with some exceptions, either side can use the 
arbitration agreement to require that a dispute proceed in arbitration 
instead of court.\71\ The typical agreement also specifies an 
organization called an arbitration administrator. Administrators, which 
may be for-profit or non-profit organizations, facilitate the selection 
of an arbitrator to decide the dispute, provide for basic rules of 
procedure and operations support, and generally administer the 
arbitration.\72\ Parties usually have very limited rights to appeal 
from a decision in arbitration to a court.\73\ Most arbitration also 
provides for limited or streamlined discovery procedures as compared to 
those in many court proceedings.\74\
---------------------------------------------------------------------------

    \69\ See supra note 6.
    \70\ Id.
    \71\ As described in the Study, however, most arbitration 
agreements in consumer financial contracts contain a ``small claims 
court carve-out'' that provides the parties with a contractual right 
to pursue a claim in small claims court. Study, supra note 2, 
section 2 at 33-34.
    \72\ See id., section 2 at 34.
    \73\ See 9 U.S.C. 9. See also Hall Street Assocs., L.L.C. v. 
Mattel, Inc., 552 U.S. 576, 584 (2008) (holding that parties cannot 
expand the grounds for vacating arbitration awards in Federal court 
by contract); Preliminary Results, supra note 2 at 6, n.4.
    \74\ See Study, supra note 2, section 4 at 16-17.
---------------------------------------------------------------------------

History of Arbitration
    The use of arbitration to resolve disputes between parties is not 
new.\75\ In England, the historical roots of arbitration date to the 
medieval period, when merchants adopted specialized rules to resolve 
disputes between them.\76\ English merchants began utilizing 
arbitration in large numbers during the nineteenth century.\77\ 
However, English courts were hostile towards arbitration, limiting its 
use through doctrines that rendered certain types of arbitration 
agreements unenforceable.\78\ Arbitration in the United States in the 
eighteenth and nineteenth centuries reflected both traditions: it was 
used primarily by merchants, and courts were hostile toward it.\79\ 
Through the early 1920s, U.S. courts often refused to enforce 
arbitration agreements and awards.\80\
---------------------------------------------------------------------------

    \75\ The use of arbitration appears to date back at least as far 
as the Roman Empire. See, e.g., Amy J. Schmitz, Ending a Mud Bowl: 
Defining Arbitration's Finality Through Functional Analysis, 37 Ga. 
L. Rev. 123, 134-36 (2002); Derek Roebuck, Roman Arbitration (2004).
    \76\ See, e.g., Jeffrey W. Stempel, Pitfalls of Public Policy: 
The Case of Arbitration Agreements, 22 St. Mary's L.J. 259, 269-70 
(1990).
    \77\ Id.
    \78\ See, e.g., Schmitz, supra note 75, at 137-39.
    \79\ See, e.g., Stempel, supra note 76 at 273-74.
    \80\ David S. Clancy & Matthew M.K. Stein, An Uninvited Guest: 
Class Arbitration and the Federal Arbitration Act's Legislative 
History, 63 Bus. Law. 55, 58 & n.11 (2007) (citing, inter alia, 
Haskell v. McClintic-Marshall Co., 289 F. 405, 409 (9th Cir. 1923) 
(refusing to enforce arbitration agreement because of a ``settled 
rule of the common law that a general agreement to submit to 
arbitration did not oust the courts of jurisdiction, and that rule 
has been consistently adhered to by the federal courts''); Dickson 
Manufacturing Co. v. Am. Locomotive Co., 119 F. 488, 490 (C.C.M.D. 
Pa. 1902) (refusing to enforce an arbitration agreement where 
plaintiff revoked its consent to arbitration).
---------------------------------------------------------------------------

    In 1920, New York enacted the first modern arbitration statute in 
the United States, which strictly limited courts' power to undermine 
arbitration decisions and arbitration agreements.\81\ Under that law, 
if one party to an arbitration agreement refused to proceed to 
arbitration, the statute permitted the other party to seek a remedy in 
State court to enforce the arbitration agreement.\82\ In 1925, Congress 
passed the United States Arbitration Act, which was based on the New 
York arbitration law and later became known as the Federal Arbitration 
Act (FAA).\83\ The FAA remains in force today. Among other things, the 
FAA makes agreements to arbitrate ``valid, irrevocable, and 
enforceable, save upon such grounds as exist at law or in equity for 
the revocation of any contract.'' \84\
---------------------------------------------------------------------------

    \81\ 43 N.Y. Stat. 833 (1925).
    \82\ Id.
    \83\ 9 U.S.C. 1, et seq. The FAA was codified in 1947. Public 
Law 282, 61 Stat. 669 (July 30, 1947). James E. Berger & Charlene 
Sun, The Evolution of Judicial Review Under the Federal Arbitration 
Act, 5 N.Y.U. J. Law & Bus. 745, 754 n.45 (2009).
    \84\ 9 U.S.C. 2.
---------------------------------------------------------------------------

Expansion of Consumer Arbitration and Arbitration Agreements
    From the passage of the FAA through the 1970s, arbitration 
continued to be used in commercial disputes between companies.\85\ 
Beginning in the 1980s, however, companies began to use arbitration 
agreements in contracts with consumers, investors, employees, and 
franchisees that were not negotiated.\86\ By the 1990s, some financial 
services providers began including arbitration agreements in their form 
consumer agreements.\87\
---------------------------------------------------------------------------

    \85\ See, e.g., Soia Mentschikoff, Commercial Arbitration, 61 
Colum. L. Rev. 846, 850 (1961) (noting that, as of 1950, nearly one-
third of trade associations used a mechanism like the American 
Arbitration Association as a means of dispute resolution between 
trade association members, and that over one-third of other trade 
associations saw members make their own individual arrangements for 
arbitrations); see also id. at 858 (noting that AAA heard about 240 
commercial arbitrations a year from 1947 to 1950, comparable to the 
volume of like cases before the U.S. District Court of the Southern 
District of New York in the same time period). Arbitration was also 
used in the labor context where unions had bargained with employers 
to create specialized dispute resolution mechanisms pursuant to the 
Labor Management Relations Act. 29 U.S.C. 401-531.
    \86\ Stephen J. Ware, Arbitration Clauses, Jury-Waiver Clauses 
and Other Contractual Waivers of Constitutional Rights, 67 Law & 
Contemp. Problems 179 (2004).
    \87\ Sallie Hofmeister, Bank of America is Upheld on Consumer 
Arbitration, N.Y. Times, Aug. 20, 1994 (`` `The class action cases 
is where the real money will be saved [by arbitration agreements],' 
Peter Magnani, a spokesman for the bank, said.''); John P. Roberts, 
Mandatory Arbitration by Financial Institutions, 50 Cons. Fin. L.Q. 
Rep. 365, 367 (1996) (identifying an anonymous bank ``ABC'' as 
having adopted arbitration provisions in its contracts for consumer 
credit cards, deposit accounts, and safety deposit boxes); Hossam M. 
Fahmy, Arbitration: Wiping Out Consumers Rights?, 64 Tex. B.J. 917, 
917 (2001) (citing Barry Meier, In Fine Print, Customers Lose 
Ability to Sue, N.Y. Times, Mar. 10, 1997, at A1 (noting in 2001 
that ``[t]he use of consumer arbitration expanded eight years ago 
when Bank of America initiated its current policy,'' when ``notices 
of the new arbitration requirements were sent along with monthly 
statements to 12 million customers, encouraging thousands of other 
companies to follow the same policy'').
---------------------------------------------------------------------------

    One notable feature of these agreements it that they could be used 
to block class action litigation and often class arbitration as 
well.\88\ The

[[Page 32836]]

agreements could block class actions filed in court because, when sued 
in a class action, companies could use the arbitration agreement to 
dismiss or stay the class action in favor of arbitration. Yet the 
agreements often prohibited class arbitration as well, rendering 
plaintiffs unable to pursue class claims in either litigation or 
arbitration.\89\ More recently, some consumer financial providers 
themselves have disclosed in their filings with the SEC that they rely 
on arbitration agreements for the express purpose of shielding 
themselves from class action liability.\90\
---------------------------------------------------------------------------

    \88\ See, e.g., Alan S. Kaplinsky & Mark J. Levin, Excuse Me, 
But Who's the Predator? Banks Can Use Arbitration Clauses as a 
Defense, 7 Bus. L. Today 24 (1998) (``Lenders that have not yet 
implemented arbitration programs should promptly consider doing so, 
since each day that passes brings with it the risk of additional 
multimillion-dollar class action lawsuits that might have been 
avoided had arbitration procedures been in place.''); see also 
Bennet S. Koren, Our Mini Theme: Class Actions, 7 Bus. L. Today 18 
(1998) (industry attorney recommends adopting arbitration agreements 
because ``[t]he absence of a class remedy ensures that there will be 
no formal notification and most claims will therefore remain 
unasserted.'').
    \89\ Even if a pre-dispute arbitration agreement does not 
prohibit class arbitration, an arbitrator may not permit arbitration 
to go forward on a class basis unless the arbitration agreement 
itself shows the parties agreed to do so. See Stolt-Nielsen S.A. v. 
AnimalFeeds Int'l Corp., 559 U.S. 662, 684 (2010) (``[A] party may 
not be compelled under the FAA to submit to class arbitration unless 
there is a contractual basis for concluding that the party agreed to 
do so.'') (emphasis in original). Both the AAA and JAMS class 
arbitration procedures reflect the law; both require an initial 
determination as to whether the arbitration agreement at issue 
provides for class arbitration before a putative class arbitration 
can move forward. See AAA, Supplementary Rules for Class 
Arbitrations, Rule 3 (effective Oct. 8, 2003) (``Upon appointment, 
the arbitrator shall determine as a threshold matter, in a reasoned, 
partial final award on the construction of the arbitration clause, 
whether the applicable arbitration clause permits the arbitration to 
proceed on behalf of or against a class (the ``Clause Construction 
Award.''); JAMS Class Action Procedures, Rule 2: Construction of the 
Arbitration Clause (effective May 1, 2009) (``[O]nce appointed, the 
Arbitrator, following the law applicable to the validity of the 
arbitration clause as a whole, or the validity of any of its terms, 
or any court order applicable to the matter, shall determine as a 
threshold matter whether the arbitration can proceed on behalf of or 
against a class.'').
    \90\ See, e.g., Discover Financial Services, Annual Report (Form 
10-K) (Feb. 25, 2015) at 43 (``[W]e have historically relied on our 
arbitration clause in agreements with customers to limit our 
exposure to consumer class action litigation . . .''); Synchrony 
Financial, Annual Report (Form 10-K) (Feb. 23, 2015) at 45 
(``[H]istorically the arbitration provision in our customer 
agreements generally has limited our exposure to consumer class 
action litigation . . . .'').
---------------------------------------------------------------------------

    Since the early 1990s, the use of arbitration agreements in 
consumer financial contracts has become widespread, as shown by Section 
2 of the Study (which is discussed in detail in Part III.D below). By 
the early 2000s, a few consumer financial companies had become heavy 
users of arbitration proceedings to obtain debt collection judgments 
against consumers. For example, in 2006 alone, the National Arbitration 
Forum (NAF) administered 214,000 arbitrations, most of which were 
consumer debt collection proceedings brought by companies.\91\
---------------------------------------------------------------------------

    \91\ Carrick Mollenkamp, et al., Turmoil in Arbitration Empire 
Upends Credit-Card Disputes, Wall St. J., Oct. 16, 2009. See also 
Public Citizen, The Arbitration Trap: How Credit Card Companies 
Ensnare Consumers (2007), available at http://www.citizen.org/publications/publicationredirect.cfm?ID=7545.
---------------------------------------------------------------------------

Legal Challenges to Arbitration Agreements
    The increase in the prevalence of arbitration agreements coincided 
with various legal challenges to their use in consumer contracts. One 
set of challenges focused on the use of arbitration agreements in 
connection with debt collection disputes. In the late 2000s, consumer 
groups began to criticize the fairness of debt collection arbitration 
proceedings administered by the NAF, the most widely used arbitration 
administrator for debt collection.\92\ In 2008, the San Francisco City 
Attorney's office filed a civil action against NAF alleging that NAF 
was biased in favor of debt collectors.\93\ In 2009, the Minnesota 
Attorney General sued NAF, alleging an institutional conflict of 
interest because a group of investors with a 40 percent ownership stake 
in an affiliate of NAF also had a majority ownership stake in a debt 
collection firm that brought a number of cases before NAF.\94\ A few 
days after the filing of the lawsuit, NAF reached a settlement with the 
Minnesota Attorney General pursuant to which it agreed to stop 
administering consumer arbitrations completely, although NAF did not 
admit liability.\95\ Further, a series of class actions filed against 
NAF were consolidated in a multidistrict litigation and NAF settled 
those in 2011 by agreeing to suspend $1 billion in pending debt 
collection arbitrations.\96\ The American Arbitration Association (AAA) 
likewise announced a moratorium on administering company-filed debt 
collection arbitrations, articulating significant concerns about due 
process and fairness to consumers subject to such arbitrations.\97\
---------------------------------------------------------------------------

    \92\ See Mollencamp, supra note 91. In addition to cases 
relating to debt collection arbitrations, NAF was later added as a 
defendant to the Ross v. Bank of America case, a putative class 
action pertaining to non-disclosure of foreign currency conversion 
fees; NAF was alleged to have facilitated an antitrust conspiracy 
among credit card companies to adopt arbitration agreements. NAF 
settled those allegations. See Order Preliminarily Approving Class 
Action Settlement as to Defendant National Arbitration Forum Inc., 
In re Currency Conversion Fee Antitrust Litig., MDL 1409 (S.D.N.Y. 
Dec. 13, 2011).
    \93\ California v. National Arbitration Forum, Inc., No. 473-569 
(S.F. Sup. Ct. Mar. 2009).
    \94\ See Complaint at 2, State of Minnesota v. National 
Arbitration Forum, Inc. No. 27-cv-0918550 (4th Jud. Dist. Minn. July 
14, 2009), available at https://www.nclc.org/images/pdf/unreported/naf_complaint.pdf.
    \95\ Press Release, State of Minnesota, Office of the Attorney 
General, National Arbitration Forum Barred from Credit Card and 
Consumer Arbitrations Under Agreement with Attorney General Swanson 
(July 19, 2009), available at http://pubcit.typepad.com/files/nafconsentdecree.pdf. NAF settled the City of San Francisco's claims 
in 2011 by agreeing to cease administering consumer arbitrations in 
California in perpetuity and to pay a $1 million penalty. News 
Release, City Attorney Dennis Herrera, Herrera Secures $5 Million 
Settlement, Consumer Safeguards Against BofA Credit Card Subsidiary 
(Aug. 22, 2011).
    \96\ Mem. and Order, In re National Arbitration Forum Trade 
Practices Litigation, No. 10-md-02122 (D. Minn. Aug. 8, 2011).
    \97\ See AAA Press Release, The American Arbitration Association 
Calls for Reform of Debt Collection Arbitration (July 23, 2009), 
available at https://www.nclc.org/images/pdf/arbitration/testimonysept09-exhibit3.pdf. See also American Arbitration 
Association, Consumer Debt Collection Due Process Protocol Statement 
of Principles (2010), available at https://www.adr.org/aaa/ShowProperty?nodeId=%2FUCM%2FADRSTG_003865. JAMS has reported to the 
Bureau that it only handles a small number of debt collection claims 
and often those arbitrations are initiated by consumers.
---------------------------------------------------------------------------

    A second group of challenges asserted that the invocation of 
arbitration agreements to block class actions was unlawful. Because the 
FAA permits challenges to the validity of arbitration agreements on 
grounds that exist at law or in equity for the revocation of any 
contract,\98\ challengers argued that provisions prohibiting 
arbitration from proceeding on a class basis--as well as other features 
of particular arbitration agreements--were unconscionable under State 
law or otherwise unenforceable.\99\ Initially, these challenges yielded 
conflicting results. Some courts held that class arbitration waivers 
were not unconscionable.\100\ Other courts held that such waivers were 
unenforceable on unconscionability grounds.\101\ Some of

[[Page 32837]]

these decisions also held that the FAA did not preempt application of a 
state's unconscionability doctrine.\102\
---------------------------------------------------------------------------

    \98\ 9 U.S.C. 2 (providing that agreements to arbitrate ``shall 
be valid, irrevocable, and enforceable, save upon such grounds as 
exist at law or in equity for the revocation of any contract.'').
    \99\ See, e.g., Opening Br. on the Merits, Discover Bank v. 
Superior Court, No. S113725, 2003 WL 26111906, at 5 (Cal. 2005) 
(``[A] ban on class actions in an adhesive consumer contract such as 
the one at issue here is unconscionable because it is one-sided and 
effectively non-mutual--that is, it benefits only the corporate 
defendant, and could never operate to the benefit of the 
consumer.'')
    \100\ See, e.g., Strand v. U.S. Bank N.A., 693 NW.2d 918 (N.D. 
2005); Edelist v. MBNA America Bank, 790 A.2d 1249 (Sup. Ct. of 
Del., New Castle Cty. 2001).
    \101\ See, e.g., Brewer v. Missouri Title Loans, Inc., 323 SW.3d 
18 (Mo. 2010) (en banc); Feeney v. Dell, Inc., 908 NE.2d 753 (Mass. 
2009); Fiser v. Dell Computer Corp., 188 P.3d 1215 (N.M. 2008); 
Tillman v. Commercial Credit Loans, Inc., 655 SE.2d 362 (N.C. 2008); 
Dale v. Comcast Corp., 498 F.3d 1216 (11th Cir. 2007) (holding that 
class action ban in arbitration agreement substantively 
unconscionable under Georgia law); Scott v. Cingular Wireless, 161 
P.3d 1000 (Wash. 2007) (en banc); Kinkel v. Cingular Wireless LLC, 
857 NE.2d 250 (Ill. 2006); Muhammad v. Cnty. Bank of Rehoboth Beach, 
Del., 912 A.2d 88 (N.J. 2006); Discover Bank v. Superior Court, 113 
P.3d 1100 (Cal. 2005).
    \102\ See, e.g., Feeney, 908 NE.2d at 767-69; Scott, 161 P.3d at 
1008-09; Discover Bank, 113 P.3d at 1110-17.
---------------------------------------------------------------------------

    Before 2011, courts were divided on whether arbitration agreements 
that bar class proceedings were unenforceable because they violated 
some states' laws. Then, in 2011, the Supreme Court held in AT&T 
Mobility v. Concepcion that the FAA preempted application of 
California's unconscionability doctrine to the extent it would have 
precluded enforcement of a consumer arbitration agreement with a 
provision prohibiting the filing of arbitration on a class basis. The 
Court concluded that any State law--even one that serves as a general 
contract law defense--that ``[r]equir[es] the availability of classwide 
arbitration interferes with fundamental attributes of arbitration and 
thus creates a scheme inconsistent with the FAA.'' \103\ The Court 
reasoned that class arbitration eliminates the principal advantage of 
arbitration--its informality--and increases risks to defendants (due to 
the high stakes of mass resolution combined with the absence of 
multilayered review).\104\ As a result of the Court's holding, parties 
to litigation could no longer prevent the use of an arbitration 
agreement to block a class action in court on the ground that a 
prohibition on class arbitration in the agreement was unconscionable 
under the relevant State law.\105\ The Court further held, in a 2013 
decision, that a court may not use the ``effective vindication'' 
doctrine--under which a court may invalidate an arbitration agreement 
that operates to waive a party's right to pursue statutory remedies--to 
invalidate a class arbitration waiver on the grounds that the 
plaintiff's cost of individually arbitrating the claim exceeds the 
potential recovery.\106\
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    \103\ AT&T Mobility LLC v. Concepcion, 563 U.S. 333, 344 (2011).
    \104\ Id. at 348-51.
    \105\ See Robert Buchanan Jr., The U.S. Supreme Court's Landmark 
Decision in AT&T Mobility v. Concepcion: One Year Later, Bloomberg 
Law, May 8, 2012, available at http://www.bna.com/att-v-concepcion-one-year-later/ (noting that 45 out of 61 cases involving a class 
waiver in an arbitration agreement were sent to arbitration). The 
Court did not preempt all State law contract defenses under all 
circumstances; rather, these doctrines remain available provided 
that they are not applied in a manner that disfavors arbitration.
    \106\ American Express Co. v. Italian Colors Restaurant, 133 S. 
Ct. 2304, 2309 (2013).
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Regulatory and Legislative Activity
    As arbitration agreements in consumer contracts became more common, 
Federal regulators, Congress, and State legislatures began to take 
notice of their impact on the ability of consumers to resolve disputes. 
One of the first entities to regulate arbitration agreements was the 
National Association of Securities Dealers--now known as the Financial 
Industry Regulatory Authority (FINRA)--the self-regulating body for the 
securities industry that also administers arbitrations between member 
companies and their customers.\107\ Under FINRA's Code of Arbitration 
for customer disputes, FINRA members have been prohibited since 1992 
from enforcing an arbitration agreement against any member of a 
certified or putative class unless and until the class treatment is 
denied (or a certified class is decertified) or the class member has 
opted out of the class or class relief.\108\ FINRA's code also requires 
this limitation to be set out in any member company's arbitration 
agreement. The SEC approved this rule in 1992.\109\ In addition, since 
1976, the regulations of the Commodities Futures Trading Commission 
(CFTC) implementing the Commodity Exchange Act have required that 
arbitration agreements in commodities contracts be voluntary.\110\ In 
2004, the Federal National Mortgage Association (Fannie Mae) and the 
Federal Home Loan Mortgage Corporation (Freddie Mac)--government-
sponsored enterprises that purchase a large share of mortgages--ceased 
purchasing mortgages that contained arbitration agreements.\111\
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    \107\ See FINRA Arbitration and Mediation, https://www.finra.org/arbitration-and-mediation.
    \108\ FINRA Code of Arbitration Procedure for Customer Disputes 
12204(d). For individual disputes between brokers and customers, 
FINRA requires individual arbitration.
    \109\ See SE.C., Order Approving Proposed Rule Change Relating 
to the Exclusion of Class Actions From Arbitration Proceedings, 57 
FR 52659-52661 (Nov. 4, 1992) (citing Securities and Exchange Act, 
section 19(b)(1) and Rule 19b-4). In a separate context, the SEC has 
opposed attempts by companies to include arbitration agreements in 
their securities filings in order to force shareholders to arbitrate 
disputes rather than litigate them in court. See, e.g., Carl 
Schneider, Arbitration Provisions in Corporate Governance Documents, 
Harv. L. Sch. Forum on Corp. Governance and Fin. Reg. (Apr. 27, 
2012), available at https://corpgov.law.harvard.edu/2012/04/27/arbitration-provisions-in-corporate-governance-documents/ 
(``According to published reports, the SEC advised Carlyle that it 
would not grant an acceleration order permitting the registration 
statement to become effective unless the arbitration provision was 
withdrawn.''). Carlyle subsequently withdrew its arbitration 
provision.
    \110\ Arbitration or Other Dispute Settlement Procedures, 41 FR 
42942, 42946 (Sept. 29, 1976); 17 CFR 166.5(b).
    \111\ See Kenneth Harney, Fannie Follows Freddie in Banning 
Mandatory Arbitration, Wash. Post., Oct. 9, 2004, available at 
http://www.washingtonpost.com/wp-dyn/articles/A18052-2004Oct8.html.
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    Since 1975, FTC regulations implementing the Magnuson-Moss Warranty 
Act (MMWA) have barred the use, in consumer warranty agreements, of 
arbitration agreements that would result in binding decisions.\112\ 
Some courts in the late 1990s disagreed with the FTC's interpretation, 
but the FTC promulgated a final rule in 2015 that ``reaffirm[ed] its 
long-held view'' that the MMWA ``disfavors, and authorizes the 
Commission to prohibit, mandatory binding arbitration in warranties.'' 
\113\ In doing so, the FTC noted that the language of the MMWA 
presupposed that the kinds of informal dispute settlement mechanisms 
the FTC would permit would not foreclose the filing of a civil action 
in court.\114\
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    \112\ 10 CFR 703.5(j). The FTC's rules do permit warranties that 
require consumers to resort to an informal dispute resolution 
mechanism before proceeding in a court, but decisions from such 
informal proceedings are not binding and may be challenged in court. 
(By contrast, most arbitration awards are binding and may only be 
challenged on very limited grounds as provided by the FAA.) The 
FTC's rulemaking was based on authority expressly delegated by 
Congress in its passage of the MMWA pertaining to informal dispute 
settlement procedures. 15 U.S.C. 2310(a)(2). Until 1999, courts 
upheld the validity of the rule. See 80 FR 42719; see also Jonathan 
D. Grossberg, The Magnuson-Moss Warranty Act, the Federal 
Arbitration Act, and the Future of Consumer Protection, 93 Cornell 
L. Rev. 659, 667 (2008). After 1999, two appellate courts questioned 
whether the MMWA was intended to reach arbitration agreements. See 
Final Action Concerning Review of the Interpretations of Magnuson-
Moss Warranty Act, 80 FR 42710, 42719 & nn.115-116 (July 20, 2015) 
(citing Davis v. Southern Energy Homes, Inc., 305 F.3d 1268 (11th 
Cir. 2002); Walton v. Rose Mobile Homes, LLC, 298 F.3d 470 (5th Cir. 
2002)).
    \113\ See FTC Final Action Concerning Review of the 
Interpretations of Magnuson-Moss Warranty Act, 80 FR 42710, 42719 
(July 20, 2015).
    \114\ See id.
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    More recently, the Centers for Medicare and Medicaid Services (CMS) 
proposed a rule that would revise the requirements that long-term 
health care facilities must meet to participate in the Medicare and 
Medicaid programs.\115\ Among the new proposed rules are a number of 
requirements for any arbitration agreements between long-term care 
facilities and residents of those facilities, including that there be a 
stand-alone agreement signed by the resident; that care at the facility 
not be conditioned on signing the agreement; and that the agreement be 
clear in form, manner and language as to what arbitration is and that 
the resident is waiving a right to judicial relief and that arbitration 
be conducted by a neutral arbitrator in a location that is

[[Page 32838]]

convenient to both parties.\116\ Finally, the Department of Education 
recently announced that it is proposing options in the context of a 
negotiated rulemaking to limit the impact of arbitration agreements in 
certain college enrollment agreements, specifically by addressing the 
use of arbitration agreements to bar students from bringing group 
claims.\117\
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    \115\ Centers for Medicare & Medicaid Services, Medicare and 
Medicaid Programs, Reform of Requirements for Long-Term Care 
Facilities, 80 FR 42168 (July 16, 2015).
    \116\ See id. at 42264-65; see also id. at 42211.
    \117\ See U.S. Dep't of Education Press Release, U.S. Department 
of Education Takes Further Steps to Protect Students from Predatory 
Higher Education Institutions (Mar. 11, 2016), available at https://www.ed.gov/news/press-releases/us-department-education-takes-further-steps-protect-students-predatory-higher-education-institutions.
---------------------------------------------------------------------------

    Congress has also taken several steps to address the use of 
arbitration agreements in different contexts. In 2002, Congress amended 
Federal law to require that, whenever a motor vehicle franchise 
contract contains an arbitration agreement, arbitration may be used to 
resolve the dispute only if, after a dispute arises, all parties to the 
dispute consent in writing to the use of arbitration.\118\ In 2006, 
Congress passed the Military Lending Act (MLA), which, among other 
things, prohibited the use of arbitration provisions in extensions of 
credit to active servicemembers, their spouses, and certain 
dependents.\119\ As first implemented by Department of Defense (DoD) 
regulations in 2007, the MLA applied to ``[c]losed-end credit with a 
term of 91 days or fewer in which the amount financed does not exceed 
$2,000.'' \120\ In July 2015, DoD promulgated a final rule that 
significantly expanded that definition of ``consumer credit'' to cover 
closed-end loans that exceeded $2,000 or had terms longer than 91 days 
as well as various forms of open-end credit, including credit 
cards.\121\ In 2008, Congress amended federal agriculture law to 
require, among other things, that livestock or poultry contracts 
containing arbitration agreements disclose the right of the producer or 
grower to decline the arbitration agreement; the Department of 
Agriculture issued a final rule implementing the statute in 2011.\122\
---------------------------------------------------------------------------

    \118\ 21st Century Department of Justice Appropriations 
Authorization Act, Public Law 107-273, section 11028(a)(2), 116 
Stat. 1835 (2002), codified at 15 U.S.C. 1226(a)(2). The statute 
defines ``motor vehicle franchise contract'' as ``a contract under 
which a motor vehicle manufacturer, importer, or distributor sells 
motor vehicles to any other person for resale to an ultimate 
purchaser and authorizes such other person to repair and service the 
manufacturer's motor vehicles.'' Id. at section 11028(a)(1)(B), 116 
Stat. 1835, codified at 15 U.S.C. 1226(a)(1)(B).
    \119\ John Warner National Defense Authorization Act for Fiscal 
Year 2007, Public Law 109-364, 120 Stat. 2083 (2006).
    \120\ Limitations on Terms of Consumer Credit Extended to 
Service Members and Dependents, 72 FR 50580 (Aug. 31, 2007) 
(codified at 32 CFR 232).
    \121\ See 32 CFR 232.8(c). Creditors must comply with the 
requirements of the rule for transactions or accounts established or 
consummated on or after October 3, 2016, subject to certain 
exemptions. 32 CFR 232.13(a). The rule applies to credit card 
accounts under an open-end consumer credit plan only on October 3, 
2017. 32 CFR 232.13(c)(2). Earlier, Congress passed an 
appropriations provision prohibiting Federal contractors and 
subcontractors receiving Department of Defense funds from requiring 
employees or independent contractors arbitrate certain kinds of 
employment claims. See Department of Defense Appropriations Act of 
2010, Public Law 111-118, 123 Stat. 3454 (2010), section 8116.
    \122\ Food, Conservation, and Energy Act of 2008, Public Law 
110-234, section 11005, 122 Stat. 1356-58 (2008), codified at 7 
U.S.C. 197c; Implementation of Regulations Required Under Title XI 
of the Food, Conservation and Energy Act of 2008; Suspension of 
Delivery of Birds, Additional Capital Investment Criteria, Breach of 
Contract, and Arbitration, 76 FR 76874, 76890 (Dec. 9, 2011).
---------------------------------------------------------------------------

    As previously noted, Congress again addressed arbitration 
agreements in the 2010 Dodd-Frank Act. Dodd-Frank section 1414(a) 
prohibited the use of arbitration agreements in mortgage contracts, 
which the Bureau implemented in its Regulation Z.\123\ Section 921 of 
the Act authorized the SEC to issue rules to prohibit or impose 
conditions or limitations on the use of arbitration agreements by 
investment advisers.\124\ Section 922 of the Act invalidated the use of 
arbitration agreements in connection with certain whistleblower 
proceedings.\125\ Finally, and as discussed in greater detail below, 
section 1028 of the Act required the Bureau to study the use of 
arbitration agreements in contracts for consumer financial products and 
services and authorized this rulemaking.\126\ The authority of the 
Bureau and the SEC are similar under the Dodd-Frank Act except that the 
SEC does not have to complete a study before promulgating a rule. State 
legislatures have also taken steps to regulate the arbitration process. 
Several States, most notably California, require arbitration 
administrators to disclose basic data about consumer arbitrations that 
take place in the State.\127\ States are constrained in their ability 
to regulate arbitration because the FAA preempts conflicting State 
law.\128\
---------------------------------------------------------------------------

    \123\ See Dodd-Frank section 1414(a) (codified as 15 U.S.C. 
1639c(e)(1)) (``No residential mortgage loan and no extension of 
credit under an open end consumer credit plan secured by the 
principal dwelling of the consumer may include terms which require 
arbitration or any other nonjudicial procedure as the method for 
resolving any controversy or settling any claims arising out of the 
transaction.''); 12 CFR 1026.36(h)(1).
    \124\ Dodd-Frank section 921(b).
    \125\ Dodd-Frank section 922(c)(2).
    \126\ Dodd-Frank section 1028(a).
    \127\ Cal. Civ. Proc. Code sec. 1281.96 (amended effective Jan. 
1, 2015); DC Code secs. 16-4430; Md. Comm. L. Code, secs. 14-3901-
05; 10 M.R.S.A. sec. 1394 (Maine).
    \128\ See Doctor's Assocs., Inc. v. Casarotto, 517 U.S. 681, 687 
(1996) (``Courts may not, however, invalidate arbitration agreements 
under state laws applicable only to arbitration provisions.''); 
Perry v. Thomas, 482 U.S. 483, 492 n.9 (1987) (``[S]tate law, 
whether of legislative or judicial origin, is applicable if that law 
arose to govern issues concerning the validity, revocability, and 
enforceability of contracts generally. A state-law principle that 
takes its meaning precisely from the fact that a contract to 
arbitrate is at issue does not comport with this requirement of 
[FAA] sec. 2.'').
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Arbitration Today
    Today, the AAA is the primary administrator of consumer financial 
arbitrations.\129\ The AAA's consumer financial arbitrations are 
governed by the AAA Consumer Arbitration Rules, which includes 
provisions that, among other things, limit filing and administrative 
costs for consumers.\130\ The AAA also has adopted the AAA Consumer Due 
Process Protocol, which creates a floor of procedural and substantive 
protections and affirms that ``[a]ll parties are entitled to a 
fundamentally-fair arbitration process.'' \131\ A second entity, JAMS, 
administers consumer financial arbitrations pursuant to the JAMS 
Streamlined Arbitration Rules & Procedures \132\ and the JAMS Consumer 
Minimum Standards. These administrators' procedures for arbitration 
differ in several respects from the procedures found in court, as 
discussed in Section 4 of the Study and summarized below at Part III.D.
---------------------------------------------------------------------------

    \129\ See infra Part III.D.
    \130\ AAA, Consumer Arbitration Rules.
    \131\ AAA, Consumer Due Process Protocol Statement of 
Principles, Principle 1. Other principles include that all parties 
are entitled to a neutral arbitrator and administrator (Principle 
3), that all parties retain the right to pursue small claims 
(Principle 5), and that face-to-face arbitration should be conducted 
at a ``reasonably convenient'' location (Principle 6). The AAA 
explained that it adopted these principles because, in its view, 
``consumer contracts often do not involve arm's length negotiation 
of terms, and frequently consist of boilerplate language.'' The AAA 
further explained that ``there are legitimate concerns regarding the 
fairness of consumer conflict resolution mechanisms required by 
suppliers. This is particularly true in the realm of binding 
arbitration, where the courts are displaced by private adjudication 
systems.'' Id. at 4.
    \132\ JAMS, Streamlined Arbitration Rules & Procedures 
(effective July 1, 2014), available at http://www.jamsadr.com/rules-streamlined-arbitration/. If a claim or counterclaim exceeds 
$250,000, the JAMS Comprehensive Arbitration Procedures, not the 
Streamlined Rules & Procedures, apply. Id. Rule 1(a).
---------------------------------------------------------------------------

    Further, although virtually all arbitration agreements in the 
consumer financial context expressly preclude arbitration from 
proceeding on a class basis, the major arbitration administrators do 
provide procedures for administering class arbitrations and

[[Page 32839]]

have occasionally administered them in class arbitrations involving 
providers of consumer financial products and services.\133\ These 
procedures, which are derived from class action litigation procedures 
used in court, are described in Section 4.8 of the Study. These class 
arbitration procedures will only be used by the AAA or JAMS if the 
arbitration administrator first determines that the arbitration 
agreement can be construed as permitting class arbitration. These class 
arbitration procedures are not widely used in consumer financial 
services disputes: Reviewing consumer financial arbitrations pertaining 
to six product types filed over a period of three years, the Study 
found only three.\134\ Industry has criticized class arbitration on the 
ground that it lacks procedural safeguards. For example, class 
arbitration generally has limited judicial review of arbitrator 
decisions (for example, on a decision to certify a class or an award of 
substantial damages).\135\
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    \133\ See AAA Class Arbitration dockets, available at https://www.adr.org/aaa/faces/services/disputeresolutionservices/casedocket?_afrLoop=368852573510045&_afrWindowMode=0&_afrWindowId=nul
l.
    \134\ Study, supra note 2, section 5, at 86-87. The review of 
class action filings in five of these markets also identified one of 
these two class arbitrations, as well as an additional class action 
arbitration filed with JAMS following the dismissal or stay of a 
class litigation. Id., section 6, at 59.
    \135\ In a recent amicus curiae filing, the U.S. Chamber of 
Commerce argued that ``[c]lass arbitration is a worst-of-all-worlds 
Frankenstein's monster: It combines the enormous stakes, formality 
and expense of litigation that are inimical to bilateral arbitration 
with exceedingly limited judicial review of the arbitrators' 
decisions.'' Br. of the Chamber of Commerce of the United States of 
America as Amicus Curiae in Support of Pl.-Appellants at 9, Marriott 
Ownership Resorts, Inc. v. Sterman, No. 15-10627 (11th Cir. Apr. 1, 
2015).
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III. The Arbitration Study

    Section 1028(a) of the Dodd-Frank Act directed the Bureau to study 
and provide a report to Congress on ``the use of agreements providing 
for arbitration of any future dispute between covered persons and 
consumers in connection with the offering or providing of consumer 
financial products or services.'' Pursuant to section 1028(a), the 
Bureau conducted a study of the use of pre-dispute arbitration 
agreements in contracts for consumer financial products and services 
and, in March 2015, delivered to Congress its Arbitration Study: Report 
to Congress, Pursuant to Dodd-Frank Wall Street Reform and Consumer 
Protection Act Sec.  1028(a).\136\
---------------------------------------------------------------------------

    \136\ Study, supra note 2.
---------------------------------------------------------------------------

    This Part describes the process the Bureau used to carry out the 
Study and summarizes the Study's results.

A. April 2012 Request for Information

    At the outset of its work, on April 27, 2012, the Bureau published 
a Request for Information (RFI) in the Federal Register concerning the 
Study.\137\ The RFI sought public comment on the appropriate scope, 
methods, and data sources for the Study. Specifically, the Bureau asked 
for input on how it should address three topics: (1) The prevalence of 
arbitration agreements in contracts for consumer financial products and 
services; (2) arbitration claims involving consumers and companies; and 
(3) other impacts of arbitration agreements on consumers and companies, 
such as impacts on the incidence of consumer claims against companies, 
prices of consumer financial products and services, and the development 
of legal precedent. The Bureau also requested comment on whether and 
how the Study should address additional topics. In response to the RFI, 
the Bureau received and reviewed 60 comment letters. The Bureau also 
met with numerous commenters and other stakeholders to obtain 
additional feedback on the RFI.
---------------------------------------------------------------------------

    \137\ Arbitration Study RFI, supra note 2.
---------------------------------------------------------------------------

    The feedback received through this process substantially affected 
the scope of the study the Bureau undertook. For example, several 
industry trade association commenters suggested that the Bureau study 
not only consumer financial arbitration but also consumer financial 
litigation in court. The Study incorporates an extensive analysis of 
consumer financial litigation--both individual litigation and class 
actions.\138\ Commenters also advised the Bureau to compare the 
relationship between public enforcement actions and private class 
actions. The Study included extensive research into this subject, 
including an analysis of public enforcement actions filed over a period 
of five years by State and Federal regulators and the relationship, or 
lack of relationship of these cases to private class litigation.\139\ 
Commenters also recommended that the Bureau study whether arbitration 
reduces companies' dispute resolution costs and the relationship 
between any such cost savings and the cost and availability of consumer 
financial products and services. To investigate this, the Study 
includes a ``difference-in-differences'' regression analysis using a 
representative random sample of the Bureau's Credit Card Database 
(CCDB), to look for price impacts associated with changes relating to 
arbitration agreements for credit cards, an analysis that had never 
before been conducted.\140\
---------------------------------------------------------------------------

    \138\ See generally Study, supra note 2, sections 6 and 8.
    \139\ Id., section 9.
    \140\ Id., section 10 at 7-14.
---------------------------------------------------------------------------

    In some cases, commenters to the RFI encouraged the Bureau to study 
a topic, but the Bureau did not do so because certain effects did not 
appear measurable. For example, some commenters suggested that the 
Bureau study the effect of arbitration agreements on the development, 
interpretation, and application of the rule of law. The Bureau did not 
identify a robust data set that would allow empirical analysis of this 
phenomenon. Nonetheless, legal scholars have subsequently attempted to 
quantify this effect in relation to consumer law.\141\
---------------------------------------------------------------------------

    \141\ See Myriam Gilles, The End of Doctrine: Private 
Arbitration, Public Law and the Anti-Lawsuit Movement, (Benjamin N. 
Cardozo Sch. of L. Faculty Research Paper No. 436, 2014), available 
at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2488575 
(analyzing cases under ``counterfactual scenarios'' as to ``what 
doctrinal developments in antitrust and consumer law . . . would not 
have occurred over the past decade if arbitration clauses had been 
deployed to the full extent now authorized by the Supreme Court'').
---------------------------------------------------------------------------

B. December 2013 Preliminary Report

    In December 2013, the Bureau issued a 168-page report summarizing 
its preliminary results on a number of topics (Preliminary 
Results).\142\ One purpose of releasing the Preliminary Results was to 
solicit additional input from the public about the Bureau's work on the 
Study to date. In the Preliminary Results, the Bureau also included a 
section that set out a detailed roadmap of the Bureau's plans for 
future work, including the Bureau's plans to address topics that had 
been suggested in response to the RFI.\143\
---------------------------------------------------------------------------

    \142\ Preliminary Results, supra note 2.
    \143\ Id. at 129-31.
---------------------------------------------------------------------------

    In February 2014, the Bureau invited stakeholders for in-person 
discussions with staff regarding the Preliminary Results, as well as 
the Bureau's future work plan. Several external stakeholders, including 
industry associations and consumer groups, took that opportunity and 
provided additional input regarding the Study.

C. Comments on Survey Design Pursuant to the Paperwork Reduction Act

    In the Preliminary Results, the Bureau indicated that it planned to 
conduct a survey of consumers. The purpose of the survey was to assess 
consumer awareness of arbitration agreements, as well as consumer 
perceptions of, and expectations about, dispute resolution with respect 
to disputes between consumers and financial services

[[Page 32840]]

providers.\144\ Pursuant to the Paperwork Reduction Act, the Bureau 
also undertook an extensive public outreach and engagement process in 
connection with its consumer survey (the results of which are published 
in Section 3 of the Study). The Bureau obtained approval for the 
consumer survey from the Office of Management and Budget (OMB), and 
each version of the materials submitted to OMB during this process 
included draft versions of the survey instrument.\145\ In June 2013, 
the Bureau published a Federal Register notice that solicited public 
comment on its proposed approach to the survey and received 17 comments 
in response. In July 2013, the Bureau hosted two roundtable meetings to 
consult with various stakeholders including industry groups, banking 
trade associations, and consumer advocates. After considering the 
comments and conducting two focus groups to help refine the survey, but 
before undertaking the survey, the Bureau published a second Federal 
Register notice in May 2014, which generated an additional seven 
comments.
---------------------------------------------------------------------------

    \144\ Id. at 129.
    \145\ The survey was assigned OMB control number 3170-0046.
---------------------------------------------------------------------------

D. The March 2015 Arbitration Study

    The Bureau ultimately focused on nine empirical topics in the 
Study:
    1. The prevalence of arbitration agreements in contracts for 
consumer financial products and services and their main features 
(Section 2 of the Study);
    2. Consumers' understanding of dispute resolution systems, 
including arbitration and the extent to which dispute resolution 
clauses affect consumer's purchasing decisions (Section 3 of the 
Study);
    3. How arbitration procedures differ from procedures in court 
(Section 4 of the Study);
    4. The volume of individual consumer financial arbitrations, the 
types of claims, and how they are resolved (Section 5 of the Study);
    5. The volume of individual and class consumer financial 
litigation, the types of claims, and how they are resolved (Section 6 
of the Study);
    6. The extent to which consumers sue companies in small claims 
court with respect to disputes involving consumer financial services 
(Section 7 of the Study);
    7. The size, terms, and beneficiaries of consumer financial class 
action settlements (Section 8 of the Study);
    8. The relationship between public enforcement and consumer 
financial class actions (Section 9 of the Study); and
    9. The extent to which arbitration agreements lead to lower prices 
for consumers (Section 10 of the Study).
    As described further in each subsection below, the Bureau's 
research on several of these topics drew in part upon data sources 
previously unavailable to researchers. For example, the AAA voluntarily 
provided the Bureau with case files for consumer arbitrations filed 
from the beginning of 2010, approximately when the AAA began 
maintaining electronic records, to the end of 2012. Compared to data 
sets previously available to researchers, the AAA case files covered a 
much longer period and were not limited to case files for cases 
resulting in an award. Using this data set, the Bureau conducted the 
first analysis of arbitration frequency and outcomes specific to 
consumer financial products and services.\146\ Similarly, the Bureau 
submitted orders to financial service providers in the checking account 
and payday loan markets, pursuant to its market monitoring authority 
under Dodd-Frank section 1022(c)(4), to obtain a sample set of 
agreements of those institutions. Using these agreements, among others 
gathered from other sources, the Bureau conducted the most 
comprehensive analysis to date of the arbitration content of contracts 
for consumer financial products and services.\147\
---------------------------------------------------------------------------

    \146\ Study, supra note 2, section 5 at 19-68.
    \147\ See generally id., section 2.
---------------------------------------------------------------------------

    The results of the Study also broke new ground because the Study, 
compared to prior research, generally considered larger data sets than 
had been reviewed by other researchers while also narrowing its 
analysis to consumer financial products and services. In total, the 
Study included the review of over 850 agreements for certain consumer 
financial products and services; 1,800 consumer financial services 
arbitrations filed over a three-year period; a random sample of the 
nearly 3,500 individual consumer finance cases identified as having 
been filed over a period of three years; and all of the 562 consumer 
finance class actions identified in Federal and selected State courts 
of the same time period. The study also included over 40,000 small 
claims court filings over the course of a single year. The Bureau 
supplemented this research by assembling and analyzing all of the more 
than 400 consumer financial class action settlements in Federal courts 
over a five-year period and more than 1,100 State and Federal public 
enforcement actions in the consumer finance area.\148\ The Study also 
includes the findings of the Bureau's survey of over 1,000 credit card 
consumers, focused on exploring their knowledge and understanding of 
arbitration and other dispute resolution mechanisms. The sections below 
describe in detail the process the Bureau followed in undertaking each 
section of the Study and summarize the main results of each 
section.\149\
---------------------------------------------------------------------------

    \148\ Since the publication of the Study, the Bureau determined 
that 41 FDIC enforcement actions were inadvertently omitted from the 
results published in Section 9 of the Study. The corrected total 
number of enforcement actions reviewed in Section 9 was 1,191. Other 
figures, including the identification of public enforcement cases 
with overlapping private actions, were not affected by this 
omission.
    \149\ Overall, the markets assessed in the Study represent 
lending money (e.g., small-dollar open-ended credit, small-dollar 
closed-ended credit, large-dollar unsecured credit, large-dollar 
secured credit), storing money (i.e., consumer deposits), and moving 
or exchanging money. The Study also included debt relief and debt 
collection disputes arising from these consumer financial products 
and services. Study, supra note 2, section 1 at 7-9. While credit 
scoring and credit monitoring were not included in these product 
categories, settlements regarding such products were included in the 
Study's analysis of class action settlements, as well as the Study's 
analysis of the overlap between public enforcement actions and 
private class action litigation.
---------------------------------------------------------------------------

Prevalence and Features of Arbitration Agreements (Section 2 of Study)
    Section 2 of the Study addresses two central issues relating to the 
use of arbitration agreements: How frequently such agreements appear in 
contracts for consumer financial products and services and what 
features such agreements contain. Among other findings, the Study 
determined that arbitration agreements are commonly used in contracts 
for consumer financial products and services and that the AAA is the 
primary administrator of consumer financial arbitrations.
    To conduct this analysis, the Bureau reviewed contracts for six 
product markets: Credit cards, checking accounts, general purpose 
reloadable (GPR) prepaid cards, payday loans, private student loans, 
and mobile wireless contracts governing third-party billing 
services.\150\ Previous studies that analyzed the prevalence and 
features of arbitration agreements in contracts for consumer financial 
products and services either relied on small samples or limited their 
study to one market.\151\ As a result, the Bureau's inquiry in Section 
2 of the Study represents the most comprehensive analysis to date of 
the arbitration content of contracts for consumer financial products 
and services.
---------------------------------------------------------------------------

    \150\ Study, supra note 2, section 2 at 3.
    \151\ Id., section 2 at 4-6.

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[[Page 32841]]

    The Bureau's sample of credit card contracts consisted of contracts 
filed by 423 issuers with the Bureau as required by the Credit Card 
Accountability, Responsibility and Disclosure Act (CARD Act) as 
implemented by Regulation Z.\152\ Taken together, these contracts 
covered nearly all consumers in the credit card market. For deposit 
accounts, the Bureau identified the 100 largest banks and the 50 
largest credit unions, and constructed a random sample of 150 small and 
mid-size banks. The Bureau obtained the deposit account agreements for 
these institutions by downloading them from the institutions' Web sites 
and through orders sent to institutions using the Bureau's market 
monitoring authority.
---------------------------------------------------------------------------

    \152\ 12 CFR 1026.58(c) (requiring credit card issuers to submit 
their currently-offered credit card agreements to the Bureau to be 
posted on the Bureau's Web site).
---------------------------------------------------------------------------

    For prepaid cards, the Bureau's sample included agreements from two 
sources. The Bureau gathered agreements for 52 GPR prepaid cards that 
were listed on the Web sites of two major card networks and a Web site 
that provided consolidated card information as of August 2013. The 
Bureau also obtained agreements from GPR prepaid card providers that 
had been included in several recent studies of the terms of GPR prepaid 
cards and that continued to be available as of August 2014.\153\ For 
the storefront payday loan market, the Bureau again used its market 
monitoring authority to obtain a sample of 80 payday loan contracts 
from storefront payday lenders in California, Texas, and Florida.\154\ 
For the private student loan market, the Bureau sampled seven private 
student loan contracts plus the form contract used by 250 credit unions 
that use a leading credit union service organization.\155\ For the 
mobile wireless market, the Bureau reviewed the wireless contracts of 
the eight largest facilities-based providers of mobile wireless 
services \156\ which also govern third-party billing services.\157\
---------------------------------------------------------------------------

    \153\ Study, supra note 2, section 2 at 18.
    \154\ Id., section 2 at 21-22. This data was supplemented with a 
smaller, non-random sample of payday loan contracts from tribal, 
offshore, and other online payday lenders, which is reported in 
Appendix C of the Study.
    \155\ Id, section 2 at 24.
    \156\ Facilities-based mobile wireless service providers are 
wireless providers that ``offer mobile voice, messaging, and/or data 
services using their own network facilities,'' in contrast to 
providers that purchase mobile services wholesale from facilities-
based providers and resell the services to consumers, among other 
types of providers. Federal Communications Commission, Annual Report 
and Analysis of Competitive Market Conditions with Respect to Mobile 
Wireless, at 37-39 (2013), available at https://www.fcc.gov/document/16th-mobile-competition-report.
    \157\ Study, supra note 2, section 2 at 25-26. In mobile 
wireless third-party billing, a mobile wireless provider authorizes 
third parties to charge consumers, on their wireless bill, for 
services provided by the third parties. Because mobile wireless 
third-party billing involves the extension of credit to, and 
processing of payments for, consumers in connection with goods and 
services that the provider does not directly sell and that consumers 
do not purchase from the provider, the provision of mobile wireless 
third-party billing is a ``consumer financial product or service'' 
under the Dodd-Frank Act. 12 U.S.C. 5481(6), 15(A)(i) and (vii).
---------------------------------------------------------------------------

    The analysis of the agreements that the Bureau collected found that 
tens of millions of consumers use consumer financial products or 
services that are subject to arbitration agreements, and that, in some 
markets such as checking accounts and credit cards, large providers are 
more likely to have the agreements than small providers.\158\ In the 
credit card market, the Study found that small bank issuers were less 
likely to include arbitration agreements than large bank issuers.\159\ 
Likewise, only 3.3 percent of credit unions in the credit card sample 
used arbitration agreements.\160\ As a result, while 15.8 percent of 
credit card issuers included such agreements in their contracts, 53 
percent of credit card loans outstanding were subject to such 
agreements.\161\ In the checking account market, the Study again found 
that larger banks tended to include arbitration agreements in their 
consumer checking contracts (45.6 percent of the largest 103 banks, 
representing 58.8 percent of insured deposits).\162\ In contrast, only 
7.1 percent of small-and mid-sized banks and 8.2 percent of credit 
unions used arbitration agreements.\163\ In the prepaid card and payday 
loan markets, the Study found that the substantial majority of 
contracts--92.3 percent of GPR prepaid card contracts and 83.7 percent 
of the storefront payday loan contracts--included such agreements.\164\ 
In the private student loan and mobile wireless markets, the Study 
found that most of the large companies--85.7 percent of the private 
student loan contracts, and 87.5 percent of the mobile wireless 
contracts--used arbitration agreements.\165\
---------------------------------------------------------------------------

    \158\ Study, supra note 2, section 1 at 9.
    \159\ Id., section 2 at 10.
    \160\ Id.
    \161\ Id. As the Study notes, the Ross settlement--a 2009 
settlement in which four of the ten largest credit card issuers 
agreed to remove their arbitration agreements--likely impacts these 
results. Had the settling defendants in Ross continued to use 
arbitration agreements, 93.6 percent of credit card loans 
outstanding would be subject to arbitration agreements. Id. section 
2 at 11.
    \162\ Id., section 2 at 14.
    \163\ Id.
    \164\ Id., section 2 at 19, 22.
    \165\ Id., section 2 at 24, 26.
---------------------------------------------------------------------------

    In addition to examining the prevalence of arbitration agreements, 
Section 2 of the Study reviewed 13 features sometimes included in such 
agreements.\166\ One feature the Bureau studied was which entity or 
entities were designated by the contract to administer the arbitration. 
The Study found that the AAA was the predominant arbitration 
administrator for all the consumer financial products the Bureau 
examined in the Study. The contracts studied specified the AAA as at 
least one of the possible arbitration administrators in 98.5 percent of 
the credit card contracts with arbitration agreements; 98.9 percent of 
the checking account contracts with arbitration agreements; 100 percent 
of the GPR prepaid card contracts with arbitration agreements; 85.5 
percent of the storefront payday loan contracts with arbitration 
agreements; and 66.7 percent of private student loan contracts with 
arbitration agreements.\167\ The contracts specified the AAA as the 
sole option in 17.9 percent of the credit card contracts with 
arbitration agreements; 44.6 percent of the checking account contracts 
with arbitration agreements; 63.0 percent to 72.7 percent of the GPR 
prepaid card contracts with arbitration agreements; 27.4 percent of the 
payday loan contracts with arbitration agreements; and one of the 
private student loan contracts the Bureau reviewed.\168\
---------------------------------------------------------------------------

    \166\ Id., section 2 at 30.
    \167\ Id., section 2 at 38.
    \168\ Id., section 2 at 36. The prevalence of GPR prepaid cards 
with arbitration agreements specifying AAA as the sole option is 
presented as a range because two GPR prepaid firms studied each used 
two different form cardholder agreements, with different agreements 
pertaining to different features. Because of this it was unclear 
precisely how much of the prepaid market share represented by each 
provider was covered by a particular cardholder agreement. As such, 
for GPR prepaid cards, prevalence by market share is presented as a 
range rather than a single figure.
---------------------------------------------------------------------------

    In contrast, JAMS is specified in relatively fewer arbitration 
agreements. The Study found that the contracts studied specified JAMS 
as at least one of the possible arbitration administrators in 40.9 
percent of the credit card contracts with arbitration agreements; 34.4 
percent of the checking

[[Page 32842]]

account contracts with arbitration agreements; 52.9 percent of the GPR 
prepaid card contracts with arbitration agreements; 59.2 percent of the 
storefront payday loan contracts with arbitration agreements; and 66.7 
percent of private student loan contracts with arbitration agreements. 
JAMS was specified as the sole option in 1.5 percent of the credit card 
contracts with arbitration agreements (one contract); 1.6 percent of 
the checking account contracts with arbitration agreements (one 
contract); 63.0 percent to 72.7 percent of the GPR prepaid card 
contracts with arbitration agreements; and none of the payday loan or 
private student loan contracts the Bureau reviewed.\169\
---------------------------------------------------------------------------

    \169\ Id.
---------------------------------------------------------------------------

    The Bureau's analysis also found, among other things, that nearly 
all the arbitration agreements studied included provisions stating that 
arbitration may not proceed on a class basis. Across each product 
market, 85 percent to 100 percent of the contracts with arbitration 
agreements--covering over 99 percent of market share subject to 
arbitration in the six product markets studied--included such no-class-
arbitration provisions.\170\ Most of the arbitration agreements that 
included such provisions also contained an ``anti-severability'' 
provision stating that, if the no-class-arbitration provision were to 
be held unenforceable, the entire arbitration agreement would become 
unenforceable as a result.\171\
---------------------------------------------------------------------------

    \170\ Id., section 2 at 44-47.
    \171\ Id., section 2 at 46-47.
---------------------------------------------------------------------------

    The Study found that most of the arbitration agreements contained a 
small claims court ``carve-out,'' permitting either the consumer or 
both parties to file suit in small claims court.\172\ The Study 
similarly explored the number of arbitration provisions that allowed 
consumers to ``opt out'' or otherwise reject an arbitration agreement. 
To exercise the opt-out right, consumers must follow stated procedures, 
which usually requires all authorized users on an account to physically 
mail a signed written document to the issuer (electronic submission is 
permitted only rarely), within a stated time limit. With the exception 
of storefront payday loans and private student loans, the substantial 
majority of arbitration agreements in each market studied generally did 
not include opt-out provisions.\173\
---------------------------------------------------------------------------

    \172\ Id., section 2 at 33-34.
    \173\ Id., section 2 at 31-32.
---------------------------------------------------------------------------

    The Study analyzed three different types of cost provisions: 
provisions addressing the initial payment of arbitration fees; 
provisions that addressed the reallocation of arbitration fees in an 
award; and provisions addressing the award of attorney's fees.\174\ 
Most arbitration agreements reviewed in the Study contained provisions 
that had the effect of capping consumers' up front arbitration costs at 
or below the AAA's maximum consumer fee thresholds. These same 
arbitration agreements took noticeably different approaches to the 
reallocation of arbitration fees in the arbitrator's award 
(approximately one-fifth of the arbitration agreements in credit card, 
checking account, and storefront payday loan markets permitted shifting 
company fees to consumers).\175\ The Study also found only negligible 
market shares of relevant markets directed or permitted arbitrators to 
award attorney's fees to prevailing companies.\176\ A significant share 
of arbitration agreements across almost all markets did not address 
attorney's fees.\177\
---------------------------------------------------------------------------

    \174\ Id., section 2 at 58. Many contracts--particularly 
checking account contracts--included general provisions about the 
allocation of costs and expenses arising out of disputes that were 
not specific to arbitration costs. Indeed, such provisions were 
commonly included in contracts without arbitration agreements as 
well. While such provisions could be relevant to the allocation of 
expenses in an arbitration proceeding, the Study did not address 
such provisions because they were not specific to arbitration 
agreements.
    \175\ Id., section 2 at 62-66.
    \176\ Id., section 2 at 67.
    \177\ Id., section 2 at 66-76. As described supra when the 
arbitration agreement did not address the issue, the arbitrator is 
able to award attorney's fees when permitted elsewhere in the 
agreement or by applicable law.
---------------------------------------------------------------------------

    The Study found that many arbitration agreements permit the 
arbitrator to reallocate arbitration fees from one party to the other. 
About one-third of credit card arbitration agreements, one-fourth of 
checking account arbitration agreements, and half of payday loan 
arbitration agreements expressly permitted the arbitrator to shift 
arbitration costs to the consumer.\178\ However, as the Study pointed 
out, the AAA's consumer arbitration fee schedule, which became 
effective March 1, 2013, restricts such reallocation.\179\ With respect 
to another type of provision that affects consumers' costs in 
arbitration--where the arbitration must take place--the Study noted 
that most, although not all, arbitration agreements contained 
provisions requiring or permitting hearings to take place in locations 
close to the consumer's place of residence.\180\
---------------------------------------------------------------------------

    \178\ Id., section 2 at 62-66.
    \179\ Id., section 2 at 61-62.
    \180\ Id., section 2 at 53.
---------------------------------------------------------------------------

    Further, most of the arbitration agreements the Bureau studied 
contained disclosures describing the differences between arbitration 
and litigation in court. Most agreements disclosed expressly that the 
consumer would not have a right to a jury trial, and most disclosed 
expressly that the consumer could not be a party to a class action in 
court.\181\ Depending on the product market, between one-quarter and 
two-thirds of the agreements disclosed four key differences between 
arbitration and litigation in court: no jury trial is available in 
arbitration; parties cannot participate in class actions in court; 
discovery is typically more limited in arbitration; and appeal rights 
are more limited in arbitration.\182\ The Study found that this 
language was often capitalized or in boldfaced type.\183\
---------------------------------------------------------------------------

    \181\ Id., section 2 at 72.
    \182\ Id., section 2 at 72-79.
    \183\ Id., section 2 at 72 and n.144.
---------------------------------------------------------------------------

    The Study also examined whether arbitration agreements limited 
recovery of damages--including punitive or consequential damages--or 
specified the time period in which a claim had to be brought. The Study 
determined that most agreements in the credit card, payday loan, and 
private student loan markets did not include damages limitations. 
However, the opposite was true of agreements in checking account 
contracts, where more than three-fourths of the market included damages 
limitations; prepaid card contracts, almost all of which included such 
limitations; and mobile wireless contracts, all of which included such 
limitations. A review of consumer agreements without arbitration 
agreements revealed a similar pattern, albeit with damages limitations 
being somewhat less common.\184\
---------------------------------------------------------------------------

    \184\ Id., section 2 at 49. More than one-third (35 percent) of 
large bank checking account contracts without arbitration agreements 
included either a consequential damages waiver or a consequential 
damages waiver together with a punitive damages waiver. Similarly a 
third of prepaid card contracts without arbitration agreements 
included a consequential damages waiver, a punitive damages waiver, 
or both. The only mobile wireless contract without an arbitration 
agreement limited any damages recovery to the amount of the 
subscriber's bill. Id.
---------------------------------------------------------------------------

    The Study also found that a minority of arbitration agreements in 
two markets set time limits other than the statute of limitations that 
would apply in a court proceeding for consumers to file claims in 
arbitration. Specifically, these types of provisions appeared in 28.4 
percent and 15.8 percent of the checking account and mobile wireless 
agreements by market share, respectively.\185\ Again, a review of 
consumer agreements without arbitration agreements showed that 10.7 
percent of checking account

[[Page 32843]]

agreements imposed a one-year time limit for consumer claims.\186\ No 
storefront payday loan, private student loan, or mobile wireless 
contracts in the sample without arbitration agreements had such time 
limits.\187\
---------------------------------------------------------------------------

    \185\ Id., section 2 at 50.
    \186\ Id., section 2 at 51.
    \187\ Id.
---------------------------------------------------------------------------

    The Study assessed the extent to which arbitration agreements 
included contingent minimum recovery provisions, which provide that 
consumers would receive a specified minimum recovery if an arbitrator 
awards the consumer more than the amount of the company's last 
settlement offer. The Study found that such provisions were uncommon; 
they appeared in three out of the six private student loan agreements 
the Bureau reviewed, but, in markets other than student loans, they 
appeared in 28.6 percent or less of the agreements the Bureau 
studied.\188\
---------------------------------------------------------------------------

    \188\ Id., section 2 at 70-71 (albeit covering 43.0 percent of 
the storefront payday loan market subject to arbitration agreements 
and 68.4 percent of the mobile wireless market subject to 
arbitration agreements).
---------------------------------------------------------------------------

Consumer Understanding of Dispute Resolution Systems, Including 
Arbitration (Section 3 of Study)
    Section 3 of the Study presented the results of the Bureau's 
telephone survey of a nationally representative sample of credit card 
holders.\189\ The survey examined two main topics: (1) The extent to 
which dispute resolution clauses affected consumer's decisions to 
acquire credit cards; and (2) consumers' awareness, understanding, and 
knowledge of their rights in disputes against their credit card 
issuers. In late 2014, the Bureau's contractor completed telephone 
surveys with 1,007 respondents who had credit cards.\190\
---------------------------------------------------------------------------

    \189\ The Bureau focused its survey on credit cards because 
credit cards offer strong market penetration with consumers across 
the nation. Further, because major credit card issuers are required 
to file their agreements with the Bureau (12 CFR 1026.58(c)), 
limiting the survey to credit cards permitted the Bureau to verify 
the accuracy of many of the respondents' default assumptions about 
their dispute resolution rights by examining the actual credit card 
agreements to which the consumers were subject to at the time of the 
survey. Id., section 3 at 2.
    \190\ Based on the size of the Bureau's sample, its results were 
representative of the national population, with a sampling error of 
plus or minus 3.1 percent, though the sampling error is larger in 
connection with sample sets of fewer than the 1,007 respondents. 
Id., section 3 at 10.
---------------------------------------------------------------------------

    The consumer survey found that when presented with a hypothetical 
situation in which their credit card issuer charged them a fee they 
knew to be wrongly assessed and in which they exhausted efforts to 
obtain relief from the company through customer service, only 2.1 
percent of respondents stated that they would seek legal advice or 
consider legal proceedings.\191\ Almost the same proportion of 
respondents stated that they would simply pay for the improperly 
assessed fee (1.7 percent).\192\ A majority of respondents (57.2 
percent) said that they would cancel their cards.\193\
---------------------------------------------------------------------------

    \191\ Id., section 3 at 18.
    \192\ Id.
    \193\ Id.
---------------------------------------------------------------------------

    Respondents also reported that factors relating to dispute 
resolution--such as the presence of an arbitration agreement--played 
little to no role when they were choosing a credit card. When asked an 
open-ended question about all the factors that affected their decision 
to obtain the credit card that they use most often for personal use, no 
respondents volunteered an answer that referenced dispute resolution 
procedures.\194\ When presented with a list of nine features of credit 
cards--features such as interest rates, customer service, rewards, and 
dispute resolution procedures--and asked to identify those features 
that factored into their decision, respondents identified dispute 
resolution procedures as being relevant less often than any other 
option.\195\
---------------------------------------------------------------------------

    \194\ Id., section 3 at 15.
    \195\ Id.
---------------------------------------------------------------------------

    As for consumers' knowledge and default assumptions as to the means 
by which disputes between consumers and financial service providers can 
be resolved, the survey found that consumers generally lack awareness 
regarding the effects of arbitration agreements. Of the survey's 1,007 
respondents, 570 respondents were able to identify their credit card 
issuer with sufficient specificity to enable the Bureau to find the 
issuer's standard credit card agreement and thus to compare the 
respondents' beliefs with respect to the terms of their agreements with 
the agreements' actual terms.\196\ Among the respondents whose credit 
card contracts did not contain an arbitration agreement, when asked if 
they could sue their credit card issuer in court, 43.7 percent answered 
``Yes,'' 7.7 percent answered ``No,'' and 47.8 percent answered ``Don't 
Know.'' \197\ At the same time, among the respondents whose credit card 
agreements did contain arbitration requirements, 38.6 percent of 
respondents answered ``Yes,'' while 6.8 percent answered ``No,'' and 
54.4 percent answered ``Don't Know.'' \198\ Even the 6.8 percent of 
respondents who stated that they could not sue their credit card 
issuers in court may not have had knowledge of the arbitration 
agreement: As noted above, a similar proportion of respondents without 
an arbitration agreement in their contract--7.7 percent compared to 6.8 
percent--reported that they could not sue their issuers in court.\199\ 
When asked if they could participate in class action lawsuits against 
their credit card issuer, more than half of the respondents whose 
contracts had pre-dispute arbitration agreements thought they could 
participate (56.7 percent).\200\
---------------------------------------------------------------------------

    \196\ Id., section 3 at 18.
    \197\ Id., section 3 at 18-20.
    \198\ Id. These respondents were asked additional questions to 
account for the possibility that respondents who answered ``Yes'' 
meant suing their issuers in small claims court; that they meant 
they could bring a lawsuit even though they are subject to an 
arbitration agreement; or that they had previously ``opted-out'' of 
their arbitration agreements with their issuers. With those caveats 
in mind and after accounting for demographic weighting, the Study 
found that the consumers whose credit cards included arbitration 
requirements were wrong at least 79.8 percent of the time. Id., 
section 3 at 20-21.
    \199\ Id., section 3 at 18-20.
    \200\ Id., section 3 at 25.
---------------------------------------------------------------------------

    Respondents were also generally unaware of any opt-out 
opportunities afforded by their issuer. Only one respondent whose 
current credit card contract permitted opting out of the arbitration 
agreement recalled being offered such an opportunity.\201\
---------------------------------------------------------------------------

    \201\ Id., section 3 at 21 & 21 n.44. Eighteen other respondents 
recalled being offered an opportunity to opt out of their 
arbitration requirements. But, for the respondents whose credit card 
agreements the Bureau could identify, none of their 2013 agreements 
actually contained opt-out provisions. In fact, four of the 
agreements did not even contain pre-dispute arbitration provisions.
---------------------------------------------------------------------------

Comparison of Procedures in Arbitration and in Court (Section 4 of 
Study)
    While the Study generally limited its scope to empirical analysis 
of dispute resolution, Section 4 of the Study compared the procedural 
rules that apply in court and in arbitration. Particularly given 
changes to the AAA consumer fee schedule that took effect March 1, 
2013, the procedural rules are relevant to understanding the context 
from which the Study's empirical findings arise.
    The Study's procedural overview described court litigation as 
reflected in the Federal Rules and, as an example of a small claims 
court process, the Philadelphia Municipal Court Rules of Civil 
Practice. It compared those procedures to arbitration procedures as set 
out in the rules governing consumer arbitrations administered by the 
two leading arbitration administrators in the United States, the AAA 
and JAMS. The Study compared arbitration and court procedures according 
to eleven factors: The process for filing a claim, fees, legal

[[Page 32844]]

representation, the process for selecting the decision maker, 
discovery, dispositive motions, class proceedings, privacy and 
confidentiality, hearings, judgments and awards, and appeals.
    Filing a Claim and Fees. The Study described the processes for 
filing a claim in court and in arbitration. With respect to fees, the 
Study noted that the fee for filing a case in Federal court is $350 
plus a $50 administrative fee--paid by the party filing suit, 
regardless of the amount being sought--and the fee for a small claims 
filing in Philadelphia Municipal Court ranges from $63 to $112.38.\202\ 
In arbitration, under the AAA consumer fee schedule that took effect 
March 1, 2013, the consumer pays a $200 administrative fee, regardless 
of the amount of the claim and regardless of the party that filed the 
claim; in JAMS arbitrations, when a consumer initiates arbitration 
against the company, the consumer is required to pay a $250 fee.\203\ 
Prior to March 1, 2013, arbitrators in AAA consumer arbitrations had 
discretion to reallocate fees in the ultimate award. After March 1, 
2013, arbitrators can only reallocate arbitration fees in the award if 
required by applicable law or if the claim ``was filed for purposes of 
harassment or is patently frivolous.'' \204\
---------------------------------------------------------------------------

    \202\ Id., section 4 at 10. As the Study noted, a federal 
statute permits indigent plaintiffs filing in Federal court to seek 
to have the court waive the required filing fees. Id. (citing 28 
U.S.C. 1915(a)).
    \203\ Id., section 4 at 11-12.
    \204\ Id., section 4 at 11-12.
---------------------------------------------------------------------------

    Parties in court generally bear their own attorney's fees, unless a 
statute or contract provision provides otherwise or a party is shown to 
have acted in bad faith. However, under several consumer protection 
statutes, providers may be liable for attorney's fees.\205\ Under the 
AAA's Consumer Rules, ``[t]he arbitrator may grant any remedy, relief, 
or outcome that the parties could have received in court, including 
awards of attorney's fees and costs, in accordance with the law(s) that 
applies to the case.'' \206\
---------------------------------------------------------------------------

    \205\ See, e.g., 15 U.S.C. 1640(a)(3) (TILA).
    \206\ Study, supra note 2, section 4 at 12.
---------------------------------------------------------------------------

    Representation. The Study noted that in most courts, individuals 
can either represent themselves or hire a lawyer as their 
representative.\207\ In arbitration, the rules are more flexible than 
in many courts about the identity of any party representative. For 
example, the AAA Consumer Rules permit a party to be represented ``by 
counsel or other authorized representative, unless such choice is 
prohibited by applicable law.'' \208\ Some states, however, prohibit 
non-attorneys to represent parties in arbitration.\209\
---------------------------------------------------------------------------

    \207\ Id., section 4 at 13.
    \208\ Id., section 4 at 13-14.
    \209\ Id., section 4 at 14.
---------------------------------------------------------------------------

    Selecting the Decisionmaker. The Study noted that court rules 
generally do not permit parties to reject the judge assigned to hear 
their case.\210\ In arbitration, if the parties agree on the individual 
they want to serve as arbitrator, they can choose that person to decide 
their dispute; if the parties cannot agree on the arbitrator, the 
arbitrator is selected following the procedure specified in their 
contract or in the governing arbitration rules.\211\
---------------------------------------------------------------------------

    \210\ Id.
    \211\ Id., section 4 at 15.
---------------------------------------------------------------------------

    Discovery. The Study stated that the Federal Rules provide a 
variety of means by which a party can discover evidence in the 
possession of the opposing party or a third party, while the right to 
discovery in arbitration is more limited.\212\
---------------------------------------------------------------------------

    \212\ Arbitration rules on discovery give the arbitrator 
authority to manage discovery ``with a view to achieving an 
efficient and economical resolution of the dispute, while at the 
same time promoting equality of treatment and safeguarding each 
party's opportunity to present its claims and defenses.'' AAA 
Commercial Rules, Rule R-22, cited in Study, supra note 2, section 4 
at 16-17. Arbitration rules do not allow for broad discovery from 
third parties, which were not parties to the underlying agreement to 
arbitrate disputes. Section 7 of the FAA, however, grants 
arbitrators the power to subpoena witnesses to appear before them 
(and bring documents). 9 U.S.C. 7. Appellate courts are split on 
whether Section 7 of the FAA authorizes subpoenas for discovery 
before an arbitral hearing. Study, supra note 2, section 4 at 17 
n.78. As described above, many arbitration agreements highlighted 
the difference in discovery practices in arbitration proceedings as 
compared to litigation. See id.
---------------------------------------------------------------------------

    Dispositive Motions. The Study noted that the Federal Rules provide 
for a variety of motions by which a party can seek to dispose of the 
case, either in whole or in part, while arbitration rules typically do 
not expressly authorize dispositive motions.\213\
---------------------------------------------------------------------------

    \213\ Study, supra note 2, section 4 at 18.
---------------------------------------------------------------------------

    Class Proceedings. The Study described the procedural rules for 
class actions under Federal Rule 23 and noted that the Bureau was 
unaware of a class action procedure for small claims court.\214\ The 
Study further noted that the AAA and JAMS have adopted rules, derived 
from Rule 23, for administering arbitrations on a class basis.\215\
---------------------------------------------------------------------------

    \214\ Id., section 4 at 18-20.
    \215\ Id., section 4 at 20.
---------------------------------------------------------------------------

    Privacy and Confidentiality. The Study stated that court litigation 
(including small claims court) is a public process, with proceedings 
conducted in public courtrooms and the record generally available for 
public review; by comparison, arbitration is a private although not 
necessarily a confidential process.\216\
---------------------------------------------------------------------------

    \216\ Id., section 4 at 21-22. A small minority of arbitration 
agreements, primarily in the checking account market, included 
provisions requiring that the proceedings remain confidential. Id., 
section 2 at 51-53.
---------------------------------------------------------------------------

    Hearings. The Study stated that if a case in court does not settle 
before trial or get resolved on a dispositive motion, it will proceed 
to trial in the court in which the case was filed. A jury may be 
available for these claims. On the other hand, if an arbitration filing 
does not settle, the arbitrator can resolve the parties' dispute based 
on the parties' submission of documents alone, by a telephone hearing, 
or by an in-person hearing.\217\
---------------------------------------------------------------------------

    \217\ Id., section 4 at 22-24.
---------------------------------------------------------------------------

    Judgments/Awards. The Study further noted that the outcome of a 
case in court is reflected in a judgment, which the prevailing party 
can enforce through various means of post-judgment relief, and that the 
outcome of a case in arbitration is reflected in an award, which, once 
turned into a court judgment, can be enforced the same as any other 
court judgment.\218\
---------------------------------------------------------------------------

    \218\ Id., section 4 at 24.
---------------------------------------------------------------------------

    Appeals. The Study stated that parties in court can appeal a 
judgment against them to an appellate court; by comparison, parties can 
challenge arbitration awards in court only on the more limited grounds 
set out in the FAA.\219\
---------------------------------------------------------------------------

    \219\ Courts may vacate arbitration awards under the FAA only in 
limited circumstances. 9 U.S.C. 10. Cf. supra notes 98-106 and 
accompanying text (identifying the narrow grounds upon which a court 
may determine an arbitration agreement to be unenforceable).
---------------------------------------------------------------------------

Consumer Financial Arbitrations: Frequency and Outcomes (Section 5 of 
Study)
    Section 5 of the Study analyzed arbitrations of consumer finance 
disputes between consumers and consumer financial services providers. 
This section tallied the frequency of such arbitrations, including the 
number of claims brought and a classification of which claims were 
brought. It also examined outcomes, including how cases were resolved 
and how consumers and companies fared in the relatively small share of 
cases that an arbitrator resolved on the merits. The Study performed 
this analysis for arbitrations concerning credit cards, checking 
accounts, payday loans, GPR prepaid cards, private student loans, and 
auto purchase loans. To conduct this analysis, the Bureau used 
electronic case files from the AAA.\220\ Pursuant to

[[Page 32845]]

a non-disclosure agreement, the AAA voluntarily provided the Bureau its 
electronic case records for consumer disputes filed during the years 
2010, 2011, and 2012.\221\ Because the AAA provided the Bureau with 
case records for all disputes filed in arbitration during this period, 
Section 5 of the Study provides a reasonably complete picture of the 
frequency and typology of claims that consumers and companies file in 
arbitration.\222\
---------------------------------------------------------------------------

    \220\ See Christopher R. Drahozal & Samantha Zyontz, An 
Empirical Study of AAA Consumer Arbitrations, 25 Ohio St. J. on 
Disp. Res. 843, 845 (2010) (reviewing 301 AAA consumer disputes 
covering a nine-month period in 2007, but limiting analysis to 
disputes actually resolved by arbitrators); Drahozal & Zyontz, 
Creditor Claims in Arbitration and in Court, 7 Hastings Bus. L. J. 
77 (2011) (follow-on study that compared debt collection claims by 
companies in AAA consumer arbitrations with debt collection claims 
in Federal court and in State court proceedings in jurisdictions in 
Virginia and Oklahoma).
    \221\ Study, supra note 2, section 5 at 17.
    \222\ While the analysis does not provide a window into how 
arbitrations are resolved in other arbitral fora, the AAA is the 
predominant administrator of consumer financial arbitrations. Id., 
section 2 at 35.
---------------------------------------------------------------------------

    The Study identified about 1,847 filings in total--about 616 per 
year--with the AAA for the six product markets combined.\223\ According 
to the standard AAA claim forms, about 411 arbitrations per year were 
designated as having been filed by consumers alone; the remaining 
filings were designated as having been filed by companies or filed as 
mutual submission by both the consumer and the company.\224\ Forty 
percent of the arbitration filings involved a dispute over the amount 
of debt a consumer allegedly owed to a company, with no additional 
affirmative claim by either party; in 31 percent of the filings, 
parties brought affirmative claims with no formal dispute about the 
amount of debt owed; in another 29 percent of the filings, consumers 
disputed alleged debts, but also brought affirmative claims against 
companies.\225\
---------------------------------------------------------------------------

    \223\ Study, supra note 2, section 5 at 9.
    \224\ Id., section 1 at 11. Under the AAA policies that applied 
during the period studied, a company could unilaterally file a debt 
collection dispute against a consumer in arbitration only if a 
preceding debt collection litigation had been dismissed or stayed in 
favor of arbitration. Companies could file disputes mutually with 
consumers; they could also file counterclaims in dispute filed by 
consumers against them. Id., section 5 at 27 n.56. As noted in the 
Study, the Bureau did not attempt to verify whether the 
representation on the claim forms as to the party filing the case 
was accurate. For example, in a number of cases that were designated 
as having been filed by a consumer, the record indicates that the 
consumer failed to prosecute the action and that the company 
actually paid the fees and obtained a quasi-default judgment. In 
other cases, a law firm representing consumers filed a number of 
student loan disputes but indicated on the checkbox that the action 
was being filed by the company. Id., section 5 at 19 n.38.
    \225\ Id., section 1 at 11.
---------------------------------------------------------------------------

    Although claim amounts varied by product, in disputes involving 
affirmative claims by consumers, the average amount of such claims was 
approximately $27,000 and the median amount of such claims was 
$11,500.\226\ About 25 disputes a year involved affirmative claims by 
consumers of $1,000 or less.\227\ In debt disputes, the average 
disputed debt amount was approximately $15,700; the median was 
approximately $11,000.\228\ Across all six product markets, about 25 
cases per year involved disputed debts of $1,000 or less.\229\
---------------------------------------------------------------------------

    \226\ Id., section 5 at 10.
    \227\ Id.
    \228\ Id.
    \229\ Id.
---------------------------------------------------------------------------

    Overall, consumers were represented by counsel in 63.2 percent of 
arbitration cases.\230\ The rate of representation, however, varied 
widely based on the product at issue; in payday and student loan 
disputes, for example, consumers had counsel in about 95 percent of all 
cases filed.\231\
---------------------------------------------------------------------------

    \230\ Id., section 5 at 29.
    \231\ Id., section 5 at 28-32.
---------------------------------------------------------------------------

    To analyze the outcomes in arbitration, the Bureau confined its 
analysis to claims filed in 2010 and 2011 in order to limit the number 
of cases that were pending at the close of the period for which the 
Bureau had data. The Bureau's analysis of arbitration outcomes was 
limited by a number of factors that are unavoidable in any review of 
dispute resolution.\232\ Among other issues, settlement terms were 
rarely known if the parties settled their disputes. In many cases, even 
the fact that a settlement occurred was difficult to discern because 
the parties were not required to notify the AAA of a settlement.\233\ 
Accordingly, an incomplete file could indicate a settlement, on the one 
hand, or that the proceeding was still in progress but relatively 
dormant, on the other hand. Because parties settle claims 
strategically, disputes that did reach an arbitrator's decision on the 
merits were not a representative sample of the disputes that were 
filed.\234\ For example, if parties settled all strong consumer (or 
company) claims, then consumers (or companies) may appear to do poorly 
before arbitrators because only weak claims are heard at hearings. As 
the Study explained, these limitations are inherent in a review of this 
nature and unavoidable.
---------------------------------------------------------------------------

    \232\ Id., section 5 at 4-7. As a result, the Bureau was only 
able to determine a substantive outcome in 341 cases.
    \233\ Id., section 5 at 6.
    \234\ Id., section 5 at 7 (noting that it is ``quite challenging 
to attempt to answer even the simple question of how well do 
consumers (or companies) fare in arbitration''). The Study notes 
further that the same selection bias concerns apply to disputes 
filed in litigation and that ``[t]hese various considerations 
warrant caution in drawing conclusions as to how well consumers or 
companies fare in arbitration as compared to litigation.'' Id. For 
example, the Study found that the disputes that parties filed in 
arbitration differ from the disputes filed in litigation. Id.
---------------------------------------------------------------------------

    With those significant caveats noted, the Study determined that in 
32.2 percent of the 1,060 disputes filed during the first two years of 
the study period (341 disputes) arbitrators resolved the dispute on the 
merits. In 23.2 percent of the disputes (246 disputes), the record 
shows that the parties settled. In 34.2 percent of disputes (362 
disputes), the available AAA case record ends in a manner that is 
consistent with settlement--for example, a voluntary dismissal of the 
action--but the Bureau could not definitively determine that settlement 
occurred. In the remaining 10.5 percent of disputes (111 disputes), the 
available AAA case record ends in a manner suggesting the dispute is 
unlikely to have settled; for example, the AAA may have refused to 
administer the dispute because it determined that the arbitration 
agreement at issue was inconsistent with the AAA's Consumer Due Process 
Protocol.\235\
---------------------------------------------------------------------------

    \235\ Id.
---------------------------------------------------------------------------

    As noted above, only a small portion of filed arbitrations reached 
a decision. The Study identified 341 cases filed in 2010 and 2011 that 
were resolved by an arbitrator and for which the outcome was 
ascertainable.\236\ Of these 341 cases, 161 disputes involved an 
arbitrator decision on a consumer's affirmative claim. Of the cases in 
which the Bureau could determine the results, the consumer obtained 
relief on their affirmative claims in 32 disputes (20.3 percent).\237\ 
Consumers obtained debt forbearance in 19.2 percent of the cases in 
which an arbitrator could have provided some form of debt forbearance 
(46 cases).\238\ The total amount of affirmative relief awarded in all 
cases was $172,433 and total debt forbearance was $189,107.\239\ Of the 
52 cases filed in 2010 and 2011 that involved consumer affirmative 
claims of $1,000 or less, arbitrators resolved 19, granting affirmative 
relief to consumers in four

[[Page 32846]]

such cases.\240\ With respect to disputes involving company claims, the 
Bureau could determine the terms of arbitrator awards relating to 
company claims in 244 of the 421 disputes involving company claims 
filed in 2010 and 2011.\241\ Arbitrators provided companies some type 
of relief in 227, or 93.0 percent, of those disputes. In those 227 
disputes, companies won a total of $2,806,662.\242\
---------------------------------------------------------------------------

    \236\ Id., section 5 at 13.
    \237\ Id.
    \238\ Id.
    \239\ Of the 244 cases in which companies made claims or 
counterclaims that the Bureau could determine were resolved by 
arbitrators, companies obtained relief in 227 disputes. The total 
amount of relief in those cases was $2,806,662. These totals 
included 60 cases in which the company advanced fees for the 
consumer and obtained an award without participation by the 
consumer. Excluding those 60 cases, the total amount of relief 
awarded by arbitrators to companies was $2,017,486. Id., section 5 
at 12.
    \240\ Id.
    \241\ This includes cases filed by companies as well as cases in 
which companies asserted counterclaims in consumer-initiated 
disputes. Id., section 5 at 14.
    \242\ Id., section 5 at 43-44. Excluding 60 cases in which 
companies paid filing fees for consumers who failed to pay their 
initial fees--resulting in what appears to be decisions similar to 
default judgments--companies won a total of $2,017,486. Id. at 44.
---------------------------------------------------------------------------

    The Study found that consumers appealed very few arbitration 
decisions and companies appealed none. Specifically, it found four 
arbitral appeals filed between 2010 and 2012. Consumers without counsel 
filed all four. Three of the four were closed after the parties failed 
to pay the required administrator fees and arbitrator deposits. In the 
fourth, a three-arbitrator panel upheld an arbitration award in favor 
of the company after a 15-month appeal process.\243\
---------------------------------------------------------------------------

    \243\ Id., section 5 at 85.
---------------------------------------------------------------------------

    The Study also found that very few class arbitrations were filed. 
The Study identified only two filed between 2010 and 2012. One was 
still pending on a motion to dismiss as of September 2014. The other 
file contained no information other than the arbitration demand that 
followed a State court decision granting the company's motion seeking 
arbitration.\244\
---------------------------------------------------------------------------

    \244\ Id., section 5 at 86-87.
---------------------------------------------------------------------------

    The Study also found that, when there was a decision on the merits 
by an arbitrator, the average time to resolution was 179 days, and the 
median time to resolution was 150 days. When the record definitively 
indicated that a case had settled, the median time to settlement was 
155 days from the filing of the initial claim.\245\ Further, the Study 
found that more than half of the filings that reached a decision were 
resolved by ``desk arbitrations,'' meaning that the proceedings were 
resolved solely on the basis of documents submitted by the parties 
(57.8 percent). Approximately one-third (34.0 percent) of proceedings 
were resolved by an in-person hearing, 8.2 percent by telephonic 
hearings, and 2.4 percent through a dispositive motion with no 
hearing.\246\ When there was an in-person hearing, the Study estimated 
that consumers travelled an average of 30 miles and a median of 15 
miles to attend the hearing.\247\
---------------------------------------------------------------------------

    \245\ Id., section 5 at 71-73.
    \246\ Id., section 5 at 69-70.
    \247\ Id., section 5 at 70-71.
---------------------------------------------------------------------------

Consumer Financial Litigation: Frequency and Outcomes (Section 6 of 
Study)
    The Study's review of consumer financial litigation in court 
represents, the Bureau believes, the only analysis of the frequency and 
outcomes of consumer finance cases to date. While there is a large body 
of research regarding cases filed in court generally, preexisting 
studies of consumer finance cases either assessed only the number of 
filings--not typologies and outcomes, as the Study did--or focused on 
the frequency of cases filed under individual statutes.\248\ The Study 
performed this analysis for individual court litigation concerning five 
of the same six product markets as those covered by its analysis of 
consumer financial arbitration: Credit cards, checking accounts and 
debit cards; payday loans; GPR prepaid cards; and private student 
loans. In addition, the study analyzed class cases filed in these five 
markets and also with respect to automobile loans. This analysis 
focused on cases filed from 2010 to 2012, as an analogue to the years 
for which electronic AAA records were available, and captured outcomes 
reflected on dockets through February 28, 2014.
---------------------------------------------------------------------------

    \248\ See, e.g., Thomas E. Willging, Laural L. Hooper & Robert 
J. Niemic, Empirical Study of Class Actions in Four Federal District 
Courts: Final Report to the Advisory Committee on Civil Rules (Fed. 
Judicial Ctr., 1996), available at http://www.uscourts.gov/file/document/empirical-study-class-actions-four-federal-district-courts-final-report-advisory; ACA International, FDCPA Lawsuits Decline 
While FCRA and TCPA Filings Increase, (reporting on January 2014 
case filings under FDCPA as reported by Webrecon), available at 
http://www.acainternational.org/news-fdcpa-lawsuits-decline-while-fcra-and-tcpa-filings-increase-31303.aspx, cited in Study, supra 
note 2, section 6 at 9-11.
---------------------------------------------------------------------------

    The Bureau's class action litigation analysis extended to all 
Federal district courts. To conduct this analysis, the Bureau collected 
complaints concerning these six products using an electronic database 
of pleadings in Federal district courts.\249\ The Bureau also reviewed 
Federal multidistrict litigation (MDL) proceedings to identify 
additional consumer financial complaints filed in Federal court. After 
the Bureau identified its set of Federal class complaints concerning 
the six products and individual complaints concerning the five 
products, it collected the docket sheet from the Federal district court 
in which the complaint was filed in order to analyze relevant case 
events. The Bureau also collected State court class action complaints 
from three States (Utah, Oklahoma, and New York) and seven counties 
that had a public electronic database in which complaints were 
regularly available.\250\ The Bureau determined that it was feasible to 
collect class action complaints from the State and county databases, 
but not complaints in individual cases from those databases.\251\ 
Collectively, this State court sample accounted for 18.1 percent of the 
U.S. population as of 2010.\252\
---------------------------------------------------------------------------

    \249\ LexisNexis CourtLink, http://www.lexisnexis.com/en-us/products/courtlink-for-corporate-or-professionals.page.
    \250\ To determine what counties to include in the data set, the 
Bureau started with the Census Bureau's list of the ten most 
populous U.S. counties. The Bureau then excluded the two counties on 
that list that were already included in the State court sample (two 
in New York City) and one additional county that did not have a 
public electronic database in which complaints were regularly 
available. The remaining seven counties were the counties in the 
Bureau's data set.
    \251\ Study, supra note 2, appendix L at 71.
    \252\ Id., section 6 at 15; see generally id., appendix L.
---------------------------------------------------------------------------

    The Study's analysis of putative class action filings identified 
562 cases filed by consumers from 2010 through 2012 in Federal courts 
and selected State courts concerning the six products, or about 187 per 
year.\253\ Of these 562 putative class cases, 470 were filed in Federal 
court, and the remaining 92 were filed in the State courts in the 
Bureau's State court sample set.\254\ In Federal court class cases, the 
most common claims were under the FDCPA and State UDAP statutes.\255\ 
In State court class cases, State law claims predominated.\256\ All 
Federal and State class cases sought monetary relief. Unlike the AAA 
arbitration rules, court rules of procedure generally do not require 
plaintiffs to identify specific claim amounts in their pleadings. 
Accordingly, the Bureau had limited ability to ascertain the number of 
``small'' claims asserted in class action litigation, as compared to 
the 25 arbitration disputes each year in the markets analyzed in the 
AAA case set that included consumer affirmative claims of $1,000 or 
less.\257\ The Bureau was able to determine, however, that

[[Page 32847]]

more than a third of the 562 class cases sought statutory damages only 
under Federal statutes that cap damages available in class proceedings 
(sometimes accompanied by claims for actual damages). In addition, 
nearly 90 percent of the 562 class cases did not seek statutory damages 
under Federal statutes that do not cap damages available in class 
proceedings.\258\
---------------------------------------------------------------------------

    \253\ Id., section 6 at 6. Due to limitations of the electronic 
database coverage and searchability of State court pleadings, the 
Bureau does not believe the electronic search of U.S. District Court 
pleadings identified a meaningful set of complaints filed in State 
court and subsequently removed to Federal court. Id., section 6 at 
13.
    \254\ Id., section 6 at 6. Because the Bureau's State sample 
accounted for about one-fifth of the U.S. population, the actual 
number of State class filings would have been higher, but the Bureau 
cannot say by how much. Id.
    \255\ Id.
    \256\ Id.
    \257\ Id.
    \258\ Id., section 6 at 22-26. The ``capped'' claims arose from 
five statutory schemes: The Expedited Funds Availability Act, EFTA, 
the FDCPA, TILA (including the Consumer Leasing Act and the Fair 
Credit Billing Act), and ECOA (which provides for punitive and 
actual damages but not statutory damages). Id., section 6 at 23 n.45 
(describing damages limitations). In over half of the cases in which 
Federal statutory damages were sought, the consumers also sought 
actual damages. Id., section 6 at 25 n.48.
---------------------------------------------------------------------------

    As with the Study's analysis of the arbitration proceedings noted 
above, the Study set out a number of explicit and inherent limitations 
to its analysis of litigation outcomes.\259\ While the available data 
indicated that most court cases were resolved by settlement or in a 
manner consistent with a settlement, the terms of any settlement were, 
for reasons noted previously, typically unavailable from the court 
record unless the settlement was on a class basis. The bulk of cases, 
therefore, including individual cases and cases filed as a class action 
but that settled on an individual basis only, resulted in unknown 
substantive outcomes.\260\ Other limitations, however, were unique to 
the review of litigation filings. For instance, the lack of specific 
information about claim amounts in court filings meant that the Study 
was unable to offer a meaningful analysis of recovery rates.\261\ 
Further, some cases in court often could not be reduced to a single 
result because plaintiffs in those cases may have alleged multiple 
claims against multiple defendants and one case can have multiple 
outcomes across the different claims and parties. For this reason, the 
Study reported on several types of outcomes, more than one of which may 
have occurred in any single case.\262\ In addition, while the Bureau 
stated that its data set of State court complaints appears to be the 
most robust available, the Bureau noted the dataset's limitations. For 
example, the three states and seven additional counties from which we 
collected complaints filed in State court may not be representative of 
the consumer financial litigation filed in State courts 
nationwide.\263\
---------------------------------------------------------------------------

    \259\ Id., section 6 at 2-5.
    \260\ Id., section 6 at 8.
    \261\ Id., section 6 at 3.
    \262\ Id., section 6 at 3-4.
    \263\ Id., section 6 at 15 n.34. See also id. at appendix L.
---------------------------------------------------------------------------

    Outside of case outcomes, however, the Study noted that even 
comparing frequency or process across litigation and arbitration 
proceedings was of limited utility.\264\ The Study noted that 
differences in data may result from decisions consumers and companies 
make pertaining to arbitration and litigation, including but not 
limited to whether a relationship would be governed by a pre-dispute 
arbitration agreement; whether a case is filed and if so on a class or 
individual basis; and whether to seek arbitration of cases filed in 
court.\265\ With those caveats noted, the Study indicated that class 
filings result in myriad outcomes. Of the 562 class cases the Study 
identified, 12.3 percent (69 cases) had final class settlements 
approved by February 28, 2014.\266\ As of April 2016, 18.1 percent of 
the filings (102 cases) featured final class settlements or class 
settlement agreements pending approval.
---------------------------------------------------------------------------

    \264\ Id., section 6 at 4.
    \265\ Id.
    \266\ Id., section 6 at 7.
---------------------------------------------------------------------------

    An additional 24.4 percent of the class cases (137 cases) involved 
a non-class settlement and 36.7 percent (206 cases) involved a 
potential non-class settlement.\267\ In 10 percent of the class cases 
(56 cases), the action against at least one company defendant was 
dismissed as the result of a dispositive motion unrelated to 
arbitration.\268\ In 8 percent of the 562 class cases (45 cases), all 
claims against a company were stayed or dismissed based on a company 
filing an arbitration motion.\269\
---------------------------------------------------------------------------

    \267\ Id. The Bureau deemed cases to be potential non-class 
settlements where a named plaintiff withdrew claims or the court 
dismissed claims for failure to serve or failure to prosecute, which 
could have occurred due to a non-class settlement; but the record 
did not disclose that such a settlement occurred. Litigants 
generally do not have an obligation to disclose non-class 
settlements. In addition, they have certain incentives not to do so.
    \268\ Id.
    \269\ Id.
---------------------------------------------------------------------------

    The Study also identified 3,462 individual cases filed in Federal 
court concerning the five product markets studied during the period, or 
1,154 per year.\270\ As with putative class filings, individual 
pleadings provide minimal information about the overall claim amounts 
sought by plaintiffs. Less than 6 percent of the overall individual 
litigation disputes were filed without counsel.\271\
---------------------------------------------------------------------------

    \270\ Id., section 6 at 27-28. As noted above, the Study did not 
include data on individual cases in State courts, and the Study 
evaluated Federal cases in five product markets.
    \271\ Id., section 6 at 7.
---------------------------------------------------------------------------

    The Bureau reviewed outcomes in all of the individual cases from 
four of the five markets studied and a random sample of the cases filed 
in the fifth market, resulting in an analysis of 1,205 cases.\272\ In 
48.2 percent of those 1,205 cases (581 cases), the record reflected 
that a settlement had occurred, though the record only rarely (in 
around 5 percent of those 581 cases) reflected the monetary or other 
relief afforded by the settlement. In 41.8 percent of the 1,205 cases 
(504 cases), the record reflected a withdrawal by at least one consumer 
or another outcome potentially consistent with settlement, such as a 
dismissal for failure to prosecute or failure to serve (but where the 
plaintiff also might have withdrawn with no relief). In 6.8 percent of 
the cases (82 cases), a consumer obtained a judgment against a company 
party through a summary judgment motion, a default judgment (most 
common), or, in two cases, a trial. In 3.7 percent of cases (44 cases), 
the action against at least one company was dismissed via a dispositive 
motion unrelated to arbitration.\273\
---------------------------------------------------------------------------

    \272\ Because the 3,462 cases the Study identified contained a 
high proportion of credit card cases, the Bureau reviewed outcomes 
in a 13.3 percent sample of the credit card cases. Id., section 6 at 
27-28.
    \273\ Id., section 6 at 48.
---------------------------------------------------------------------------

    Individual cases generally resolved more quickly than class cases. 
Aside from cases that were transferred to MDLs, Federal class cases 
closed in a median of approximately 218 days for cases filed in 2010 
and 211 days for cases filed in 2011. Class cases in MDLs were markedly 
slower, closing in a median of approximately 758 days for cases filed 
in 2010 and 538 days for cases filed in 2011. State class cases closed 
in a median of approximately 407 days for cases filed in 2010 and 255 
days for cases filed in 2011.\274\ Aside from a handful of individual 
cases transferred to MDL proceedings, individual Federal cases closed 
in a median of approximately 127 days.\275\
---------------------------------------------------------------------------

    \274\ Id., section 6 at 9.
    \275\ Id.
---------------------------------------------------------------------------

    Notwithstanding the inherent limitations noted above, the Bureau's 
large set of individual and class action litigations allowed the Study 
to explore whether motions seeking to compel arbitration were more 
likely to be asserted in individual filings or in putative class action 
filings. Across its entire set of court filings, the Study found that 
motions seeking to compel arbitration were much more likely to be 
asserted in cases filed as class actions. For most of the cases 
analyzed in the Study, it was not apparent whether the defendants in 
the proceedings had the option of moving to seek arbitration

[[Page 32848]]

proceedings (i.e., the Bureau was unable to determine definitively 
whether the contracts between the consumers and defendants contained 
arbitration agreements). The Bureau, however, was able to limit its 
focus to complaints against companies that it knew to use arbitration 
agreements in their consumer contracts in the year in which the cases 
were filed by limiting its sample set to disputes regarding credit 
cards. In the 40 class cases where the Study was able to ascertain that 
the case was subject to an arbitration agreement, motions seeking 
arbitration were filed 65 percent of the time.\276\ In a comparable set 
of 140 individual disputes, motions seeking arbitration were filed one 
tenth as often, in only 5.7 percent of proceedings.\277\ Overall, the 
Study identified nearly 100 Federal and State class action filings that 
were dismissed or stayed because companies invoked arbitration 
agreements by filing a motion to compel and citing an arbitration 
agreement in support.\278\
---------------------------------------------------------------------------

    \276\ Id., section 6 at 60-61. The court granted motions seeking 
arbitration in 61.5 percent of these disputes.
    \277\ Id., section 6 at 61. The court granted motions seeking 
arbitration in five of the eight individual disputes in which 
motions seeking arbitration were filed (62.5 percent).
    \278\ Id., section 6 at 58 (noting that companies moved to 
compel arbitration in 94 of the 562 class action cases in the 
Bureau's dataset, and that the motion was granted in full or in part 
in 46 cases); id. at 58-59 (noting that the Bureau confirmed that 
motions to compel arbitration were granted in at least 50 additional 
class cases using a methodology described in appendix P).
---------------------------------------------------------------------------

Small Claims Court (Section 7 of Study)
    As described above, Section 2 of the Study found that most 
arbitration agreements in the six markets the Bureau studied contained 
a small claims court ``carve-out'' that typically afforded either the 
consumer or both parties the right to file suit in small claims court 
as an alternative to arbitration. Commenters on the RFI urged the 
Bureau to study the use of small claims courts with respect to consumer 
financial disputes. The Bureau undertook this analysis, published the 
results of this inquiry in the Preliminary Results, and also included 
these results in Section 7 of the Study.
    The Study's review of small claims court filings represents the 
only study of the incidence and typology of consumer financial disputes 
in small claims court to date. Prior research suggests that companies 
make greater use of small claims court than consumers and that most 
company-filed suits in small claims court are debt collection 
cases.\279\ The Study, however, was the first to assess the frequency 
of small claims court filings concerning consumer financial disputes 
across multiple jurisdictions.
---------------------------------------------------------------------------

    \279\ As described in the Study, for example, a 1990 analysis of 
the Iowa small claims court system found that many more businesses 
sued individuals than individuals sued businesses. Suzanne E. Elwell 
& Christopher D. Carlson, The Iowa Small Claims Court: An Empirical 
Analysis, 75 Iowa L. Rev. 433 (1990). In 2007, a working group of 
Massachusetts trial court judges and administrators ``recognized 
that a significant portion of small claims cases involve the 
collection of commercial debts from defendants who are not 
represented by counsel.'' Commonwealth of Massachusetts, District 
Court Department of the Trial Court, Report of the Small Claims 
Working Group, at 3 (Aug. 1, 2007), available at http://www.mass.gov/courts/docs/lawlib/docs/smallclaimreport.pdf.
---------------------------------------------------------------------------

    The Bureau obtained the data for this analysis from online small 
claims court databases operated by States and counties. No centralized 
repository of small claims court filings exists.\280\ The Bureau 
identified 14 State databases that purport to provide statewide data 
and that can be searched by year and party name, although this also 
included the District of Columbia and a database for New York State 
that did not include New York City. This ``State-level sample'' covers 
approximately 52 million people. The Bureau also identified 17 counties 
with small claims court databases that met the same criteria 
(purporting to provide statewide data and being searchable by year and 
party name), including small claims courts for three of five counties 
in New York City. This ``county-level sample'' covers approximately 35 
million people and largely avoids overlap with the State-level 
sample.\281\ The Bureau searched each of these 31 jurisdictions' 
databases for cases involving a set of ten large credit card issuers 
that the Bureau estimated to cover approximately 80 percent of credit 
card balances outstanding.\282\ The Bureau cross-referenced the 
issuers' advertising patterns to confirm that the issuers offered 
credit on a widespread basis to consumers in the jurisdictions the 
Bureau studied.\283\
---------------------------------------------------------------------------

    \280\ Study, supra note 2, section 7 at 5.
    \281\ Id., section 7 at 5-6.
    \282\ Id., section 7 at 6.
    \283\ Preliminary Results, supra note 2, at 156.
---------------------------------------------------------------------------

    The Study estimated that, in the jurisdictions the Bureau studied--
with a combined population of approximately 85 million people--
consumers filed no more than 870 disputes in 2012 against these ten 
institutions \284\ (including the three largest retail banks in the 
United States).\285\ This figure includes all cases in which an 
individual sued an issuer or a party with a name that a consumer might 
use to mean the issuer, without regard to whether the claim was 
consumer financial in nature.
---------------------------------------------------------------------------

    \284\ Study, supra note 2, section 7 at 9.
    \285\ Id., appendix Q at 120-21.
---------------------------------------------------------------------------

    As the Study noted, the number of claims brought by consumers that 
were consumer financial in nature was likely much lower. Out of the 31 
jurisdictions studied, the Bureau was able to obtain underlying case 
documents on a systematic basis for only two jurisdictions: Alameda 
County and Philadelphia County. The Bureau's analysis of all cases 
filed by consumers against the credit card issuers in its sample found 
39 such cases in Alameda County and four such cases in Philadelphia 
County. When the Bureau reviewed the actual pleadings, however, only 
four of the 39 Alameda cases were clearly individuals filing credit 
card claims against one of the ten issuers, and none of the four 
Philadelphia cases were situations where individuals were filing credit 
card claims against one of the ten issuers. This additional analysis 
shows that the Bureau's broad methodology likely significantly 
overstated the actual number of small claims court cases filed by 
consumers against credit card issuers.\286\
---------------------------------------------------------------------------

    \286\ Id., section 7 at 8-9.
---------------------------------------------------------------------------

    The Study also found that in small claims court credit card issuers 
were more likely to sue consumers than consumers were to sue issuers. 
The Study estimated that, in these same jurisdictions, issuers in the 
Bureau's sample filed over 41,000 cases against individuals.\287\ Based 
on the available data, it is likely that nearly all these cases were 
debt collection claims.\288\
---------------------------------------------------------------------------

    \287\ Id., section 1 at 16.
    \288\ Id.
---------------------------------------------------------------------------

Class Action Settlements (Section 8 of Study)
    Section 8 of the Study contains the results of the Bureau's 
quantitative assessment of consumer financial class action settlements. 
As described above, Section 6 of the Study, which analyzes consumer 
financial litigation, includes findings about the frequency with which 
consumer financial class actions are filed and the types of outcomes 
reached in such cases. However, the dataset used for that analysis 
consisted of cases filed between 2010 and 2012 and outcomes of those 
cases through February 28, 2014.
    To better understand the results of consumer financial class 
actions that result in settlements, for Section 8, the Bureau conducted 
a search of class action settlements through an online database for 
Federal district court dockets. The Bureau searched this database using 
terms designed to identify final settlement orders finalized

[[Page 32849]]

from 2008 to 2012 in consumer financial cases. The selection criteria 
for this data set differed from many other sections in the Study, in 
that it was not restricted to a discrete number of consumer financial 
products and services.\289\ Rather, the Bureau reviewed these dockets 
and identified settlements where either: (1) The complaint alleged a 
violation of one of the enumerated consumer protection statutes under 
Title X of the Dodd-Frank Act; or (2) the plaintiffs were primarily 
consumers and the defendants were institutions selling consumer 
financial products or engaged in providing consumer financial services 
(other than consumer investment products and services), regardless of 
the basis of the claim. To the extent that the case involved any such 
consumer financial product or service--not only the six main product 
areas identified in the AAA and litigation sets--it was included in the 
data set.\290\
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    \289\ Because Section 8 of the Study focused on settled class 
action disputes, the Bureau could begin its search with a relatively 
limited set of documents: All Federal class action settlements 
available on the Westlaw docket database, resulting in over 4,400 
disputes settled between January 1, 2008 and December 31, 2012. Id., 
appendix R. In contrast, in exploring filings in Federal and State 
court in Section 6 of the Study, described above, the volume of 
court filings required the Bureau to rely on word searches that 
helped limit the set of documents that the Bureau manually reviewed 
to the six product groups mentioned previously. Id., appendix L.
    \290\ Id., section 8 at 8-11. The Study did, however, exclude 
disputes involving residential mortgage lenders, where arbitration 
provisions are not prevalent, and another subset of disputes 
involving claims against defendants that are not ``covered persons'' 
regulated by the Bureau, such as claims against merchants under the 
Fair and Accurate Credit Transaction Act. Id., section 8 at 9 n.25 
and appendix S.
---------------------------------------------------------------------------

    The set of consumer financial class action settlements overlaps 
with the data set used for the analysis of the frequency and outcomes 
of consumer financial litigation (Section 6 of the Study) insofar as 
cases filed in 2010 through 2012 had settled by the end of 2012. The 
analysis of class action settlements is larger because it encompasses a 
wider time period (settlements finalized from 2008-12) to decrease the 
variance across years that could be created by unusually large 
settlements and to account for the impact of the April 2011 Supreme 
Court decision in Concepcion, which is discussed above.\291\ The Bureau 
used this data set to perform a more detailed analysis of class 
settlement outcomes, including issues such as the number of class 
members eligible for relief in these settlements; the amount and types 
of relief available to class members; the number of class members who 
had received relief and the amount of that relief; and the extent to 
which relief went to attorneys. While several previous studies of class 
action settlements have been published, the Study is the first to 
comprehensively catalogue and analyze class action settlements specific 
to consumer financial markets.\292\
---------------------------------------------------------------------------

    \291\ Concepcion, 563 U.S. at 344.
    \292\ See Study, supra note 2, section 8 at 6-7.
---------------------------------------------------------------------------

    As the Study noted, there were limitations to the Bureau's 
analysis. The Study understates the number of class action settlements 
finalized, and the amount of relief provided, during the period under 
study because the Bureau could not identify class settlements in State 
court class action litigation. (The Bureau determined it was not 
feasible to do so in a systematic way.\293\) Further, the claims data 
on the settlements the Bureau identified is incomplete, as dockets are 
often closed when the final approved settlement order is issued, but 
final settlement orders may be issued in class action settlements 
before claims numbers are final.\294\ In addition, not every settlement 
offered information on every data point or metric that was analyzed; 
the Study accounts for this by referencing, for every metric reported 
on, the number of settlements that provided the relevant number or 
estimate.\295\
---------------------------------------------------------------------------

    \293\ Id., section 8 at 10.
    \294\ Id., section 8 at 11.
    \295\ Id., section 8 at 10.
---------------------------------------------------------------------------

    The Bureau identified 422 Federal consumer financial class 
settlements that were approved between 2008 and 2012, resulting in an 
average of approximately 85 approved settlements per year.\296\ The 
bulk of these settlements (89 percent) concerned debt collection, 
credit cards, checking accounts or credit reporting.\297\ Of these 422 
settlements, the Bureau was able to analyze 419.\298\ The Bureau 
identified the class size or a class size estimate in 78.5 percent of 
these settlements (329 settlements). There were 350 million total class 
members in these settlements. Excluding one large settlement with 190 
million class members (In re TransUnion Privacy Litigation),\299\ these 
settlements included 160 million class members.\300\
---------------------------------------------------------------------------

    \296\ Id., section 8 at 9.
    \297\ Id., section 8 at 11.
    \298\ Id., section 8 at 3 n.4. For the purposes of uniformity in 
analyzing data, the Bureau excluded three cases for which it was 
unable to find data on attorney's fees. These three cases would not 
have affected the results materially. Id.
    \299\ MDL No. 1350 (N.D. Ill. Sept. 17, 2008).
    \300\ Study, supra note 2, section 8 at 3.
---------------------------------------------------------------------------

    These 419 settlements included cash relief, in-kind relief and 
other expenses that companies paid. The total amount of gross relief in 
these 419 settlements--that is, aggregate amounts promised to be made 
available to or for the benefit of damages classes as a whole, 
calculated before any fees or other costs were deducted--was about $2.7 
billion.\301\ This estimate included cash relief of about $2.05 billion 
and in-kind relief of about $644 million.\302\ These figures represent 
a floor, as the Bureau did not include the value, or cost to the 
defendant, of making agreed behavioral changes to business 
practices.\303\
---------------------------------------------------------------------------

    \301\ Id., section 8 at 23-24. The Study defined gross relief as 
the total amount the defendants offered to provide in cash relief 
(including debt forbearance) or in-kind relief and offered to pay in 
fees and other expenses. Id.
    \302\ Id., section 8 at 24.
    \303\ Id., section 8 at 23. Accordingly, where cases did provide 
values for behavioral relief, such values were not included in the 
Study's calculations regarding attorney's fees as a proportion of 
consumer recovery. Id., section 8 at 5 n.10.
---------------------------------------------------------------------------

    Sixty percent of the 419 settlements (251 settlements) contained 
enough data for the Bureau to calculate the value of cash relief that, 
as of the last document in the case files, either had been or was 
scheduled to be paid to class members. Based on these cases alone, the 
value of cash payments to class members was $1.1 billion. This excludes 
payment of in-kind relief and any valuation of behavioral relief.\304\
---------------------------------------------------------------------------

    \304\ Id., section 8 at 28.
---------------------------------------------------------------------------

    For 56 percent of the 419 settlements (236 settlements), the docket 
contained enough data for the Bureau to estimate, as of the date of the 
last filing in the case, the number of class members who were 
guaranteed cash payment because either they had submitted a claim or 
they were part of a class to which payments were to be made 
automatically. In these settlements, 34 million class members were 
guaranteed recovery as of the time of the last document available for 
review, having made claims or participated in an automatic 
distribution.\305\ Of 382 settlements that offered cash relief, the 
Bureau determined that 36.6 percent

[[Page 32850]]

included automatic cash distribution that did not require individual 
consumers to submit a claim form or claim request.\306\
---------------------------------------------------------------------------

    \305\ Id., section 8 at 27. The value of cash payments to class 
members in the 251 settlements described above ($1.1 billion), 
divided by the number of class members in the 236 settlements 
described above (34 million), yields an average recovery figure of 
approximately $32 per class member. Since the publication of the 
Study, some stakeholders have reported on this $32 figure. See, 
e.g., Todd Zywicki & Jason Johnston, A Ban that Will Only Help Class 
Action Lawyers, Mercatus Ctr., Geo. Mason Univ. blog (Mar. 18, 
2016), http://mercatus.org/expert_commentary/ban-will-only-help-class-action-lawyers. The Bureau notes that this figure represents 
an approximation, because the set of 251 settlements for which the 
Bureau had payee information was not completely congruent with the 
set of 236 settlements for which the Bureau had payment information. 
However, the Bureau believes that this $32-per-class-member recovery 
figure is a reasonable estimate.
    \306\ This set of 382 settlements represents the 410 settlements 
in which some form of cash relief was available, excluding 28 cases 
in which cash relief consisted solely of a cy pres payment or reward 
payment to the lead plaintiff(s), because, for class members, these 
cases involve neither automatic nor claims-made distributions. 
Study, supra note 2, section 8 at 19.
---------------------------------------------------------------------------

    The Study also sought to calculate the rate at which consumers 
claimed relief when such a process was required to obtain relief. The 
Bureau was able to calculate the claims rate in 25.1 percent of the 419 
settlements that contained enough data for the Bureau to calculate the 
value of cash relief that had been or was scheduled to be paid to class 
members (105 cases). In these cases, the average claims rate was 21 
percent and the median claims rate was 8 percent.\307\ Rates for these 
cases should be viewed as a floor, given that the claims numbers used 
to calculate these rates may not have been final for many of these 
settlements as of the date of the last document in the docket and 
available for review by the Bureau. The weighted average claims rate, 
excluding the cases providing for automatic relief, was 4 percent 
including the large TransUnion settlement, and 11 percent excluding 
that settlement.\308\
---------------------------------------------------------------------------

    \307\ Study, supra note 2, section 8 at 30.
    \308\ Id. Compared with the ``average claims rate,'' which is 
merely the average of the claims rates in the relevant class 
actions, the ``weighted average claims rate'' factors in the 
relative size of the classes.
---------------------------------------------------------------------------

    The Study also examined attorney's fee awards. Across all 
settlements that reported both fees and gross cash and in-kind relief, 
fee rates were 21 percent of cash relief and 16 percent of cash and in-
kind relief. Here, too, the Study did not include any valuation for 
behavioral relief, even when courts relied on such valuations to 
support fee awards. The Bureau was able to compare fees to cash 
payments in 251 cases (or 60 percent of our data set). In these cases, 
of the total amount paid out in cash by defendants (both to class 
members and in attorney's fees), 24 percent was paid in fees.\309\
---------------------------------------------------------------------------

    \309\ Id., section 8 at 35-36. These percentages likely 
represent ceilings on attorney's fee awards as a percentage of class 
payments, as they will fall as class members may have filed 
additional claims in the settlements after the Bureau's Study period 
ended.
---------------------------------------------------------------------------

    In addition, the Study includes a case study of In re Checking 
Account Overdraft Litigation, MDL 2036 (the Overdraft MDL)--a multi-
district proceeding involving class actions against a number of banks--
to shed further light on the impact of arbitration agreements on the 
resolution of individual and class claims. As of the Study's 
publication, 23 cases had been resolved in the Overdraft MDL. In eleven 
cases, the banks' deposit agreements did not include arbitration 
provisions; in those cases, 6.5 million consumers obtained $377 million 
in relief. In three cases, the defendants' deposit agreements had 
arbitration provisions, but the defendants did not seek arbitration; in 
those cases, 13.7 million consumers obtained $458 million in 
relief.\310\ Another four defendants moved to seek arbitration, but 
ultimately settled; in those cases 8.8 million consumers obtained 
$180.5 million in relief.\311\ Five companies, in contrast, 
successfully invoked arbitration agreements, resulting in the dismissal 
of the cases against them.\312\
---------------------------------------------------------------------------

    \310\ Id., section 8 at 44. One of these three defendants, Bank 
of America, had an arbitration agreement in the applicable checking 
account contract, but, in 2009, began to issue checking account 
agreements without an arbitration agreement. Prior to the transfer 
of the litigation to the MDL, Bank of America moved to seek 
individual arbitration of the dispute; but once the litigation was 
transferred, Bank of America did not renew its motion seeking 
arbitration, instead listing arbitration as an affirmative defense. 
See, e.g., id., section 8 at 41 n.59.
    \311\ Id., section 8 at 45.
    \312\ Id., section 8 at 42.
---------------------------------------------------------------------------

    The Overdraft MDL cases also provided useful insight into the 
extent to which consumers were able to obtain relief via informal 
dispute resolution--such as telephone calls to customer service 
representatives. As the Study notes, in 17 of the 18 Overdraft MDL 
settlements, the amount of the settlement relief was finalized, and the 
number of class members determined, after specific calculations by an 
expert witness who took into account the number and amount of fees that 
had already been reversed based on informal consumer complaints to 
customer service. The expert witness used data provided by the banks to 
calculate the amount of consumer harm on a per-consumer basis; the data 
showed, and the calculations reflected, informal reversals of overdraft 
charges. Even after controlling for these informal reversals, nearly $1 
billion in relief was made available to more than 28 million class 
members in these MDL cases.\313\
---------------------------------------------------------------------------

    \313\ Id., section 8 at 39-46. The case record does not reveal 
how many consumers had received informal relief of some form. It is 
likely that many other class action settlements account for similar 
set-offs for consumers that received relief in informal dispute 
resolution, as settling defendants would have economic incentives to 
avoid double-compensating such plaintiffs.
---------------------------------------------------------------------------

Consumer Financial Class Actions and Public Enforcement (Section 9 of 
Study)
    Section 9 of the Study explores the relationship between private 
consumer financial class actions and public (governmental) enforcement 
actions. As Section 9 notes, some industry trade association commenters 
(commenting on the RFI) urged the Bureau to study whether class actions 
are an efficient and cost-effective mechanism to ensure compliance with 
the law given the authority of public enforcement agencies. 
Specifically, these commenters suggested that the Bureau explore the 
percentage of class actions that are follow-on proceedings to 
government enforcement actions. Other stakeholders have argued that 
private class actions are needed to supplement public enforcement, 
given the limited resources of government agencies, and that private 
class actions may precede public enforcement and, in some cases, spur 
the government to action. To better understand the relationship between 
private class actions and public enforcement, Section 9 analyzes the 
extent to which private class actions overlap with government 
enforcement activity and, when they do overlap, which types of actions 
come first.
    The Bureau obtained data for this analysis in two steps. First, it 
assembled a sample of public enforcement actions and searched for 
``overlapping'' private class actions, meaning that the cases sought 
relief against the same defendants for the same conduct, regardless of 
the legal theory employed in the complaint at issue.\314\ The Bureau 
did this by reviewing Web sites for all Federal regulatory agencies 
with jurisdiction over consumer finance matters and the Web sites of 
the State regulatory and enforcement agencies in the 10 largest and 10 
smallest States and four county agencies in those States to identify 
reports on public enforcement activity over a period of five 
years.\315\

[[Page 32851]]

The Bureau used this sample because it wanted to capture enforcement 
activity by both large and small States and because it wanted to 
capture enforcement activity by city attorneys, in light of the 
increasing work by city attorneys in this regard. The Bureau then 
searched an online database to identify overlapping private cases and 
searched the pleadings in those cases.\316\
---------------------------------------------------------------------------

    \314\ Id., section 9 at 5 and appendix U at 141.
    \315\ The analysis included review of enforcement activity 
conducted by the Bureau, the FTC, the Department of Justice 
(specifically the Civil Division and the Civil Rights Division), the 
Department of Housing and Urban Development, the Office of the 
Comptroller of the Currency, the former Office of Thrift 
Supervision, the Federal Deposit Insurance Corporation, the Federal 
Reserve Board of Governors, the National Credit Union 
Administration. It also included review of proceedings brought by 
State banking regulators, to the extent that they had independent 
enforcement authority, from Alaska, California, the District of 
Columbia, Florida, Georgia, Michigan, New York, Ohio, Pennsylvania, 
Rhode Island, Texas, and Vermont. And the review included State 
attorney general actions brought by California, Texas, New York, 
Florida, Illinois, Pennsylvania, Ohio, Georgia, Michigan, North 
Carolina, New Hampshire, Rhode Island, Montana, Delaware, South 
Dakota, Alaska, North Dakota, the District of Columbia, Vermont, and 
Wyoming. Finally, the analysis included consumer enforcement 
activity from city attorneys from Los Angeles, San Francisco, San 
Diego, and Santa Clara County. Study, supra note 2, appendix U at 
141-42. See supra note 148 (noting that 41 FDIC enforcement actions 
were inadvertently omitted from the results published in Section 9 
of the Study; that the corrected total number of enforcement actions 
reviewed in Section 9 was 1,191; and that other figures, including 
the identification of public enforcement cases with overlapping 
private actions, were not affected by this omission).
    \316\ Study, supra note 2, section 9 at 7.
---------------------------------------------------------------------------

    Second, the Bureau essentially performed a similar search, but in 
reverse: The Bureau assembled a sample of private class actions and 
then searched for overlapping public enforcement actions. This sample 
of private class actions was derived from a sample of the class 
settlements used for Section 8 and a review of the Web sites of leading 
plaintiffs' class action law firms. To find overlapping public 
enforcement actions (typically posted on government agencies' Web 
sites), the Bureau searched online using keywords specific to the 
underlying private action.\317\
---------------------------------------------------------------------------

    \317\ Id., section 9 at 5-7.
---------------------------------------------------------------------------

    The Study found that, where the government brings an enforcement 
action, there is rarely an overlapping private class action. For 88 
percent of the public enforcement actions the Bureau identified, the 
Bureau did not find an overlapping private class action.\318\ The Study 
similarly found that, where private parties bring a class action, an 
overlapping government enforcement action exists in only a minority of 
cases, and rarely exists when the class action settlement is relatively 
small. For 68 percent of the private class actions the Bureau 
identified, the Bureau did not find an overlapping public enforcement 
action. For class action settlements of less than $10 million, the 
Bureau did not identify an overlapping public enforcement action 82 
percent of the time.\319\
---------------------------------------------------------------------------

    \318\ Id., section 9 at 14.
    \319\ Id., section 9 at 4.
---------------------------------------------------------------------------

    Finally, the Study found that, when public enforcement actions and 
class actions overlapped, private class actions tended to precede 
public enforcement actions instead of the reverse. When the Study began 
with government enforcement activity and identified overlapping private 
class actions, public enforcement activity was preceded by private 
activity 71 percent of the time. Likewise, when the Bureau began with 
private class actions and identified overlapping public enforcement 
activity, private class action complaints were preceded by public 
enforcement activity 36 percent of the time.\320\
---------------------------------------------------------------------------

    \320\ Id., section 9 at 4.
---------------------------------------------------------------------------

Arbitration Agreements and Pricing (Section 10 of Study)
    Section 10 of the Study contains the results of a quantitative 
analysis exploring whether arbitration agreements affect the price and 
availability of credit to consumers. Commenters on the Bureau's RFI 
suggested that the Bureau explore whether arbitration agreements lower 
the prices of financial services to consumers. In academic literature, 
some hypothesize that arbitration agreements reduce companies' dispute 
resolution costs and that companies ``pass through'' at least some cost 
savings to consumers in the form of lower prices, while others reject 
this notion.\321\ However, as the Study notes, there is little 
empirical evidence to support either position.\322\
---------------------------------------------------------------------------

    \321\ Compare, e.g., Amy J. Schmitz, Building Bridges to 
Remedies for Consumers in International eConflicts, 34 U. Ark. L. 
Rev. 779, 779 (2012) (``[C]ompanies often include arbitration 
clauses in their contracts to cut dispute resolution costs and 
produce savings that they may pass on to consumers through lower 
prices.'') with Jeffrey W. Stempel, Arbitration, Unconscionability, 
and Equilibrium, The Return of Unconscionability Analysis as a 
Counterweight to Arbitration Formalism, 19 Ohio St. J. on Disp. 
Resol. 757, 851 (2004) (``[T]here is nothing to suggest that vendors 
imposing arbitration clauses actually lower their prices in 
conjunction with using arbitration clauses in their contracts.'').
    \322\ Study, supra note 2, section 10 at 5.
---------------------------------------------------------------------------

    To address this gap in scholarship, the Study explored the effects 
of arbitration agreements on the price and availability of credit in 
the credit card marketplace following a series of settlements in Ross 
v. Bank of America, an antitrust case in which, among other things, 
several credit card issuers were alleged to have colluded to introduce 
arbitration agreements into their credit card contracts.\323\ In these 
Ross settlements (separately negotiated from the settlements pertaining 
to the non-disclosure of currency conversion fees), certain credit card 
issuers agreed to remove arbitration agreements from their consumer 
credit card contracts for at least three and one-half years.\324\ Using 
data from the CCDB,\325\ the Bureau examined whether it could find 
statistically significant evidence, at standard confidence level (95 
percent), that companies that removed their arbitration agreements 
raised their prices (measured by total cost of credit) in a manner that 
was different from that of comparable companies that did not remove 
their agreements. The Bureau was unable to identify any such evidence 
from the data.\326\
---------------------------------------------------------------------------

    \323\ See First Amended Class Action Complaint, In re Currency 
Conversion Antitrust Litig., MDL No. 1409 (S.D.N.Y. June 4, 2009).
    \324\ Study, supra note 2, section 10 at 6.
    \325\ The CCDB provides loan-level information, stripped of 
direct personal identifiers, regarding consumer and small business 
credit card portfolios for a sample of large issuers, representing 
85 to 90 percent of credit card industry balances. Id., section 10 
at 7-11.
    \326\ See id., section 10 at 15. In the Study, the Bureau 
described several limitations of its model. For example, it is 
theoretically possible that the Ross settlers had characteristics 
that would make their pricing different after removal of the 
arbitration agreement, as compared to non-settlers. See id., section 
10 at 15-17.
---------------------------------------------------------------------------

    The Bureau performed a similar inquiry into whether affected 
companies altered the amount of credit they offered consumers, all else 
being equal, in a manner that was statistically different from that of 
comparable companies. The Study notes that this inquiry was subject to 
limitations not applicable to the price inquiry, such as the lack of a 
single metric to define credit availability.\327\ Using two measures of 
credit offered, the Study did not find any statistically significant 
evidence that companies that eliminated arbitration provisions reduced 
the credit they offered.\328\
---------------------------------------------------------------------------

    \327\ Id.
    \328\ Id., section 10 at 15.
---------------------------------------------------------------------------

IV. Post-Study Outreach

A. Stakeholder Outreach Following the Study

    As noted, the Bureau released the Arbitration Study in March 2015. 
After doing so, the Bureau held roundtables with key stakeholders and 
invited them to provide feedback on the Study and how the Bureau should 
interpret its results.\329\ Stakeholders also provided feedback to the 
Bureau or published their own articles commenting on and responding to 
the Study. The Bureau has reviewed all of this correspondence and many 
of these articles in preparing this proposal.
---------------------------------------------------------------------------

    \329\ As noted above, the Bureau similarly invited feedback from 
stakeholders on the Preliminary Report published in December 2013. 
In early 2014, the Bureau also held roundtables with stakeholders to 
discuss the Preliminary Report. See supra Parts III.A-III.C 
(summarizing the Bureau's outreach efforts in connection with the 
Study).
---------------------------------------------------------------------------

B. Small Business Review Panel

    In October 2015, the Bureau convened a Small Business Review Panel 
(SBREFA Panel) with the Chief Counsel for Advocacy of the Small 
Business Administration (SBA) and the Administrator of the Office of 
Information and Regulatory Affairs with the Office of Management and 
Budget

[[Page 32852]]

(OMB).\330\ As part of this process, the Bureau prepared an outline of 
proposals under consideration and the alternatives considered (SBREFA 
Outline), which the Bureau posted on its Web site for review by the 
small financial institutions participating in the panel process, as 
well as the general public.\331\ Working with stakeholders and the 
agencies, the Bureau identified 18 Small Entity Representatives (SERs) 
to provide input to the SBREFA Panel on the proposals under 
consideration. With respect to some markets, the relevant industry 
trade associations reported significant difficulty in identifying any 
small financial services companies that would be impacted by the 
approach described in the Bureau's SBREFA Outline.
---------------------------------------------------------------------------

    \330\ The Small Business Regulatory Enforcement Fairness Act of 
1996 (SBREFA), as amended by section 1100G(a) of the Dodd-Frank Act, 
requires the Bureau to convene a Small Business Review Panel before 
proposing a rule that may have a substantial economic impact on a 
significant number of small entities. See 5 U.S.C. 609(d).
    \331\ Bur. Of Consumer Fin. Prot., Outline of Proposals under 
Consideration for the SBREFA process (Oct. 7, 2015), available at 
http://files.consumerfinance.gov/f/201510_cfpb_small-business-review-panel-packet-explaining-the-proposal-under-consideration.pdf.; Bur. Of Consumer Fin. Prot., Press Release, CFPB 
Considers Proposal to Ban Arbitration Clauses that Allow Companies 
to Avoid Accountability to Their Customers (Oct. 7, 2015), available 
at http://www.consumerfinance.gov/newsroom/cfpb-considers-proposal-to-ban-arbitration-clauses-that-allow-companies-to-avoid-accountability-to-their-customers/. The Bureau also gathered 
feedback on the SBREFA Outline from other stakeholders and members 
of the public, and from the Bureau's Consumer Advisory Board (CAB). 
See http://www.consumerfinance.gov/advisory-groups/advisory-groups-meeting-details/ Video of the Bureau's October 2015 presentation to 
the CAB is available at https://www.youtube.com/watch?v=V11Xbp9z2KQ.
---------------------------------------------------------------------------

    Prior to formally meeting with the SERs, the Bureau held conference 
calls to introduce the SERs to the materials and to answer their 
questions. The SBREFA Panel then conducted a full-day outreach meeting 
with the small entity representatives in October 2015 in Washington, 
DC. The SBREFA Panel gathered information from the SERs at the meeting. 
Following the meeting, nine SERs submitted written comments to the 
Bureau. The SBREFA Panel then made findings and recommendations 
regarding the potential compliance costs and other impacts of the 
proposed rule on those entities. Those findings and recommendations are 
set forth in the Small Business Review Panel Report, which is being 
made part of the administrative record in this rulemaking.\332\ The 
Bureau has carefully considered these findings and recommendations in 
preparing this proposal and addresses certain specific issues that 
concerned the Panel below.
---------------------------------------------------------------------------

    \332\ Bur. Of Consumer Fin. Prot., U.S. Small Bus. Admin. & 
Office of Mgmt. & Budget, Final Report of the Small Business Review 
Panel on CFPB's Potential Rulemaking on Pre-Dispute Arbitration 
Agreements (2015), available at http://files.consumerfinance.gov/f/documents/CFPB_SBREFA_Panel_Report_on_Pre-Dispute_Arbitration_Agreements_FINAL.pdf (hereinafter SBREFA Panel 
Report).
---------------------------------------------------------------------------

C. Additional Stakeholder Outreach

    At the same time that the Bureau conducted the SBREFA Panel, it met 
with other stakeholders to discuss the SBREFA Outline and the impacts 
analysis discussed in that outline. The Bureau convened several 
roundtable meetings with a variety of industry representatives--
including national trade associations for depository banks and non-bank 
providers--and consumer advocates. Bureau staff also presented an 
overview at a public meeting of the Bureau's Consumer Advisory Board 
(CAB) and solicited feedback from the CAB on the proposals under 
consideration. The Bureau expects to meet with Indian tribes and engage 
in consultation pursuant to its Policy for Consultation with Tribal 
Governments after the release of this notice of proposed rulemaking. 
The Bureau specifically solicits comment on this proposal from Tribal 
governments.

V. Legal Authority

    As discussed more fully below, there are two components to this 
proposal: A proposal to prohibit providers from the use of arbitration 
agreements to block class actions (as set forth in proposed Sec.  
1040.4(a)) and a proposal to require the submission to the Bureau of 
certain arbitral records (as set forth in proposed Sec.  1040.4(b). The 
Bureau is issuing the first component of its proposal pursuant to its 
authority under section 1028(b) of the Dodd-Frank Act and is issuing 
the second component of its pursuant to its authority under that 
section and under sections 1022(b) and (c).

A. Section 1028

    Section 1028(b) of the Dodd-Frank Act authorizes the Bureau to 
issue regulations that would ``prohibit or impose conditions or 
limitations on the use of an agreement between a covered person and a 
consumer for a consumer financial product or service providing for 
arbitration of any future dispute between the parties,'' if doing so is 
``in the public interest and for the protection of consumers.'' Section 
1028(b) also requires that ``[t]he findings in such rule shall be 
consistent with the Study.''
    Section 1028(c) further instructs that the Bureau's authority under 
section 1028(b) may not be construed to prohibit or restrict a consumer 
from entering into a voluntary arbitration agreement with a covered 
person after a dispute has arisen. Finally, Section 1028(d) provides 
that, notwithstanding any other provision of law, any regulation 
prescribed by the Bureau under section 1028(b) shall apply, consistent 
with the terms of the regulation, to any agreement between a consumer 
and a covered person entered into after the end of the 180-day period 
beginning on the effective date of the regulation, as established by 
the Bureau. As is discussed below in Part VI, the Bureau finds that its 
proposals relating to pre-dispute arbitration agreements fulfill all 
these statutory requirements and are in the public interest, for the 
protection of consumers, and consistent with the Bureau's Study.\333\
---------------------------------------------------------------------------

    \333\ See infra Part VI.
---------------------------------------------------------------------------

B. Sections 1022(b) and (c)

    Section 1022(b)(1) of the Dodd-Frank Act authorizes the Bureau to 
prescribe rules ``as may be necessary or appropriate to enable the 
Bureau to administer and carry out the purposes and objectives of the 
Federal consumer financial laws, and to prevent evasions thereof.'' 
Among other statutes, Title X of the Dodd-Frank Act is a Federal 
consumer financial law.\334\ Accordingly, in proposing this rulemaking, 
the Bureau is proposing to exercise its authority under Dodd-Frank Act 
section 1022(b) to prescribe rules under Title X that carry out the 
purposes and objectives and prevent evasion of those laws. Section 
1022(b)(2) of the Dodd-Frank Act prescribes certain standards for 
rulemaking that the Bureau must follow in exercising its authority 
under section 1022(b)(1).\335\
---------------------------------------------------------------------------

    \334\ See Dodd-Frank section 1002(14) (defining ``Federal 
consumer financial law'' to include the provisions of Title X of the 
Dodd-Frank Act).
    \335\ See Section 1022(b)(2) Analysis, infra Part V.B. 
(discussing the Bureau's standards for rulemaking under section 
1022(b)(2) of the Dodd-Frank Act).
---------------------------------------------------------------------------

    Dodd-Frank section 1022(c)(1) provides that, to support its 
rulemaking and other functions, the Bureau shall monitor for risks to 
consumers in the offering or provision of consumer financial products 
or services, including developments in markets for such products or 
services. The Bureau may make public such information obtained by the 
Bureau under this section as is in the public interest.\336\ Moreover, 
section 1022(c)(4) of the Act provides that, in conducting such 
monitoring or assessments, the Bureau shall have the authority to 
gather information from time to time regarding the organization,

[[Page 32853]]

business conduct, markets, and activities of covered persons and 
service providers. The Bureau proposes Sec.  1040.4(b) pursuant to the 
Bureau's authority under Dodd-Frank section 1022(c), as well as its 
authority under Dodd-Frank section 1028(b).
---------------------------------------------------------------------------

    \336\ Dodd-Frank section 1022(c)(3)(B).
---------------------------------------------------------------------------

VI. The Bureau's Preliminary Findings That the Proposal is in the 
Public Interest and for the Protection of Consumers

    In this section, the Bureau sets forth how it interprets the 
requirements of Dodd-Frank section 1028(b) and why it preliminarily 
finds that the proposed rule (as set out more fully in proposed Sec.  
1040.4 and the Section-by-Section Analysis thereto) would be in the 
public interest and for the protection of consumers. The Bureau also 
identifies below why it believes that its proposal would be consistent 
with the Study. This section first explains the Bureau's interpretation 
of the legal standard, then discusses its application to the class 
proposal (proposed Sec.  1040.4(a)) and the monitoring proposal 
(proposed Sec.  1040.4(b)).

A. Relevant Legal Standard

    As discussed above in Part V, Dodd-Frank section 1028(b) authorizes 
the Bureau to ``prohibit or impose conditions or limitations on the use 
of'' a pre-dispute arbitration agreement between covered persons and 
consumers if the Bureau finds that doing so ``is in the public interest 
and for the protection of consumers.'' This requirement can be read as 
either a single integrated standard or as two separate tests (that a 
rule be both ``in the public interest'' and ``for the protection of 
consumers''), and the Bureau must exercise its expertise to determine 
which reading best effectuates the purposes of the statute. As 
explained below, the Bureau is proposing to interpret the two phrases 
as related but conceptually distinct. The Bureau invites comment on 
this proposed interpretation, and specifically on whether ``in the 
public interest'' and ``for the protection of consumers'' should be 
interpreted as having independent meanings or as a single integrated 
standard.
    The Dodd-Frank section 1028(b) statutory standard parallels the 
standard set forth in Dodd-Frank section 921(b), which authorizes the 
SEC to ``prohibit or impose conditions or limitations on the use of'' a 
pre-dispute arbitration agreement between investment advisers and their 
customers or clients if the SEC finds that doing so ``is in the public 
interest and for the protection of investors.'' That language in turn 
parallels language in the Securities Act and the Exchange Act, which, 
for over 80 years, have authorized the SEC to adopt certain regulations 
or take certain actions if doing so is ``in the public interest and for 
the protection of investors.'' \337\ The SEC has routinely applied the 
Exchange Act language without delineating separate tests or definitions 
for the two phrases.\338\ There is an underlying logic to such an 
approach since investors make up a substantial portion of ``the 
public'' whose interests the SEC is charged with advancing. This is 
even more true for section 1028, since nearly every member of the 
public is a consumer. Furthermore, in exercising its roles and 
responsibilities as the Consumer Financial Protection Bureau, the 
Bureau ordinarily approaches the idea of consumer protection 
holistically in accordance with the broad range of factors it generally 
considers under Title X of Dodd-Frank, which as discussed further below 
include systemic impacts and other public concerns. Therefore, if the 
Bureau were to treat the standard as a single, unitary test, the 
Bureau's analysis would encompass the public interest, as defined by 
the purposes and objectives of the Bureau and informed by the Bureau's 
particular expertise in the protection of consumers.
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    \337\ See, e.g., Securities Act of 1933, Public Law 73 22, 
section 3(b)(1) (1933) 15 U.S.C 77c(b)(1); Securities Exchange Act 
of 1934, Public Law 73 291, section 12(k)(1) (1934) 15 U.S.C. 
78(k)(l).
    \338\ Under the Exchange Act, the SEC has often found that its 
actions are ``for the protection of investors and in the public 
interest'' without delineating separate standards or definitions for 
the two phrases. See, e.g., In re: Bravo Enterprises Ltd., SE.C. 
Release No. 75775, Admin. Proc. No. 3-16292 at 6 (Aug. 27, 2015) 
(applying ``the `public interest' and `protection of investors' 
standards'' in light ``of their breadth [and] supported by the 
structure of the Exchange Act and Section 12(k)(1)'s legislative 
history''). See also SEC Release No. 5627 (Oct. 14, 1975) (``Whether 
particular disclosure requirements are necessary to permit the 
Commission to discharge its obligations under the Securities Act and 
the Securities Exchange Act or are necessary or appropriate in the 
public interest or for the protection of investors involves a 
balancing of competing factors.'').
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    The Bureau believes, however, that treating the two phrases as 
separate tests may ensure a fuller consideration of all relevant 
factors. This approach would also be consistent with canons of 
construction that counsel in favor of giving the two statutory phrases 
discrete meaning notwithstanding the fact that the two phrases in 
section 1028(b)--``in the public interest'' and ``for the protection of 
consumers''--are inherently interrelated for the reasons discussed 
above.\339\ Under this framework, the Bureau would be required to 
exercise its expertise to determine what each standard requires because 
both terms are ambiguous. In doing so, and as described in more detail 
below, the Bureau would look, using its expertise, to the purposes and 
objectives of Title X to inform the ``public interest'' prong,\340\ 
while relying on its expertise in consumer protection to define the 
``consumer protection'' prong.
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    \339\ See Hibbs v. Winn, 542 U.S. 88, 101 (2004); Bailey v. 
United States, 516 U.S. 137, 146 (1995).
    \340\ This approach is also consistent with precedent holding 
that the statutory criterion of ``public interest'' should be 
interpreted in light of the purposes of the statute in which the 
standard is embedded. See Nat'l Ass'n for Advancement of Colored 
People v. FPC, 425 U.S. 662, 669 (1976).
---------------------------------------------------------------------------

    Under this approach the Bureau believes that ``for the protection 
of consumers'' in the context of section 1028 should be read to focus 
specifically on the effects of a regulation in promoting compliance 
with laws applicable to consumer financial products and services and 
avoiding or preventing harm to the consumers who use or seek to use 
those products. In contrast, under this approach the Bureau would read 
section 1028(b)'s ``in the public interest'' prong, consistent with the 
purposes and objectives of Title X, to require consideration of the 
entire range of impacts on consumers and impacts on other elements of 
the public. These interests encompass not just the elements of consumer 
protection described above, but also secondary impacts on consumers 
such as effects on pricing, accessibility, and the availability of 
innovative products, as well as impacts on providers, markets, the rule 
of law and accountability, and other general systemic 
considerations.\341\ The Bureau is proposing to adopt this 
interpretation, giving the two phrases independent meaning.\342\
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    \341\ Treating consumer protection and public interest as two 
separate but overlapping criteria is consistent with the FCC's 
approach to a similar statutory requirement. See Verizon v. FCC, 770 
F.3d 961, 964 (D.C. Cir. 2014).
    \342\ The Bureau believes that findings sufficient to meet the 
two tests explained here would also be sufficient to meet a unitary 
interpretation of the phrase ``in the public interest and for the 
protection of consumers,'' because any set of findings that meets 
each of two independent criteria would necessarily meet a single 
test combining them.
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    The Bureau's interpretations of each phrase standing alone are 
informed by several considerations. As noted above, for instance, the 
Bureau would look to the purposes and objectives of Title X to inform 
the ``public interest'' prong. The Bureau's starting point in defining 
the public interest is therefore section 1021(a) of the Act, which 
describes the Bureau's purpose as follows: ``The Bureau shall seek to 
implement and, where applicable, enforce Federal

[[Page 32854]]

consumer financial law consistently for the purpose of ensuring that 
all consumers have access to markets for consumer financial products 
and services and that markets for consumer financial products and 
services are fair, transparent, and competitive.'' \343\ Similarly, 
section 1022 of the Act authorizes the Bureau to prescribe rules to 
``carry out the purposes and objectives of the Federal consumer 
financial laws and to prevent evasions thereof'' and provides that in 
doing so the Bureau shall consider ``the potential benefits and costs'' 
of a rule both ``to consumers and covered persons, including the 
potential reduction of access by consumers to consumer financial 
products or services.'' Section 1022 also directs the Bureau to consult 
with the appropriate Federal prudential regulators or other Federal 
agencies ``regarding consistency with prudential, market, or systemic 
objectives administered by such agencies,'' and to respond in the 
course of rulemaking to any written objections filed by such 
agencies.\344\ The Bureau interprets these purposes and requirements to 
reflect a recognition and expectation that the administration of 
consumer financial protection laws is integrated with the advancement 
of a range of other public goals such as fair competition, innovation, 
financial stability, the rule of law, and transparency.
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    \343\ Section 1021(b) goes on to authorize the Bureau to 
exercise its authorities for the purposes of ensuring that, with 
respect to consumer financial products and services: (1) Consumers 
are provided with timely and understandable information to make 
responsible decisions about financial transactions; (2) consumers 
are protected from unfair, deceptive, or abusive acts and practices 
and from discrimination; (3) outdated, unnecessary, or unduly 
burdensome regulations are regularly identified and addressed in 
order to reduce unwarranted regulatory burdens; (4) Federal consumer 
financial law is enforced consistently, without regard to the status 
of a person as a depository institution, in order to promote fair 
competition; and (5) markets for consumer financial products and 
services operate transparently and efficiently to facilitate access 
and innovation.
    \344\ Dodd-Frank sections 1022(b)(2)(B) and (C).
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    Accordingly, the Bureau proposes to interpret the phrase ``in the 
public interest'' to condition any regulation on a finding that such 
regulation serves the public good based on an inquiry into the 
regulation's implications for the Bureau's purposes and objectives. 
This inquiry would require the Bureau to consider benefits and costs to 
consumers and firms, including the more direct consumer protection 
factors noted above, and general or systemic concerns with respect to 
the functioning of markets for consumer financial products or services, 
the broader economy, and the promotion of the rule of law and 
accountability.\345\
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    \345\ The Bureau uses its expertise to balance competing 
interests, including how much weight to assign each policy factor or 
outcome.
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    With respect to ``the protection of consumers,'' as explained 
above, the Bureau ordinarily considers its roles and responsibilities 
as the Consumer [Financial] Protection Bureau to encompass attention to 
the full range of considerations relevant under Title X without 
separately delineating some as ``in the public interest'' and others as 
``for the protection of consumers.'' However, given that section 
1028(b) pairs ``the protection of consumers'' with the ``public 
interest,'' the latter of which the Bureau interprets to include the 
full range of considerations encompassed in Title X, the Bureau 
believes, based on its expertise, that ``for the protection of 
consumers'' should be read more narrowly. Specifically the Bureau 
believes ``for the protection of consumers'' should be read to focus on 
the effects of a regulation in promoting compliance with laws 
applicable to consumer financial products and services, and avoiding or 
preventing harm to consumers that may result from violations of those 
laws or other consumer rights.
    The Bureau therefore proposes to interpret the phrase ``for the 
protection of consumers'' in section 1028--which relates specifically 
to arbitration agreements--to condition any regulation on a finding 
that such regulation would serve to deter and redress violations of the 
rights of consumers who are using or seek to use a consumer financial 
product or service. The focus under this prong of the test, as the 
Bureau is proposing to interpret it, would be exclusively on impacts on 
the level of compliance with relevant laws, including deterring 
violations of those laws, and on consumers' ability to obtain redress 
or relief. This would not include consideration of other benefits or 
costs or more general or systemic concerns with respect to the 
functioning of markets for consumer financial products or services or 
the broader economy. For instance, a regulation would be ``for the 
protection of consumers'' if it adopted direct requirements or 
augmented the impact of existing requirements to ensure that consumers 
receive ``timely and understandable information'' in the course of 
financial decision making, or to guard them from ``unfair, deceptive, 
or abusive acts and practices and from discrimination.'' \346\ The 
Bureau proposes to interpret the phrase ``for the protection of 
consumers'' as it is used in section 1028 as not in and of itself 
requiring the Bureau to consider more general or systemic concerns with 
respect to the functioning of the markets for consumer financial 
products or services or the broader economy,\347\ which the Bureau will 
consider under the public interest prong.
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    \346\ Dodd-Frank section 1021(b)(1) and (2).
    \347\ See Whitman v. Am. Trucking Ass'ns, Inc., 531 U.S. 457, 
465 (2001).
---------------------------------------------------------------------------

    As discussed above, the Bureau provisionally believes that giving 
separate consideration to the two prongs best ensures that the purpose 
of the statute is effectuated. This proposed interpretation would 
prevent the Bureau from acting solely based on more diffuse public 
interest benefits, absent a meaningful direct impact on consumer 
protection as described above. Likewise, the proposed interpretation 
would prevent the Bureau from issuing arbitration regulations that 
would undermine the public interest as defined by the full range of 
factors discussed above, despite some advancement of the protection of 
consumers.
    The Bureau invites comment on its proposed interpretation of 
section 1028(b). The Bureau specifically invites comment on whether 
``in the public interest'' and ``for the protection of consumers'' 
should be interpreted as having independent meaning and, if so, whether 
the Bureau's proposed interpretation of each effectuates the purpose of 
this provision. The Bureau also invites comments on whether a single, 
unitary standard would lead to a substantially different interpretation 
or application.\348\
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    \348\ As noted above, if the Bureau were to treat the standard 
as a single, unitary test, it would involve the same considerations 
as described above, while allowing for a more flexible balancing of 
the various considerations. The Bureau accordingly believes that 
findings sufficient to meet the two tests explained here would also 
be sufficient to meet a unitary test, because any set of findings 
that meets each of two independent criteria would necessarily meet a 
more flexible single test combining them.
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B. Preliminary Factual Findings From the Study and the Bureau's Further 
Analysis

    The Study provides a factual predicate for assessing whether 
particular proposals would be in the public interest and for the 
protection of consumers. This Part sets forth the preliminary factual 
findings that the Bureau has drawn from the Study and from the Bureau's 
additional analysis of arbitration agreements and their role in the 
resolution of disputes involving consumer financial products and 
services. The Bureau emphasizes that each of these findings is 
preliminary

[[Page 32855]]

and subject to further consideration in light of the comments received 
and the Bureau's ongoing analysis. The Bureau invites comments on all 
aspects of the discussion of the factual findings that follows.
    The Bureau preliminarily concludes, consistent with the Study and 
based on its experience and expertise, that: (1) The evidence is 
inconclusive on whether individual arbitration conducted during the 
Study period is superior or inferior to individual litigation in terms 
of remediating consumer harm; (2) individual dispute resolution is 
insufficient as the sole mechanism available to consumers to enforce 
contracts and the laws applicable to consumer financial products and 
services; (3) class actions provide a more effective means of securing 
relief for large numbers of consumers affected by common legally 
questionable practices and for changing companies' potentially harmful 
behaviors; (4) arbitration agreements block many class action claims 
that are filed and discourage the filing of others; and (5) public 
enforcement does not obviate the need for a private class action 
mechanism.
A Comparison of the Relative Fairness and Efficiency of Individual 
Arbitration and Individual Litigation Is Inconclusive
    The benefits and drawbacks of arbitration as a means of resolving 
consumer disputes have long been contested. The Bureau does not believe 
that, based on the evidence currently available to the Bureau, it can 
determine whether the mechanisms for the arbitration of individual 
disputes between consumers and providers of consumer financial products 
and services that existed during the Study period are more or less fair 
or efficient in resolving these disputes than leaving these disputes to 
the courts.\349\
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    \349\ See Study, supra note 2, section 6 at 2-5 (explaining why 
``[c]omparing frequency, processes, or outcomes across litigation 
and arbitration is especially treacherous''). The Bureau did not 
study and is not evaluating post-dispute agreements to arbitrate 
between consumers and companies.
---------------------------------------------------------------------------

    The Bureau believes that the predominant administrator of consumer 
arbitration agreements is the AAA, which has adopted standards of 
conduct that govern the handling of disputes involving consumer 
financial products and services. The Study further showed that these 
disputes proceed relatively expeditiously, the cost to consumers of 
this mechanism is modest, and at least some consumers proceed without 
an attorney. The Study also showed that those consumers who do prevail 
in arbitration may obtain substantial individual awards--the average 
recovery by the 32 consumers who won judgments on their affirmative 
claims was nearly $5,400.\350\
---------------------------------------------------------------------------

    \350\ See id., section 5 at 41.
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    At the same time, the Study showed that a large percentage of the 
relatively small number of AAA individual arbitration cases are 
initiated by the consumer financial product or service companies or 
jointly by companies and consumers in an effort to resolve debt 
disputes. The Study also showed that companies prevail more frequently 
on their claims than consumers \351\ and that companies are almost 
always represented by attorneys. Finally, the Study showed that 
consumers prevailed and were awarded payment of their attorney's fees 
by companies in 14.4 percent of the 146 disputes resolved by 
arbitrators in which attorneys represented consumers, while companies 
prevailed and were awarded payment of their attorney's fees by 
consumers in 14.1 percent of 341 disputes resolved by arbitrators.\352\
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    \351\ Id., section 5 at 39, 43. The Study did not suggest why 
companies prevail more often than consumers. While some stakeholders 
have suggested that arbitrators are biased--citing, for example, 
that companies are repeat players or often the party effectively 
chooses the arbitrator--other stakeholders and research suggests 
that companies prevail more often than consumers because of a 
difference in the relative merits of such cases.
    \352\ Study, supra note 2, section 5 at 79-80. Note that the 
number of attorney's fee requests was not recorded.
---------------------------------------------------------------------------

    Arbitration procedures are privately determined and can pose risks 
to consumers. For example, until it was effectively shut down by the 
Minnesota Attorney General, NAF was the predominant administrator for 
certain types of arbitrations. As set out in Part II.C above, NAF 
stopped conducting consumer arbitrations in response to allegations 
that its ownership structure gave rise to an institutional conflict of 
interest. The Study showed isolated instances of arbitration agreements 
containing provisions that, on their face, raise significant concerns 
about fairness to consumers similar to those raised by NAF, such as an 
agreement designating a tribal administrator that does not appear to 
exist and agreements specifying NAF as a provider even though NAF no 
longer handles consumer finance arbitration, making it difficult for 
consumers to resolve their claims.\353\
---------------------------------------------------------------------------

    \353\ Id., section 2 at 35. On the issue of NAF, see Wert v. 
ManorCare of Carlisle PA, LLC, 124 A.2d 1248, 1250 (Pa. 2015) 
(affirming denial of motion to compel arbitration after finding 
arbitration agreement provision that named NAF as administrator as 
``integral and non-severable''); but see Wright v. GGNSC Holdings 
LLC, 808 N.W.2d 114, 123 (S.D. 2011) (designation of NAF as 
administrator was ancillary and arbitration could proceed before a 
substitute). On the issue of tribal administrators, see Jackson v. 
Payday Financial, LLC, 764 F.3d 765 (7th Cir. 2014) (refusing to 
compel arbitration because tribal arbitration procedure was 
``illusory'').
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Individual Dispute Resolution Is Insufficient In Enforcing Laws 
Applicable to Consumer Financial Products and Services and Contracts
    Whatever the relative merits of individual proceedings pursuant to 
an arbitration agreement compared to individual litigation, the Bureau 
preliminarily concludes, based upon the results of the Study, that 
individual dispute resolution mechanisms are an insufficient means of 
ensuring that consumer financial protection laws and consumer financial 
contracts are enforced.
    The Study showed that consumers rarely pursue individual claims 
against their companies, based on its survey of the frequency of 
consumer claims, collectively across venues, in Federal courts, small 
claims courts, and arbitration. First, the Study showed that consumer-
filed Federal court lawsuits are quite rare compared to the total 
number of consumers of financial products and services. As noted above, 
from 2010 to 2012, the Study showed that only 3,462 individual cases 
were filed in Federal court concerning the five product markets studied 
during the period, or 1,154 per year.\354\ Second, the Study showed 
that relatively few consumers file claims against companies in small 
claims courts even though most arbitration agreements contain carve-
outs permitting such court claims. In particular, as noted above, the 
Study estimated that, in the jurisdictions that the Bureau studied, 
which cover approximately 85 million people, there were only 870 small 
claims disputes in 2012 filed by an individual against any of the 10 
largest credit card issuers, several of which are also among the 
largest banks in the

[[Page 32856]]

United States.\355\ Extrapolating those results to the population of 
the United States suggests that, at most, a few thousand cases at most 
are filed per year in small claims court by consumers concerning 
consumer financial products or services.
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    \354\ Study, supra note 2, section 6 at 27. As noted above, the 
Study did not include data on individual cases in State courts due 
to database limitations. One industry publication reports that 
litigation in court involving three consumer protection statutes 
occurs at a rate on the order of about 1,000 cases per month. 
WebRecon, LLC, Out Like a Lion . . . Debt Collection Litigation & 
CFPB Complaint Statistics, Dec 2015 & Year in Review, available at 
http://webrecon.com/out-like-a-lion-debt-collection-litigation-cfpb-complaint-statistics-dec-2015-year-in-review/ (some cases included 
in this analysis would not be covered by the class proposal). 
Relatedly, some critics of the Study contend that the number of 
Federal court individual cases is low because Federal court 
litigation is complex and consumers need an attorney to proceed. 
Whatever the reason, even fewer consumers pursue claims in 
arbitration. See Study, supra note 2, section 5 at 19.
    \355\ The figure of 870 claims includes all cases in which an 
individual sued a credit card issuer, without regard to whether the 
claim itself was consumer financial in nature. As the Study noted, 
the number of claims brought by consumers that were consumer 
financial in nature was likely much lower. Additionally, the Study 
cross-referenced its sample of small claims court filings with 
estimated annual volume for credit card direct mail using data from 
a commercial provider. The volume numbers showed that issuers 
collectively had a significant presence in each jurisdiction, at 
least from a marketing perspective. See Study, supra note 2, 
appendix Q at 113-14.
---------------------------------------------------------------------------

    A similarly small number of consumers file consumer financial 
claims in arbitration. The Study shows that from the beginning of 2010 
to the end of 2012 consumers filed 1,234 individual arbitrations with 
the AAA, or about 400 per year across the six markets studied.\356\ 
Given that the AAA was the predominant administrator identified in the 
arbitration agreements studied, the Bureau believes that this 
represents substantially all consumer finance arbitration disputes that 
were filed during the Study period. Similarly, JAMS (the second largest 
provider of consumer finance arbitration \357\) has reported to Bureau 
staff that it handled about 115 consumer finance arbitrations in 2015.
---------------------------------------------------------------------------

    \356\ See id. and section 5 at 19. Of the 1,234 consumer-
initiated arbitrations, 565 involved affirmative claims only by the 
consumer with no dispute of alleged debt; another 539 consumer 
filings involved a combination of an affirmative consumer claim and 
disputed debt. Id., section 5 at 31. This equates to 1,104 filings 
(out of 1,234), or 368 per year, in which the consumer asserted an 
affirmative claim at all. Id. In 737 claims filed by either party 
(or just 124 consumer filings), the only action taken by the 
consumer was to dispute the alleged debt. Id. Another 175 were 
mutually filed by consumers and companies. Id., section 5 at 19.
    \357\ Id., section 4 at 2.
---------------------------------------------------------------------------

    Collectively, as set out in the Study, the number of all individual 
claims filed by consumers in individual arbitration, individual 
litigation in Federal court, or small claims court is relatively low in 
the markets analyzed in the Study compared to the hundreds of millions 
of consumers of various types of financial products and services.\358\ 
The Bureau believes that the relatively low numbers of formal 
individual claims may be explained, at least in part, by the fact that 
legal harms are often difficult for consumers to detect without the 
assistance of an attorney. For example, some harms, by their nature, 
such as discrimination or non-disclosure of fees, can only be 
discovered and proved by reference to how a company treats many 
individuals or by reference to information possessed only by the 
company, not the consumer.\359\ Individual dispute resolution requires 
a consumer to recognize his or her own right to seek redress for any 
harm the consumer has suffered or otherwise to seek a dispensation from 
the company.
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    \358\ For instance, at the end of 2015, there were 600 million 
consumer credit card accounts, based on the total number of loans 
outstanding from Experian & Oliver Wyman Market Intelligence 
Reports. Experian & Oliver Wyman, 2015 Q4 Experian--Oliver Wyman 
Market Intelligence Report: Bank Cards Report, at 1-2 (2015) and 
Experian & Oliver Wyman, 2015 Q4 Experian--Oliver Wyman Market 
Intelligence Report: Retail Lines, at 1-2 (2015). In the market for 
consumer deposits, one of the top checking account issuers serviced 
30 million customer accounts (JPMorgan Chase Co., Inc., 2010 Annual 
Report, at 36) and in the Overdraft MDL settlements, 29 million 
consumers with checking accounts were eligible for relief. Study, 
supra note 2, section 8 at 40.
    \359\ For example, proving a claim of lending discrimination in 
violation of ECOA typically requires a showing of disparate 
treatment or disparate impact, which require comparative proof that 
members of a protected group were treated or impacted worse than 
members of another group. U.S. Dep't of Housing & Urban Dev., Policy 
Statement on Discrimination in Lending, 59 FR 18266, 18268 (Apr. 15, 
1994). Evidence of overt discrimination can also prove a claim of 
discrimination under ECOA but such proof is very rare and thus such 
claims are typically proven through showing disparate treatment or 
impact. See Cherry v. Amoco Oil Co., 490 F. Supp. 1026, 1030 (N.D. 
Ga. 1980). Systemic overcharges may also be difficult to resolve on 
an individual basis. See, e.g., Stipulation and Agreement of 
Settlement at 30, In re Currency Conversion Fee Multidistrict 
Litigation, MDL 1409 (S.D.N.Y. July 20, 2006) (noting that the 
plaintiffs class allegations that the network and bank defendants 
``inter alia . . . have conspired, have market power, and/or have 
engaged in Embedding, otherwise concealed and/or not adequately 
disclosed the pricing and nature of their Foreign Transaction 
procedures; and, as a result, holders of Credit Cards and Debit 
Cards have been overcharged and are threatened with future harm.'').
---------------------------------------------------------------------------

    The Bureau also believes that the relatively low number of formally 
filed individual claims may be explained by the low monetary value of 
the claims that are often at issue.\360\ Claims involving products and 
services that would be covered by the proposed rule often involve small 
amounts. When claims are for small amounts, there may not be 
significant incentives to pursue them on an individual basis. As one 
prominent jurist has noted, ``Only a lunatic or a fanatic sues for 
$30.'' \361\ In other words, it is impractical for the typical consumer 
to incur the time and expense of bringing a formal claim over a 
relatively small amount of money, even without a lawyer. Congress and 
the Federal courts developed procedures for class litigation in part 
because ``the amounts at stake for individuals may be so small that 
separate suits would be impracticable.'' \362\ Indeed, the Supreme 
Court has explained that:
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    \360\ One indicator of the relative size of consumer injuries in 
consumer finance cases is the amount of relief provided by financial 
institutions in connection with complaints submitted through the 
Bureau's complaint process. In 2015, approximately 6 percent of 
company responses to complaints for which the company reported 
providing monetary relief (approximately 9,730 complaints) were 
closed ``with monetary relief'' for a median amount of $134 provided 
per consumer complaint. See Bureau of Consumer Fin. Prot., Consumer 
Response Annual Report (2016) available at http://files.consumerfinance.gov/f/201604_cfpb_consumer-response-annual-report-2015.pdf. The Bureau's complaint process and informal dispute 
resolution mechanisms at other agencies do not adjudicate claims; 
instead, they provide an avenue through which a consumer can 
complain to a provider. Complaints submitted to the Bureau benefit 
the public and the financial marketplace by informing the Bureau's 
work; however, the Bureau's complaint system is not a substitute for 
consumers' rights to bring formal disputes, and relief is not 
guaranteed.
    \361\ Carnegie v. Household Int'l, Inc., 376 F.3d 656, 661 (7th 
Cir. 2004).
    \362\ 1966 Adv. Comm. Notes, 28 U.S.C. App. 161.

[t]he policy at the very core of the class action mechanism is to 
overcome the problem that small recoveries do not provide the 
incentive for any individual to bring a solo action prosecuting his 
or her own rights. A class action solves this problem by aggregating 
the relatively paltry potential recoveries into something worth 
someone's (usually an attorney's) labor.\363\
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    \363\ Amchem Prod., 521 U.S. at 617 (citing Mace v. Van Ru 
Credit Corp., 109 F.3d 338, 344 (7th Cir. 1997)).

    The Study's survey of consumers in the credit card market reflects 
this dynamic. Very few consumers said they would pursue a legal claim 
if they could not get what they believed were unjustified or 
unexplained fees reversed by contacting a company's customer service 
department.\364\
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    \364\ Just 2.1 percent of respondents said that they would have 
sought legal advice or would have sued with or without an attorney 
for unrecognized fees on a credit card statement. Study, supra note 
2, section 3 at 17-18. Similarly, many financial services companies 
opt not to pursue small claims against consumers; for example, these 
providers do not actively collect on small debts because it is not 
worth their time and expense given the small amounts at issue and 
their low likelihood of recovery.
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    Even when consumers are inclined to pursue individual claims, 
finding attorneys to represent them can be challenging. Attorney's fees 
for an individual claim can easily exceed expected individual 
recovery.\365\ A

[[Page 32857]]

consumer must pay his or her attorney in advance or as the work is 
performed unless the attorney is willing to take a case on 
contingency--a fee arrangement where an attorney is paid as a 
percentage of recovery, if any--or rely on an award of defendant-paid 
attorney's fees, which are available under many consumer financial 
statutes. Attorneys for consumers often are unwilling to rely on either 
contingency-based fees or statutory attorney's fees because in each 
instance the attorney's fee is only available if the consumer prevails 
on his or her claim (which always is at least somewhat uncertain). 
Consumers may receive free or reduced-fee legal services from legal 
services organizations, but these organizations frequently are unable 
to provide assistance to many consumers because of the high demand for 
their services and limited resources.\366\
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    \365\ For instance, in the Study's analysis of individual 
arbitrations, the average and median recoveries by consumers winning 
awards on their affirmative claims were $5,505 and $2,578, 
respectively. Study, supra note 2, section 5 at 39. By way of 
comparison (attorney's fees data limited to successful affirmative 
consumer claims was not reported in the Study), the average and 
median consumer attorney's fees awards were $8,148 and $4,800, 
respectively, across cases involving judgments favoring consumers 
involving affirmative relief or disputed debt relief. Id., section 5 
at 79. Note that the Study did not address the number of cases in 
which attorney's fees were requested by the consumer. Id.
    \366\ There is a large unmet need for legal services for low-
income individuals who want legal help in consumer cases. By one 
estimate, roughly 130,000 consumers (for all goods, not just 
financial products or services) were turned away because the legal 
aid service providers serving low-income individuals did not have 
enough staff or capacity to help. See Legal Services Corp., 
Documenting the Justice Gap In America, at 7 (2007), available at 
http://www.lsc.gov/sites/default/files/LSC/images/justicegap.pdf. 
See also Helynn Stephens, Price of Pro Bono Representations: 
Examining Lawyers' Duties and Responsibilities, 71 Def. Counsel J. 
71 (2004) (``Legal services programs are able to assist less than a 
fifth of those in need.'').
---------------------------------------------------------------------------

    For all of these reasons, the Bureau preliminarily finds that the 
relatively small number of arbitration, small claims, and Federal court 
cases reflects the insufficiency of individual dispute resolution 
mechanisms alone to enforce effectively the law for all consumers of a 
particular provider, including Federal consumer protection laws and 
consumer finance contracts.
    Some stakeholders claim that the low total volume of individual 
claims, in litigation or arbitration, found by the Study is 
attributable not to inherent deficiencies in the individual dispute 
resolution systems but rather to the success of informal dispute 
resolution mechanisms in resolving consumers' complaints. On this 
theory, the cases that actually are litigated or arbitrated are 
outliers--consumer disputes in which the consumer either bypassed the 
informal dispute resolution system or the system somehow failed to 
produce a resolution. The Bureau does not find this argument 
persuasive.
    The Bureau understands that when an individual consumer complains 
about a particular charge or other practice, it is often in the 
financial institution's interest to provide the individual with a 
response explaining that charge and, in some cases, a full or partial 
refund or reversal of the practice, in order to preserve the customer 
relationship.\367\ But, as already noted, many consumers may not be 
aware that a company is behaving in a particular way, let alone that 
the company's conduct is unlawful. Thus, an informal dispute resolution 
system is unlikely to provide relief to all consumers who are adversely 
affected by a particular practice. Indeed, the Bureau has observed that 
most of its enforcement actions deliver relief to consumers who have 
not received it already through informal dispute resolution.
---------------------------------------------------------------------------

    \367\ This is true, of course, only to the extent that consumers 
have a choice of financial service providers. The Bureau notes that 
consumers do not have such a choice in some important consumer 
financial markets, including in markets where servicing or debt 
collection is outsourced by a creditor and the consumer typically 
does not have the ability to choose a different servicer or debt 
collector.
---------------------------------------------------------------------------

    Moreover, even where consumers do make complaints informally, the 
outcome of these disputes may be unrelated to the underlying merits of 
the claim.\368\ Nothing requires a company to resolve a dispute in a 
particular consumer's favor, to award complete relief to that consumer, 
to decide the same dispute in the same way for all consumers, or to 
reimburse consumers who had not raised their dispute to a company. 
Regardless of the merits of or similarities between the complaints, the 
company retains discretion to decide how to resolve them. For example, 
if two consumers bring the same dispute to a company, the company might 
resolve the dispute in favor of a consumer who is a source of 
significant profit while it might reach a different resolution for a 
less profitable consumer.\369\ Indeed, in the Bureau's experience it is 
quite common for financial institutions (especially the larger ones 
that interact with the greatest number of consumers) to maintain 
profitability scores on each customer and to cabin the discretion of 
customer service representatives to make adjustments on behalf of 
complaining consumers based on such scores.\370\
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    \368\ Commentators have advised that concerns other than whether 
a violation occurred should be considered when resolving complaints. 
See, e.g., Claes Fornell & Birger Wernerfelt, Defensive Marketing 
Strategy by Customer Complaint Management: A Theoretical Analysis, 
24 J. of Marketing Res. 337, 339 (1987) (``[W]e show that by 
attracting and resolving complaints, the firm can defend against 
competitive advertising and lower the cost of offensive marketing 
without losing market share.''); Mike George, Cosmo Graham & Linda 
Lennard, Complaint Handling: Principles and Best Practice at 6 
(2007) (discussing research that shows that customers who complain 
are more likely to re-purchase the good or service than those who do 
not and noting that additional research that shows that good 
complaints culture and processes may well lead to improved financial 
performance), available at https://www2.le.ac.uk/departments/law/research/cces/documents/Complainthandling-PrinciplesandBestPractice-April2007_000.pdf.
    \369\ One study showed that one bank refunded the same fee at 
varying rates depending on the branch location that a consumer 
visited. Jason S. Johnston & Todd Zywicki, The Consumer Financial 
Protection Bureau's Arbitration Study: A Summary And Critique 
(Mercatus Center 2015), http://mercatus.org/publication/consumer-financial-protection-bureau-arbitration-study-summary-critique 
(explaining that the process undertaken by one bank in 2014 
``resulted in its refunding 94 percent of wire transfer fees that 
customers complained about at its San Antonio office and 75 percent 
of wire transfer fees that customers complained about at its 
Brownsville office. During that same period, the bank responded to 
complaints about inactive account fees by making refunds 74 percent 
of the time in San Antonio but only 56 percent of the time in 
Houston.''). The study does not provide information on how many of 
the bank's customers complained or why some customers were 
successful in receiving refunds while others were not.
    \370\ See, e.g., Rick Brooks, Banks and Others Base Their 
Service On Their Most-Profitable Customers, Wall St. J. (Jan. 7, 
1999), available at http://www.wsj.com/articles/SB915601737138299000 
(explaining how some banks will treat profitable customers 
differently from unprofitable ones and citing examples of banks 
using systems to routinely allow customer service representatives to 
deny fee refund and other requests from unprofitable customers while 
granting those from profitable customers).
---------------------------------------------------------------------------

    The example of overdraft reordering, which was included in the 
Study's discussion of the Overdraft MDL, provides an example of the 
limitations of informal dispute resolution and the important role of 
class litigation in more effectively resolving consumers' 
disputes.\371\ In the cases included in the MDL, certain customers 
lodged informal complaints with banks about the overdraft fees. The 
subsequent litigation revealed that banks had been reordering 
transactions from chronological order to an order based on highest to 
lowest amount to maximize the number of overdraft fees. As far as the 
Bureau is aware, these informal complaints, while resulting in some 
refunds to the relatively small number of consumers who complained, 
produced no changes in the bank practices in dispute. Ultimately, after 
taking into account the relief that consumers had obtained informally, 
29 million bank customers received cash relief in court settlements 
because they did not receive relief through internal dispute resolution 
processes.\372\
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    \371\ Study, supra note 2, section 8 at 39-46.
    \372\ In total, 18 banks paid $1 billion in settlement relief to 
over 29 million consumers. Study, supra note 2, section 8 at 43-46 
(explaining how the settlements were distributed). These settlement 
figures were net of any payments made to consumers via informal 
dispute resolution; an expert witness calculated the sum of fees 
attributable to the overdraft reordering practice and subtracted all 
refunds paid to complaining consumers. The net amount was the 
baseline from which settlement payments were negotiated. See id., 
section 8 at 45 n.61 & 46 n.63.

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[[Page 32858]]

    Thus, while informal dispute resolution systems may provide some 
relief to some consumers--and while some stakeholders have argued that 
arbitration agreements may even enhance the incentives that companies 
have to resolve those informal disputes that do arise on a case-by-case 
basis--the Bureau preliminarily finds that these systems alone are 
inadequate mechanisms to resolve potential violations of the law that 
broadly apply to many or all customers of a particular company for a 
given product or service.
    The Bureau's experience and expertise includes fielding consumer 
complaints, supervising a vast array of markets for consumer financial 
products and services, and enforcing Federal consumer financial laws. 
Based on this experience and expertise, the Bureau believes that even 
though systemic factors may discourage individual consumers from filing 
small claims, the ability of consumers to pursue these claims is 
important. Based on its experience and expertise, the Bureau 
preliminarily finds that small claims can reflect significant aggregate 
harms when the potentially illegal practices affect many consumers, 
and, more generally, the market for consumer financial products and 
services. For example, a single improper overdraft fee may only 
``cost'' a consumer $35, but if that fee is charged to tens of 
thousands of consumers, it can have a substantial impact on both the 
consumers on whom such fees are imposed and the profits of the company 
retaining the fees.\373\ When all or most providers engage in a similar 
practice, the market for that product or service is significantly 
impacted.
---------------------------------------------------------------------------

    \373\ For example, in Gutierrez v. Wells Fargo Bank, N.A., the 
court explained that the defendant bank's own documents established 
that it stood to make $40 million more per year from overdraft fees 
by reordering transaction high-to-low rather than chronologically. 
See Gutierrez v. Wells Fargo Bank, N.A., 730 F. Supp. 2d 1080, 1097 
(N.D. Cal. 2010). For further procedural history for Gutierrez, see 
infra note 377.
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Class Actions Provide a More Effective Means of Securing Significant 
Consumer Relief and Changing Companies' Potentially Illegal Behavior
    The Bureau preliminarily finds, based on the results of the Study 
and its further analysis, that the class action procedure provides an 
important mechanism to remedy consumer harm. The Study showed that 
class action settlements are a more effective means through which large 
numbers of consumers are able to obtain monetary and injunctive relief 
in a single case.
    In the five-year period studied, 419 Federal consumer finance class 
actions reached final class settlements. These settlements involved, 
conservatively, about 160 million consumers and about $2.7 billion in 
gross relief of which, after subtracting fees and costs, $2.2 billion 
was available to be paid to consumers in cash relief or in-kind 
relief.\374\ Further, as set out in the Study, nearly 24 million class 
members in 137 settlements received automatic distributions of class 
settlements, meaning they received payments without having to file 
claims.\375\ In the five years studied, at least 34 million consumers 
received $1.1 billion in actual or guaranteed payments.\376\ In 
addition to the monetary relief awarded in class settlements, consumers 
also received non-monetary relief from those settlements. Specifically, 
the Study showed that there were 53 settlements covering 106 million 
class members that mandated behavioral relief that required changes in 
the settling companies' business practices. The Bureau preliminarily 
finds, based on its experience and expertise--including its review and 
monitoring of these settlements and its enforcement of Federal consumer 
financial law through both litigation and supervisory actions--that 
behavioral relief could be, when provided, at least as important for 
consumers as monetary relief. Indeed, prospective relief can provide 
more relief to affected consumers, and for a longer period, than 
retrospective relief because a settlement period is limited (and 
provides a fixed amount of cash relief), whereas injunctive relief 
lasts for years or may be permanent.
---------------------------------------------------------------------------

    \374\ The number of consumers (160 million) obtaining relief in 
class settlements excludes a single settlement that involved a class 
of 190 million consumers. Study, supra note 2, section 8 at 15. 
Section 8 of the Study, on Federal class action settlements, covered 
a wider range of products than the analysis of individual 
arbitrations in Section 5 of the Study, which was limited to credit 
cards, checking/debit cards, payday and similar loans, general 
purpose reloadable prepaid cards, private student loans, and auto 
purchase loans. Id., section 5 at 17-18. If the class settlement 
results were narrowed to the six product markets covered in Section 
5, the Study would have identified $1.8 billion in total relief 
($1.79 billion in cash and $9.4 million of in-kind relief), or $360 
million per year, covering 78.8 million total class members, or 15.8 
million members per year.
    \375\ Id., section 8 at 27.
    \376\ As noted above, see supra note 369 and accompanying text, 
researchers have calculated that, on average, each consumer that 
received monetary relief during the period studied received $32. 
Because the settlements providing data on payments (a figure defined 
in the Study, supra note 2, section 8 at 4-5 n.9, to include relief 
provided by automatic distributions or actually claimed by class 
members in claims made processes) to class members did not overlap 
completely with the settlements providing data on the number of 
class members receiving payments, this calculation is incorrect. 
Nonetheless, the Bureau believes that it is a roughly accurate 
approximation.
---------------------------------------------------------------------------

    The Bureau further preliminarily finds that, based on its 
experience and expertise, class action settlements also benefit 
consumers not included in a particular class settlement because, as a 
result of a class settlement, companies frequently change their 
practices in ways that benefit consumers who are not members of the 
class. In resolving a class action, many companies stop potentially 
illegal practices either as part of the settlement or because the class 
action itself informed them of a potential violation of law and of the 
risk of future liability if they continued the conduct in question. Any 
consumer impacted by that practice--whether or not the consumer is in a 
particular class--would benefit from an enterprise-wide change. For 
example, if a class settlement only involved consumers who had 
previously purchased a product, a change in conduct by the company 
might benefit consumers who were not included in the class settlement 
but who purchase the product or service in the future.
    One example of this appears to have occurred with respect to 
overdraft practices. In Gutierrez v. Wells Fargo, the court ruled that 
certain Wells Fargo overdraft practices were illegal.\377\ Although 
that judgment was limited to a California class of Wells consumers, 
Wells thereafter appears to have also changed its overdraft practices 
in other jurisdictions in the United States.\378\ Similarly, the Bureau 
bases this preliminary finding on its understanding of the important 
benefits

[[Page 32859]]

gained by consumers through behavioral changes companies agree to make 
that benefit both existing customers and future customers. This is, for 
example, why the Bureau frequently tries to secure such behavioral 
relief from companies through its own enforcement actions. Although the 
value of these behavioral changes (and those, not considered behavioral 
relief in the Study, where companies simply agree to comply with the 
law going forward) are typically not quantified in case records, the 
Bureau believes their value to consumers are significant.\379\
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    \377\ The original bench trial awarded ``a certified class of 
California depositors'' both cash and injunctive relief based on 
violations of California law. Gutierrez v. Wells Fargo Bank, N.A., 
730 F. Supp. 2d 1080, 1082 (N.D. Cal. 2010). The Ninth Circuit 
reversed part of the judgment on the basis that the some parts of 
California law--as applied to overdraft reordering practices--were 
preempted by the National Bank Act, and remanded to the district 
court for it to determine if relief could still be granted under the 
parts of California law that were not preempted. 704 F.3d 712, 730 
(9th Cir. 2012). Upon remand, the district court reinstated the 
judgment, including restitution and injunctive relief. 944 F. Supp. 
2d 819 (N.D. Cal. 2013). The Ninth Circuit upheld parts of the 
reinstated judgment, permitting a judgment against Wells and 
upholding the award of restitution, but vacating for the grant of 
injunctive relief as overly broad. 589 Fed. Appx. 824 (9th Cir. Oct. 
29, 2014), cert. denied,--S.Ct.--, 2016 WL 1278632 (Apr. 4, 2016).
    \378\ See Danielle Douglas-Gabriel, Big banks have been gaming 
your overdraft fees to charge you more money, Wash. Post Wonkblog 
(July 17, 2014), https://www.washingtonpost.com/news/wonk/wp/2014/07/17/wells-fargo-to-make-changes-to-protect-customers-from-overdraft-fees/ (``Half of the country's big banks play this game, 
but one has decided to stop: Wells Fargo. Starting in August, the 
bank will process customers' checks in the order in which they are 
received, as it already does with debit card purchases and ATM 
withdrawals.'').
    \379\ As is discussed below in the Section 1022(b)(2) Analysis, 
the Study uses ``behavioral relief'' to refer to class settlements 
which contained a commitment by a defendant to alter its behavior 
prospectively, for example by promising to change business practices 
in the future or implementing new compliance programs. The Bureau 
did not include a defendant's agreement to just comply with the law, 
without more, as behavioral relief (Study, supra note 2, appendix S 
at 135).
---------------------------------------------------------------------------

    The Bureau has considered stakeholder arguments that class actions 
are not effective at securing relief and behavior changes for large 
numbers of consumers because the Study showed that about three-fifths 
of cases filed as seeking class treatment are resolved through 
voluntary individual settlements (or an outcome consistent with a 
voluntary individual settlement).\380\ The Bureau believes, however, 
that the best measure of the effectiveness of class actions for all 
consumers is the absolute relief they provide, and not the proportion 
of putative class cases that result in individual settlements or 
potential individual settlements. The fact that many cases filed as 
putative class cases do not result in class relief does not change the 
significance of that relief in the cases that do provide it. Moreover, 
when a named plaintiff agrees in a putative class action to an 
individual settlement, by rule it occurs before certification of a 
class, and thus does not prevent other consumers from resolving similar 
claims, including by filing their own class actions. The Bureau 
believes that, beyond the named plaintiff, an individual settlement of 
a class case does not bind other consumers or affect their right to 
pursue their claims; in this sense they are no worse off than if the 
individually settled case had never been filed at all. Accordingly, the 
Bureau believes it more appropriate to evaluate class actions based on 
the magnitude of relief that these cases, collectively (including the 
many that do result in class settlements) deliver to consumers.\381\ 
Thus, the Bureau preliminarily finds that the concerns raised by 
stakeholders regarding the predominance of individual outcomes in cases 
filed as putative class cases are not substantial enough for the Bureau 
to find that the class proposal would be ineffective in providing 
consumer relief.
---------------------------------------------------------------------------

    \380\ Study, supra note 2, section 6 at 37.
    \381\ Stakeholders similarly assert that class actions are 
ineffective because the fact most are resolved on an individual 
basis indicates that they were unlikely to result in class 
certification. The Bureau is not aware of evidence to support this 
assertion. Cases settle on an individual basis for a variety of 
reasons and, as noted, whether and why they are resolved does not 
alter the value of aggregate relief awarded in cases that settle on 
a classwide basis.
---------------------------------------------------------------------------

    For these reasons, the Bureau preliminarily finds that the class 
action mechanism is a more effective means of providing relief to 
consumers for violations of law or contract affecting groups of 
consumers than other mechanisms available to consumers, such as 
individual formal adjudication (either through judicial or arbitral 
fora) or informal efforts to resolve disputes.
Arbitration Agreements Block Some Class Action Claims and Suppress the 
Filing of Others
    The Bureau preliminarily finds, based upon the results of the 
Study, that arbitration agreements have the effect of blocking a 
significant portion of class action claims that are filed and of 
suppressing the filing of others.
    As noted above in Part III, the Study showed that arbitration 
agreements are widespread in consumer financial markets and hundreds of 
millions of consumers use consumer financial products or services that 
are subject to arbitration agreements. Arbitration agreements give 
companies that offer or provide consumer financial products and 
services the contractual right to block the filing of class actions in 
both court and arbitration. When a plaintiff files a class action in 
court regarding a claim that is subject to a valid and applicable 
arbitration agreement, a defendant has the ability to request that the 
court dismiss or stay the litigation in favor of arbitration. If the 
court grants such a dismissal or stay in favor of arbitration, the 
class case could, in principle, be refiled as a class arbitration.\382\ 
However, the Study showed that, depending on the market, between 85 to 
100 percent of the contracts with arbitration agreements the Bureau 
reviewed expressly precluded an arbitration proceeding on a class 
basis. The Study did not identify any contracts with arbitration 
agreements that explicitly permitted class arbitration. The combined 
effect of these provisions is to enable companies that adopt 
arbitration agreements effectively to bar all class proceedings, 
whether in litigation or arbitration, to which the agreement applies.
---------------------------------------------------------------------------

    \382\ In class arbitration, a class representative brings an 
arbitration on behalf of many individual, similarly-situated 
plaintiffs. The Study identified only two class arbitrations filed 
before the AAA from 2010 to 2012. Study, supra note 2, section 5 at 
86.
---------------------------------------------------------------------------

    As set out above in Part II.C, the public filings of some companies 
confirm that the effect--indeed, often the purpose--of such provisions 
is to allow companies to shield themselves from class liability.\383\ 
Some have stated, both to the Bureau and in public statements (such as 
those made by small entity representatives in the SBREFA Panel hearing 
on arbitration), that companies adopt arbitration agreements for the 
purpose of blocking private class action filings. Some trade 
association stakeholders have further argued that the class action 
waiver is integral to offering individual arbitration: They see little 
point in permitting individuals to bring arbitrations if other 
similarly situated consumers will simply join a class action in any 
case.
---------------------------------------------------------------------------

    \383\ See supra note 90.
---------------------------------------------------------------------------

    The Study showed that defendants are not reluctant to invoke 
arbitration agreements to block putative class actions and were 
successful in many cases. The Study recorded nearly 100 Federal and 
State class action filings that were dismissed or stayed because 
companies invoked arbitration agreements by filing a motion to compel 
arbitration and citing an arbitration agreement in support.\384\ The 
Study further indicates that companies were at least 10 times more 
likely to move to stay or dismiss a case filed as a class action on the 
basis of an arbitration agreement than non-class cases.\385\ In other 
words, companies used arbitration agreements far more frequently to 
block class actions than to move individual court cases to arbitration. 
The Bureau preliminarily finds that the above data combined indicate 
that the primary reason many companies include arbitration agreements 
in their contracts is to discourage the filing of class actions and 
block those that are filed. While companies might perceive other

[[Page 32860]]

benefits of maintaining arbitration agreements for individual disputes, 
for many, those benefits seem ancillary to their ability to limit class 
actions.
---------------------------------------------------------------------------

    \384\ Section 6 of the Study identified two sources of data on 
motions to compel arbitration. First, the Study identified 562 
Federal and State putative class action filings in six products 
markets from 2010 to 2012, and in 94 of these cases, defendants 
filed motions to compel arbitration; 46 of these motions were 
granted, and the rest were denied or still pending at the time the 
Study was published. See Study, supra note 2, section 6 at 58. 
Further, the Study identified at least 50 more putative class cases 
pertaining to consumer financial products or services (including 
more than the initial six markets studied) that were dismissed 
pursuant to a motion to compel arbitration that cited the Concepcion 
case. Id., section 6 at 58-59.
    \385\ Id., section 6 at 57-58.
---------------------------------------------------------------------------

    The analysis of cases in the Study further supports the Bureau's 
preliminary finding that arbitration agreements are frequently used to 
prevent class actions from proceeding. While the Study reports that 
motions to compel arbitration were filed in only 16.7 percent of class 
actions filed from 2010 to 2012, the Bureau was unable to determine in 
what percentage of class action cases analyzed defendants had 
arbitration agreements and were in a position to invoke an arbitration 
agreement.\386\ However, in a sample of class action cases against 
credit card companies known to have arbitration agreements, motions to 
compel arbitration were filed 65 percent of the time and, when filed, 
they were successful 61.5 percent of the time.\387\
---------------------------------------------------------------------------

    \386\ Id., section 6 at 56.
    \387\ Id., section 6 at 61.
---------------------------------------------------------------------------

    The Bureau further preliminarily finds that when courts grant a 
motion to dismiss class claims based on arbitration agreements, the 
large number of consumers who would have constituted the putative class 
are unlikely to pursue the claims on an individual basis and are even 
less likely to pursue them in class arbitration. For instance, for the 
46 class cases identified in the Study in which a motion to compel 
arbitration was granted, there was only an indication of 12 subsequent 
arbitration filings in the court dockets or the AAA Case Data, only two 
of which the Study determined were filed as putative class 
arbitrations.\388\ More broadly, the overall volume of AAA consumer-
filed claims--just over 400 individual cases per year--suggests that 
individual arbitration is not the destination for any significant 
number of putative class members. The case study of opt-outs from 
settlements in the Preliminary Results of the Study further 
demonstrates this.\389\ It reviewed Federal and State class action 
settlements that involved 13 million class members eligible for $350 
million in relief from defendants that used arbitration agreements in 
their consumer contracts, all naming the AAA as the arbitration 
administrator.
---------------------------------------------------------------------------

    \388\ See id., section 6 at 57-58.
    \389\ See Preliminary Results, supra note 2, appendix A at 102-
04.
---------------------------------------------------------------------------

    In these settlements, 3,605 of the 13 million class members chose 
to opt out of receiving cash relief.\390\ Nevertheless, just three out 
of these 3,605 individuals appear to have taken the opportunity to file 
arbitrations before the AAA against the same settling defendants.\391\ 
Although the case study is just one example, the Bureau has little 
reason to believe consumers in similar cases would refile in 
arbitration.
---------------------------------------------------------------------------

    \390\ See id. at 104.
    \391\ As the Preliminary Results make clear, at most three out 
of 3,605 individuals filed claims before the AAA against the same 
defendants. It is not clear from the records provided to the Bureau 
whether these three consumers pressed the same claims in arbitration 
that formed the basis of the class settlement. Preliminary Results, 
supra note 2, at 104 n.225.
---------------------------------------------------------------------------

    In addition to blocking class actions that are actually filed, the 
Bureau preliminarily finds that arbitration agreements inhibit a number 
of putative class action claims from being filed at all for several 
reasons. Plaintiffs and their attorneys may choose not to file such 
claims because arbitration agreements substantially lower the 
possibility of classwide relief. Given that and the fact that attorneys 
incur costs in preparing and litigating a case (and consumers rarely 
pay these costs up front in a class action) attorneys may decline to 
take such cases at all if they calculate that they will incur costs 
with little chance of recouping them. Not surprisingly, when a consumer 
or a lawyer considers whether to file a class action, the existence of 
an arbitration agreement that, if invoked, would effectively eliminate 
the possibility for a successful class claim likely discourages many of 
these suits from being filed at all. While it is difficult to measure 
the full scope of claims that are never filed because of arbitration 
agreements, stakeholders that surveyed attorneys found that they 
frequently turn away cases--both individual and class--when arbitration 
agreements were present.\392\ In some markets, consumers could not file 
class action cases after market participants included arbitration 
agreements in their consumer contracts.\393\
---------------------------------------------------------------------------

    \392\ In response to the Bureau's Request for Information in 
connection with the Study, one consumer group commenter submitted a 
2012 survey conducted of 350 consumer attorneys. See Nat'l Ass'n of 
Consumer Advocates, Consumer Attorneys Report: Arbitration clauses 
are everywhere, consequently causing consumer claims to disappear, 
at 5 (2012), available at http://www.consumeradvocates.org/sites/default/files/NACA2012BMASurveyFinalRedacted.pdf (hereinafter NACA 
Survey). Over 80 percent of those attorneys reported turning down at 
least one case they believed to be meritorious because the presence 
of an arbitration agreement would make filing the case futile and of 
those, the median number of cases each attorney turned away was 
t=10. Id. at 5. The NACA survey indicates that consumer attorneys 
believe that the presence of arbitration agreements often inhibit 
them from filing complaints, including class actions, on behalf of 
consumers. The Bureau notes that this survey has methodological 
limits. The survey does not purport to indicate the total number of 
cases turned away in aggregate. And the survey does not examine 
whether a case that was turned down by a single attorney was 
subsequently filed by another attorney.
    \393\ See, e.g., Ross v. American Express Co., 35 F.Supp.3d 407, 
433 (S.D.N.Y. 2014) (reviewing standing of credit card holders 
claiming injury from inclusion of pre-dispute arbitration agreements 
and noting that ``loss of the services of class action lawyers to 
monitor and challenge Issuing Bank behavior and the loss of the 
opportunity to go to court'' were a prospective injury for standing 
purposes).
---------------------------------------------------------------------------

Public Enforcement Is Not a Sufficient Means To Enforce Consumer 
Protection Laws and Consumer Finance Contracts
    The Bureau preliminarily concludes, based upon the results of the 
Study and its own experience and expertise, that public enforcement is 
not itself a sufficient means to enforce consumer protection laws and 
consumer finance contracts.
    Most consumer protection statutes provide explicitly for private as 
well as public enforcement mechanisms. For some laws, only public 
enforcement is available because lawmakers sometimes decide that 
certain factors favor allowing only government enforcement. For other 
laws, lawmakers decide there should be both types of enforcement--
public and private. On several occasions, Congress expressly recognized 
the role class actions can have in effectuating Federal consumer 
financial protection statutes. As described in Part II, for instance, 
Congress amended TILA in 1974 to limit damages in class cases to the 
lesser of $100,000 or 1 percent of the creditor's net worth. In reports 
and floor debates concerning the 1974 TILA amendments, the Senate 
reasoned that the damages cap it imposed would balance the objectives 
of providing adequate deterrence while appropriately limiting awards 
(because it viewed potential TILA class damages as too high).\394\ Two 
years later, when the 1976 TILA amendments increased the cap to the 
lesser of $500,000 or 1 percent of the creditor's net worth, the 
primary basis for the increase was the need to adequately deter large 
creditors.\395\
---------------------------------------------------------------------------

    \394\ Class Actions Under the Truth in Lending Act, 83 Yale L.J. 
1410, 1429 (1974) (``Two major concerns were expressed by the Senate 
in its report and floor debates on this amendment. First, the Senate 
took note of the trend away from class actions after [Ratner v. 
Chemical Bank New York Trust Co., 329 F. Supp. 270 (S.D.N.Y. 1971)] 
and the need for potential class action liability to encourage 
voluntary creditor compliance. The Senate considered individual 
actions an insufficient deterrent to large creditors, and so imposed 
a $100,000 or one percent of net worth ceiling to provide sufficient 
deterrence without financially destroying the creditor.'').
    \395\ S. Rept. 94-590, Consumer Leasing Act of 1976, at 8 (``The 
recommended $500,000 limit, coupled with the 1 percent formula, 
provides, we believe, a workable structure for private enforcement. 
Small businesses are protected by the 1 percent measure, while a 
potential half million dollar recovery ought to act as a significant 
deterrent to even the largest creditor.''); see also H. Rep. 95-
1315, Electronic Fund Transfer Act (1978) at 15.

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[[Page 32861]]

    The market for consumer finance products and services is vast, 
encompassing trillions of dollars of assets and revenue and tens if not 
hundreds of thousands of companies. As discussed further in the Section 
1022(b)(2) Analysis, this proposal alone would cover about 50,000 
firms. And this proposal would leave unaffected the single largest 
consumer financial market--the mortgage market--because Congress 
expressly prohibited most arbitration agreements in that market in the 
Dodd-Frank Act.\396\
---------------------------------------------------------------------------

    \396\ Dodd-Frank section 1414.
---------------------------------------------------------------------------

    In contrast, the resources of public enforcement agencies are 
limited. For example, the Bureau enforces over 20 separate Federal 
consumer financial protection laws with respect to every depository 
institution with assets of more than $10 billion and all non-depository 
institutions. Yet the Bureau has about 1,500 employees, only some of 
whom work in its Division of Supervision, Enforcement, and Fair 
Lending, which supervises for compliance and enforces violations of 
these laws.\397\ Furthermore, the Bureau is the only federal agency 
exclusively focused on enforcing these laws. Other financial 
regulators, including Federal prudential regulators and State agencies, 
have authority to supervise and enforce other laws with respect to the 
entities within their jurisdictions, but they face resource constraints 
as well. Further, those other regulators often have many different 
mandates, only part of which is consumer protection. By authorizing 
private enforcement of the consumer financial statutes, Congress and 
the states have allowed for more comprehensive enforcement of these 
statutory schemes.
---------------------------------------------------------------------------

    \397\ Bureau of Consumer Fin. Prot., Semi-Annual Report of the 
CFPB, at 131 (2015), available at http://files.consumerfinance.gov/f/201511_cfpb_semi-annual-report-fall-2015.pdf (noting that CFPB had 
1,529 staff as of September 30, 2015).
---------------------------------------------------------------------------

    The Study showed private class actions complement public 
enforcement rather than duplicate it. In 88 percent of the public 
enforcement actions the Bureau identified, the Bureau did not find an 
overlapping private class action.\398\ Similarly, in 68 percent of the 
private class actions the Bureau identified, the Bureau did not find an 
overlapping public enforcement action. Moreover, in a sample of class 
action settlements of less than $10 million, there was no overlapping 
public enforcement action 82 percent of the time.\399\ Even where there 
was overlap, private class actions tended to precede public enforcement 
actions, roughly two-thirds of the time.
---------------------------------------------------------------------------

    \398\ Study, supra note 2, section 9 at 4.
    \399\ Id.
---------------------------------------------------------------------------

    Finally, the Bureau notes that as a general matter public 
authorities cannot enforce private contracts or violations of the 
common law affecting consumers. For those types of claims, private 
class actions are not just complementary but often the only likely 
means by which consumers can enforce their rights.

C. The Bureau Preliminarily Finds That the Class Proposal Is in the 
Public Interest and for the Protection of Consumers

    The prior section articulated the Bureau's preliminary findings 
that individual dispute resolution mechanisms are an insufficient means 
of enforcing consumer financial laws and contracts; public enforcement 
cannot be relied upon to fully and effectively enforce all of these 
laws and private contracts; and class actions, when not blocked by 
arbitration agreements, provide a valuable complement to public 
enforcement and a means of providing substantial relief to consumers. 
In light of the Study, the Bureau's experience and expertise, and the 
Bureau's analysis and findings as discussed above, the Bureau 
preliminarily finds that precluding providers from blocking consumer 
class actions through the use of arbitration agreements would better 
enable consumers to enforce their rights under Federal and State 
consumer protection laws and the common law and obtain redress when 
their rights are violated. Allowing consumers to seek relief in class 
actions, in turn, would strengthen the incentives for companies to 
avoid potentially illegal activities and reduce the likelihood that 
consumers would be subject to such practices in the first instance. The 
Bureau preliminarily finds that both of these outcomes resulting from 
allowing consumers to seek class action relief would be in the public 
interest and for the protection of consumers.
    The analysis below discusses the bases for these findings in the 
reverse order, beginning with a discussion of the protection of 
consumers and then addressing the public interest. As discussed further 
below, the Bureau recognizes that creating these incentives and causing 
companies to choose between increased risk mitigation and enhanced 
exposure to liability would impose certain burdens on providers. These 
burdens would be chiefly in the form of increased compliance costs to 
prevent violations of consumer financial laws enforceable by class 
actions, including the costs of forgoing potentially profitable (but 
also potentially illegal) business practices that may increase class 
action exposure, and in the increased costs to litigate class actions 
themselves, including, in some cases, providing relief to a class. The 
Bureau also recognizes that providers may pass through some of those 
costs to consumers, thereby increasing prices. Those impacts are 
delineated and, where possible, quantified in the Bureau's Section 
1022(b)(2) Analysis below and, with regard in particular to burdens on 
small financial services providers, discussed further below in the 
Section-by-Section Analysis to proposed Sec.  1040.4(a) and in the 
initial Regulatory Flexibility Analysis (IRFA).
    After reviewing the considerations that would support a potential 
finding that the class proposal would be for the protection of 
consumers and in the public interest, this section considers, under the 
legal standard established by section 1028, costs to providers as well 
as other potentially countervailing considerations, such as the 
potential impacts on innovation in the market for consumer financial 
products and services. In light of all these considerations, the Bureau 
preliminarily finds that that standard is satisfied.
    The Bureau seeks comments on its preliminary finding set forth 
below--that the class proposal would be in the public interest and for 
the protection of consumers.
Enhancing Compliance With the Law and Improving Consumer Remuneration 
and Company Accountability Is for the Protection of Consumers
    Under the status quo, arbitration agreements obstruct effective 
enforcement of the law through class proceedings. This harms consumers 
in two ways: It makes consumers both more likely to be subject to 
potentially illegal conduct because of underinvestment in compliance 
activities and deliberate risk-taking by companies and makes consumers 
less likely to be able to obtain meaningful relief when violations do 
occur. The Bureau preliminarily finds that the class proposal, by 
changing the status quo, creating incentives for greater compliance, 
and restoring an important means of relief and accountability, would be 
for the protection of consumers.

[[Page 32862]]

    To the extent that laws cannot be effectively enforced, the Bureau 
believes that companies may be more likely to take legal risks, i.e., 
to engage in potentially unlawful business practices, because they know 
that any potential costs from exposure to putative class action filings 
have been reduced if not effectively eliminated. Due to this reduction 
in legal exposure (and thus a reduction in risk), companies have less 
of an incentive to invest in compliance management in general, such as 
by investing in employee training with respect to compliance matters or 
by carefully monitoring changes in the law and making appropriate 
changes in their conduct.
    As discussed in the Section 1022(b)(2) Analysis, economic theory 
supports the Bureau's belief that the availability of class actions 
affects compliance incentives. The standard economic model of 
deterrence holds that individuals who benefit from engaging in 
particular actions that violate the law will instead comply with the 
law when the expected cost from violation, i.e., the expected amount of 
the cost discounted by the probability of being subject to that cost, 
exceeds the expected benefit. Consistent with that model, Congress 
\400\ and the courts \401\ have long recognized that deterrence is one 
of the primary objectives of class actions.
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    \400\ See, e.g., supra note 394; H. Rept. 94-589, Equal Credit 
Opportunity Act Amendments of 1976, at 14 (Jan. 21, 1976).
    \401\ See, e.g., Reiter v. Sonotone Corp., 442 U.S. 330, 344 
(1979) (noting that antitrust class actions ``provide a significant 
supplement to the limited resources available to the Department of 
Justice for enforcing the antitrust laws and deterring 
violations''); Hughes v. Kore of Indiana Enter., 731 F.3d 672, 677-
78 (7th Cir. 2013) (Posner, J.) (``A class action, like litigation 
in general, has a deterrent as well as a compensatory objective. . . 
. The compensatory function of the class action has no significance 
in this case. But if [defendant's] net worth is indeed only $1 
million . . . the damages sought by the class, and, probably more 
important, the attorney's fee that the court will award if the class 
prevails, will make the suit a wake-up call for [defendant] and so 
have a deterrent effect on future violations of the Electronic Fund 
Transfer Act by [the defendant] and others.''); deHaas v. Empire 
Petroleum Co., 435 F.2d 1223, 1231 (10th Cir. 1970) (``Since [class 
action rules] allow many small claims to be litigated in the same 
action, the overall size of compensatory damages alone may 
constitute a significant deterrent.''); Globus v. Law Research 
Service, Inc., 418 F.2d 1276, 1285 (2d Cir. 1969) (``Compensatory 
damages, especially when multiplied in a class action, have a potent 
deterrent effect.'').
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    The preliminary finding that class action liability deters 
potentially illegal conduct and encourages investments in compliance is 
confirmed by the Bureau's own experience and its observations about the 
behavior of firms and the effects of class actions in markets for 
consumer financial products and services. The Bureau has analyzed a 
variety of evidence that, in its view, indicates that companies invest 
in compliance to avoid activities that could increase their exposure to 
class actions.
    First, the Bureau is aware that companies monitor class litigation 
relevant to the products and services that they offer so that they can 
mitigate their liability by changing their conduct before being sued 
themselves. This effect is evident from the proliferation of public 
materials--such as compliance bulletins, law firm alerts, and 
conferences--where legal and compliance experts routinely and 
systematically advise companies about relevant developments in class 
action litigation,\402\ for instance claims pertaining to EFTA,\403\ 
the Fair and Accurate Credit Transactions Act (FACTA),\404\ FCRA,\405\ 
FDCPA,\406\ and the TCPA.\407\
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    \402\ A brief search by the Bureau has uncovered dozens of 
alerts advising companies to halt conduct or review practices in 
light of a class action filed in their industry that may impact 
their businesses. A selection of these alerts is set forth in the 
next several footnotes and all are on file with the Bureau. See, 
e.g., Jones Day, The Future of Mandatory Consumer Arbitration 
Clauses (Nov. 13, 2015) (``Companies that are subject to the CFPB's 
oversight should take steps now to ensure their compliance with all 
applicable consumer financial services laws and to prepare for the 
CFPB's impending rulemaking [on arbitration]. These steps could help 
to diminish . . . risks that would result from the CFPB's 
anticipated placement of substantial limitations on the use of 
arbitration clauses''); Ballard Spahr LLP, Seventh Circuit Green 
Lights Data Breach Class Action Against Neiman Marcus (July 28, 
2015) (noting in response to a recent data breach class action that 
its attorneys ``regularly advise financial institutions on 
compliance with data security and privacy issues''); Bryan Cave LLP, 
Plaintiffs Seek Class Status for Alleged Card Processing ``Junk 
Fee'' Scheme (Nov. 5, 2015) (``[P]rocessors and merchant acquirers 
should revisit their form agreements and billing practices to ensure 
they are free of provisions that a court might consider against 
public policy, and that all fees payable by a merchant are clearly 
identified in the application, the main agreement, or a schedule to 
the agreement.''); Jenner & Block LLP, Civil Litigation Outlook for 
2016 (Feb. 1, 2016) (``Given such developments, 2016 will bring a 
strong and continued focus on privacy protections and data breach 
prevention both in the class action context and otherwise.''); Bryan 
E. Hopkins, Legal Risk Management for In-House Counsel & Managers 
49-52 (2013) (noting a variety of compliance activities companies 
should consider in product design in order to mitigate class action 
exposure).
    \403\ See, e.g., Bracewell LLP, Bankers Beware: ATM Fee Class 
Action Suits on the Rise (Oct. 5, 2010) (noting dozens of class 
action cases regarding ATM machines and advising ATM operators ``to 
make sure that their ATMs provide notice to consumers on both the 
machine and on the screen (with the opportunity for the customer to 
opt-out before a fee is charged) if a fee will be charged for 
providing the ATM service.'').
    \404\ See, e.g., Arent Fox LLP, Unlucky Numbers: Ensuring 
Compliance with the Fair and Accurate Credit Transactions Act (Nov. 
18, 2011) (explaining allegations in one class action and noting 
that ``ensuring proactive compliance with FACTA is crucial because a 
large number of non-compliant receipts may be printed before the 
problem is brought to a company's attention.''); Jones Day, If Your 
Business Accepts Credit Cards, You Need to Read This (Sept. 2007) 
(``If your company has not been sued for a FACTA violation, you 
still need to act. . . . If any potential violation is noted, 
correct it immediately. Also, to avoid future unknown liability, 
monitor the decisions related to FACTA to determine whether there 
are any changes regarding the statute's interpretation. With that, 
your company will be able to immediately correct any `new' 
violations found to exist under the law. If your company has been 
sued, act immediately to come into compliance with FACTA.'').
    \405\ See, e.g., K&L Gates LLP, Beyond Credit Reporting: the 
Extension of Potential Class Action Liability to Employers under the 
Fair Credit Reporting Act (Apr. 7, 2014) (``In light of FCRA's 
damages provisions and the recent initiation of putative class 
actions against large national companies, business entities which 
collect background information for prospective or current employees 
should stay abreast of the requirements of FCRA and related state 
law, and should be proactive in developing sound and logical 
practices to comply with FCRA's provisions.'').
    \406\ See, e.g., K&L Gates LLP, You Had Me at ``Hello'' Letter: 
Second Circuit Concludes That a RESPA Transfer-of-Servicing Letter 
Can Be a Communication in Connection with Collection of a Debt 
(Sept. 22, 2015) (``[M]ortgage servicers would do well to ensure 
they are paying close attention when reviewing such letters for 
FDCPA compliance'' in order to avoid class action liability).
    \407\ See, e.g., DLA Piper, Ninth Circuit Approves Provisional 
Class Action Certification in TCPA Class Action, Defines ``Prior 
Express Consent'' (Nov. 19, 2012) (``Meyer [a class action] seems to 
make clear that creditors and debt collectors must verify that 
debtors provided their cell phone numbers and that the numbers were 
provided at the time of the transactions related to the debts before 
contact is made using an automated or predictive dialer. For cell 
phone numbers provided later by debtors, it is imperative that 
creditors and debt collectors make clear to the owners of those 
numbers that they may be contacted at these numbers for purposes of 
debt collection.''); Mayer Brown LLP, Seventh Circuit Holds That 
Companies Are Liable Under Telephone Consumer Protection Act for 
Placing Automated Calls to Reassigned Numbers (May 16, 2012) 
(``[C]ompanies must ensure that the actual recipients of automated 
calls have consented to receiving them, and take steps to update 
their records when telephone numbers have been reassigned to new 
subscribers. For example, the Seventh Circuit [in a class action] 
noted that callers could avoid liability by doing a `reverse lookup 
to identify the current subscriber' or by `hav[ing] a person make 
the first call' to verify that the number is `still assigned' to the 
customer.'').
---------------------------------------------------------------------------

    Relatedly, where there is class action exposure, companies and 
their representatives will seek to focus more attention and resources 
on general proactive compliance monitoring and management. The Bureau 
has seen evidence of this motivation in various law and compliance firm 
alerts. For example, one such alert, posted shortly after the Bureau 
released its SBREFA Outline, noted that the Bureau was considering 
proposals to prevent

[[Page 32863]]

arbitration agreements from being used to block class actions. In light 
of these proposals, the firm recommended several ``Steps to Consider 
Taking Now,'' including, ``Evaluate your consumer compliance management 
system to identify and fill any gaps in processes and procedures that 
inure to the detriment of consumers under standards of unfair, 
deceptive, and abusive acts or practices, and that could result in 
groups of consumers taking action.'' \408\ Another recent alert 
relating to electronic payments litigation noted that firms could 
either improve their compliance efforts or adopt arbitration agreements 
to limit their class action exposure.\409\ Similarly, trade 
associations routinely update their members about class litigation and 
encourage them to examine their practices so as to minimize their class 
action exposure. For example, a 2015 alert from a credit union trade 
association describes ``a new potential wave of overdraft-related suits 
. . . . target[ing] institutions that base fees on `available' instead 
of `actual' balance'' and advises credit unions to take five 
compliance-related steps to mitigate potential class action 
liability.\410\
---------------------------------------------------------------------------

    \408\ See, e.g., Jones Day, The Future of Mandatory Consumer 
Arbitration Clauses, JonesDay.com (Nov. 2015), available at http://www.jonesday.com/the-future-of-mandatory-consumer-arbitration-clauses-11-13-2015/.
    \409\ Ballard Spahr LLP, The Next EFTA Class Action Wave Has 
Started (Sept. 1, 2015), http://www.ballardspahr.com/alertspublications/legalalerts/2015-09-01-the-next-efta-class-action-wave-has-started.aspx (``We have counseled financial 
institutions and consumer businesses . . . on taking steps to 
mitigate the risk of claims by consumers (such as by adding an 
enforceable arbitration provision to the relevant agreement).''); 
see also Wiley Rein LLP, E-Commerce--The Next Target of `Big Data' 
Class Actions? (Jan. 5, 2016), http://www.wileyrein.com/newsroom-articles-E-Commerce-The-Next-Target-of-Big-Data-Class-Actions.html 
(noting that arbitration agreements can help to avoid class 
litigation and advising that ``it would also be advisable for e-
commerce vendors to include in their privacy policy an arbitration 
clause establishing that any dispute would be adjudicated in 
individual arbitration (as opposed to class litigation or 
arbitration).'').
    \410\ Credit Union Magazine, Minimize the Risk of Overdraft Fee 
Lawsuits, Credit Union Nat'l Ass'n (June 26, 2015), available at 
http://news.cuna.org/articles/106373-minimize-the-risk-of-overdraft-fee-lawsuits.
---------------------------------------------------------------------------

    While the Bureau believes that such monitoring and attempts to 
anticipate litigation affect the practices of companies that are 
exposed to class action liability, the impacts can be hard to document 
and quantify because companies rarely publicize changes in their 
behavior, let alone publicly attribute those changes to risk-mitigation 
decisions. The Bureau has, however, identified instances where it 
believes that class actions filed against one or more firms in an 
industry led to others changing their practices, presumably in an 
effort to avoid being sued themselves. For example, between 2003 and 
2006, 11 auto lenders settled class action lawsuits alleging that the 
lenders' credit pricing policies had a disparate impact on minority 
borrowers under ECOA. In the settlements, the lenders agreed to 
restrict interest rate markups to no more than 2.5 percentage points. 
Following these settlements, a markup cap of 2.5 percent became 
standard across the industry even with respect to companies outside the 
direct scope of the settlements.\411\ Use of caps has continued even 
after the consent decrees that triggered them have expired.\412\
---------------------------------------------------------------------------

    \411\ See F&I and Showroom, 2.5 Percent Markups Becoming the 
Trend (Aug. 9, 2005), http://www.fi-magazine.com/news/story/2005/08/2-5-markups-becoming-the-trend.aspx; Chicago Automobile Trade Ass'n, 
Automotive News: 2.5 Percent Becoming Standard Dealer Finance Markup 
(Nov. 22, 2010), http://www.cata.info/automotive_news_25_becoming_standard_dealer_finance_markup/. The 
Bureau notes that California's adoption in 2006 of the Car Buyer's 
Bill of Rights, which mandated a maximum 2.5 percent markup for loan 
terms of 60 months or less, may also have influenced the adoption of 
this markup limit. Cal. Dep't of Motor Vehicles, Car Buyer's Bill of 
Rights, available at https://www.dmv.ca.gov/portal/dmv/?1dmy&urile=wcm:path:/dmv_content_en/dmv/pubs/brochures/fast_facts/ffvr35.
    \412\ See e.g., Automotive News, Feds Eye Finance Reserve (Feb. 
25, 2013), available at http://www.autonews.com/article/20130225/RETAIL07/302259964/feds-eye-finance-reserve (``Most were settled by 
2003, with the lenders agreeing to cap the finance reserve at two or 
three percentage points. That cap became the industry standard.'').
---------------------------------------------------------------------------

    As another example, since 2012, 18 banks have entered into class 
action settlements as part of the Overdraft MDL,\413\ in which 
plaintiffs challenged the adoption of a particular method of ordering 
the processing of payment transactions that increases substantially the 
number of overdraft fees incurred by consumers compared with 
alternative methods. Specifically, the litigation challenged banks that 
commingled debit card transactions with checks and automated 
clearinghouse transactions that come in over the course of a day and 
reordered the transactions to process them in descending order based on 
amount. Relative to chronological or a lowest-to-highest ordering, this 
practice typically produces more overdraft fees by exhausting funds in 
the account before the last several small debits can be processed. In 
the years since the litigation, the industry has largely abandoned this 
practice. According to a 2015 study, from 2013 to 2015, the percentage 
of large banks that used commingled high-to-low-reordering decreased 
from 37 percent to 9 percent.\414\
---------------------------------------------------------------------------

    \413\ See supra notes 311-313 & 371-372 and accompanying text.
    \414\ See Pew Charitable Trusts, Checks and Balances: 2015 
Update, at 12, Figure 11 (May 2015), available at http://
www.pewtrusts.org/~/media/assets/2015/05/
checks_and_balances_report_final.pdf. According to a different 2012 
study, community banks predominantly posted items in an order 
intended to minimize overdrafts, such as low-to-high or check or 
transaction order. The Independent Community Banks of America (ICBA) 
Overdraft Payment Services Study at 40 (June 2012), available at 
https://www.icba.org/files/ICBASites/PDFs/2012OverdraftStudyFinalReport.pdf. Only 8.8 percent of community 
banks reordered transactions from high to low dollar amount. Id. at 
42 & fig. 57. Most of the community banks studied did not change 
their posting order in the two year period their overdraft practices 
were reviewed. See id. at 42 (noting that 82 percent of community 
banks had not changed the order in which they posted transactions 
during the two years before the ICBA's study). To the extent that 
community banks changed their practices, in the two years preceding 
the 2012 study, 70.7 percent of those that changed their practices 
stopped high-to-low reordering. Id.
---------------------------------------------------------------------------

    A third example of companies responding to class actions by 
changing their practices to improve their compliance with the law 
relates to foreign transaction fees and debit cards. In re Currency 
Conversion Fee Antitrust Litigation (MDL 1409) is a class action 
proceeding in which plaintiffs alleged, in part, that banks that issued 
credit cards and debit cards violated the law by not adequately 
disclosing foreign transaction fees to consumers when they opened 
accounts.\415\ In the settlement, two large banks agreed to list the 
rate applicable to foreign transaction fees in their initial 
disclosures for personal checking accounts with debit cards.\416\ A 
review of the market subsequent to the 2006 settlement indicates that 
this type of disclosure is now standard practice for debit card issuers 
across the market, not merely by the two large banks bound by the 
settlement.\417\
---------------------------------------------------------------------------

    \415\ Third Consol. Am. Class Action Compl., In Re Currency 
Conversion Fee Antitrust Litig., MDL Docket No. 1409 (S.D.N.Y., July 
18, 2006) (alleging that general purpose and debit cardholders were 
``charged hidden and embedded collusively set prices, including a 
hidden, embedded and collusively set base currency conversion fee 
equal to 1% of the amount of the foreign currency transaction,'' 
that ``most member banks tack[ed] on a currency conversion fee of 
their own,'' and that all of this was done in violation of ``TILA, 
EFTA and the state consumer protection laws require[ing] disclosure 
of such fees in, inter alia, cardholder solicitations and account 
statements'').
    \416\ Stip. & Agmt of Settlement, In re Currency Conversion Fee 
Antitrust Litig., MDL 1409, 27-30 (S.D.N.Y. July 20, 2006).
    \417\ In some instances, the dynamics of deterrence may be 
different. In another example from the In re Currency Conversion Fee 
class action litigation, the defendants voluntarily halted the 
conduct at issue upon being sued. Karen Bruno, Foreign transaction 
fees: Hidden credit card `currency conversion fees' may be 
returned--if you file soon, CreditCards.com (May 23, 2007), http://www.creditcards.com/credit-card-news/foreign-transaction-fee-1282.php (``[I]n most cases the companies voluntarily began 
disclosing fees once the suit was filed.'').

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[[Page 32864]]

    These are a few examples of industry-wide change in response to 
class actions that the Bureau believes support its preliminary finding 
that exposure to consumer financial class actions creates incentives 
that encourage companies to change potentially illegal practices and to 
invest more resources in compliance in order to avoid being sued.\418\ 
The cases help to illustrate the mechanisms, among others, by which the 
proposed class rule would deter potentially illegal practices by many 
companies. The Bureau believes that the result would be more legally 
compliant consumer financial products and services that would advance 
the protection of consumers.
---------------------------------------------------------------------------

    \418\ Some stakeholders have suggested that even absent class 
action exposure there already are sufficient incentives for 
compliance and that class actions are too unpredictable to increase 
compliance incentives. The Bureau is not, at this point, persuaded 
by these arguments. The Bureau recognizes, of course, as discussed 
further in the Section 1022(b)(2) Analysis, that exposure to private 
liability is not the only incentive that companies have to comply 
with the law. However, based on its experience and expertise and for 
the reasons discussed herein, the Bureau believes that companies can 
(and in many cases should) do more to ensure that their conduct is 
compliant and that the presence of class action exposure will affect 
companies' incentives to comply.
---------------------------------------------------------------------------

    As discussed in more detail in the Section 1022(b)(2) Analysis, the 
Bureau does not believe it is possible to quantify the benefits to 
consumers from the increased compliance incentives attributable to the 
class proposal due in part to obstacles to measuring the value of 
deterrence directly in a systematic way. Nonetheless, the Bureau 
preliminarily finds that increasing compliance incentives would be for 
the protection of consumers.
    The Bureau recognizes that some companies may decide to assume the 
resulting increased legal risk rather than investing more in ensuring 
compliance with the law and foregoing practices that are potentially 
illegal or even blatantly unlawful. Other companies may seek to 
mitigate their risk but miscalibrate and underinvest or under comply. 
To the extent that this happens, the Bureau preliminarily finds that 
the class proposal would enable many more consumers to obtain redress 
for violations than do so today, when companies can use arbitration 
agreements to block class actions. As set out in the Bureau's Section 
1022(b)(2) Analysis, the amount of additional compensation consumers 
would be expected to receive from class action settlements in the 
Federal courts varies by product and service--specifically, by the 
prevalence of arbitration agreements in those individual markets--but 
is substantial nonetheless and in most markets represents a 
considerable increase.\419\
---------------------------------------------------------------------------

    \419\ As is explained in the Section 1022(b)(2) Analysis below, 
the Bureau calculates the future number of class actions by 
estimating that, in any given market, the providers that currently 
use arbitration agreements would face class litigation at the same 
rate and same magnitude as the providers that currently do not use 
arbitration agreements faced during the five-year period covered by 
the Study. For all but one of the markets for which the Bureau makes 
an estimate, only one market--pawn shops -was there no Federal class 
settlement in the period studied, and the Bureau projects that 
consumers in these markets would receive no additional compensation 
from Federal class settlements if the class proposal were adopted. 
Because it did not have the relevant data, the Bureau did not 
separate State class settlements by markets or project additional 
compensation attributable to future State class settlements. Where 
litigation actually occurs, there would also be increased costs to 
providers in the form of attorney's fees and related expenses. The 
Bureau addresses these costs below.
---------------------------------------------------------------------------

    Furthermore, the Bureau preliminarily finds that through such 
litigation consumers would be better able to cause providers to cease 
engaging in unlawful or questionable conduct prospectively than under a 
system in which companies can use arbitration agreements to block class 
actions. Class actions brought against particular providers can, by 
providing behavioral relief into the future to consumers, force more 
compliance where the general increase in incentives due to litigation 
risk are insufficient to achieve that outcome.
    The Overdraft MDL also helps illustrate the potential ongoing value 
of such prospective relief. A recent study by an academic researcher 
based on the Overdraft MDL settlements offered rare data on the 
relationship between the settlement relief offered to class members 
compared to the sum total of injury suffered by class members that has 
important implications for the value of prospective relief. The 
analysis calculated that in the various settlements, the value of cash 
settlement relief offered to the class constituted between 7 and 70 
percent (or an average of 38 percent and a median of 40 percent) of the 
total value of harm suffered by class members from overdraft reordering 
during the class period.\420\ The total value of injuries suffered by 
class members can be estimated using these settlement relief-to-total 
consumer harm ratios and the sum of cash settlement relief. Using the 
average settlement-to-harm rate of 38 percent, and the total cash 
relief figure of about $1 billion in the Overdraft MDL settlements, an 
estimate of the total value of harm suffered by consumers in the 
settlements identified by the Bureau would be approximately $2.6 
billion.\421\ More concretely, this figure estimates the total amount 
of additional or excess overdraft fees class members paid to the 
settling banks during the class periods because of the banks' use of 
the high-to-low reordering method to calculate overdraft fees.
---------------------------------------------------------------------------

    \420\ Brian T. Fitzpatrick & Robert C. Gilbert, An Empirical 
Look at Compensation in Consumer Class Actions, 11 N.Y.U. J. L. & 
Bus. 767, 785 (2015) (``[N]ot only can we report the average payout 
for class members who participated in the settlements, but also what 
the plaintiffs thought these payouts recovered relative to the 
damage done to class members.''). Fitzpatrick worked with Gilbert, 
an attorney involved in the Overdraft MDL settlements, to identify 
the total quantum of overdraft fees attributable to the practice of 
reordering in settlements identified by the Study. Id.
    \421\ See id. at 786 & tbl. 3. The calculation is the total 
amount of relief the Study identified with the Overdraft MDL 
settlements ($1 billion), divided by .38 (the average ``recovery 
rate'' of the 15 Overdraft settlements identified by Fitzpatrick and 
Gilbert, which ranged from approximately 14 percent to 69 percent). 
While Fitzpatrick and Gilbert's analysis separately identified the 
settlement to harm ratio for each individual bank, the banks were 
anonymized for purposes of their analysis and, therefore, cannot be 
matched to the specific class settlements set out in the Study.
---------------------------------------------------------------------------

    This sum--$2.6 billion--can also be used as a basis for determining 
the potential future value of the cessation of the high-to-low 
reordering practice. If $2.6 billion is the total amount of excess 
overdraft fees class members paid during their respective class periods 
because of the high-to-low reordering practice, the same figure 
(converted to an annualized figure using the class period) \422\ may be 
used to estimate how much the same class members save every year in the 
future by no longer being subject to high-to-low reordering practice 
for purposes of calculating overdraft fees. The prospective benefits to 
consumers as a whole are often even larger because companies frequently 
change their practices not just with regard to class members, but to 
their customer base as a whole, and other companies that were not sued 
may also preemptively change their practices. As

[[Page 32865]]

this one example shows, prospective relief--because it can continue in 
perpetuity--can have wide-ranging benefits for consumers over and above 
the value of retrospective relief, and can, through changing the 
behavior of providers subject to a suit, benefit other customers of 
these providers who are not class members.
---------------------------------------------------------------------------

    \422\ Assuming the average class period was the 10-year class 
period of the largest settlement, the 18 Overdraft MDL settlements 
collectively provide $260 million in prospective relief per year to 
those class members identified in our case studies. This estimate 
assumes that future overdraft fees generated from the high-to-low 
practice would have been comparable to the fees generated in the 
past. This estimate does not take into account the ongoing benefit 
to other consumers who were not class members (those who, for 
instance, were not in the jurisdiction covered by the settlement, or 
those who acquired accounts after the settlement), nor is the 
benefit to those consumers who bank with institutions that were not 
sued but voluntarily stopped the overdraft reordering practice. Nor 
does this figure include any of the other settlements identified by 
the Bureau in Section 8 of the Study, which did not contain the kind 
of information on the proportion of calculable harm to settlement 
relief.
---------------------------------------------------------------------------

    For all of these reasons, the Bureau believes that the class 
proposal would increase compliance and increase redress for non-
compliant behavior and thus would be for the protection of consumers. 
To the extent that the class proposal would affect incentives (or lead 
to more prospective relief) and enhance compliance, consumers seeking 
to use particular consumer financial products or services would more 
frequently receive the benefits of the statutory and common law regimes 
that legislatures and courts have implemented and developed to protect 
them. Consumers would, for example, be more likely to receive the 
disclosures required by and compliant with TILA, to benefit from the 
error-resolution procedures required by TILA and EFTA, and to avoid the 
unfair and abusive debt collection practices proscribed by the FDCPA 
and the discriminatory practices proscribed by ECOA.\423\ In those 
States that provide for private enforcement of their fair competition 
law, consumers similarly would be less likely to be exposed to unfair 
or deceptive acts or practices. Consumers also would be more likely to 
receive the benefits of their contract terms and less likely to be 
exposed to tortious conduct.
---------------------------------------------------------------------------

    \423\ See generally Study, supra note 2, section 8 at 13 & fig. 
1 (noting the number of class settlements by frequency of claim 
type).
---------------------------------------------------------------------------

Enhancing Compliance With the Law and Improving Consumer Remuneration 
and Company Accountability Is in the Public Interest
    The Bureau also preliminarily finds that the class proposal would 
be in the public interest. This preliminary finding is based upon 
several considerations, which are discussed below and include the 
beneficial aspects for consumers (who, as previously discussed, are 
part of the public whose interests are to be furthered), leveling the 
playing field for providers, and enhancing the rule of law. Consistent 
with the legal standard, the Bureau also considers concerns, which have 
been raised by stakeholders as well, including the class proposal's 
impacts on costs and financial access, innovation, the potential of 
class actions to provide windfalls to plaintiffs, and the availability 
of individual dispute resolution, and preliminarily finds that the 
class proposal would be for the protection of consumers and in the 
public interest in light of full consideration of these and other 
relevant factors.
    First, as discussed extensively above, the Bureau believes that its 
preliminary finding that the class proposal would protect consumers 
also contributes to a finding that the class proposal would be in the 
public interest.
    Second, the Bureau considers the impact the class proposal would 
have on leveling the playing field in markets for consumer financial 
products and services in its public interest analysis. The Bureau 
preliminarily finds that the class proposal would create a more level 
playing field between providers that concentrate on compliance and 
providers that choose to adopt arbitration agreements to insulate 
themselves from being held to account by the vast majority of their 
customers and, as the Study showed, from virtually any private 
liability. The Bureau believes this also supports a determination that 
the class proposal would be in the public interest.
    Specifically, the Bureau believes that companies that adopt 
arbitration agreements to manage their liability may possess certain 
advantages over companies that instead make greater investments in 
compliance to manage their liability, both in their ability to minimize 
costs and to profit from the provision of potentially illegal consumer 
financial products and services. The Bureau does not expect that 
eliminating the advantages enjoyed by companies with arbitration 
agreements would necessarily shift market share to companies that 
eschew arbitration agreements and instead focus on up front compliance 
because the future competitive balance between companies would also 
depend on many additional factors. It has thus not counted the effects 
of this factor as a major element of the Section 1022(b)(2) Analysis. 
However, the Bureau believes that eliminating this type of arbitrage as 
a potential source of competition would be in the public interest.\424\
---------------------------------------------------------------------------

    \424\ The Bureau recognizes, of course, that under the current 
system companies without arbitration agreements can level the 
playing field by adopting such agreements. But the Bureau believes 
that the public interest would be served by a system in which a 
level playing field is achieved by bringing all companies' 
compliance incentives up to the level of those that face class 
action liability for non-compliance. The public interest would not 
be served by a system in which the level playing field is achieved 
by bringing compliance incentives down to the level of those 
companies that are effectively immune from such liability. Indeed, 
``races to the bottom'' within the consumer financial services 
markets were a significant concern prompting Congress to enact the 
Dodd-Frank Act because of their potential impacts on consumers, 
responsible providers, and broader systemic stability. S. Rept. 111-
176, The Restoring American Financial Stability Act of 2010, at 10 
(Apr. 30, 2010) (``This fragmentation led to regulatory arbitrage 
between federal regulators and the states, while the lack of any 
effective supervision on nondepositories led to a `race to the 
bottom' in which the institutions with the least effective consumer 
regulation and enforcement attracted more business, putting pressure 
on regulated institutions to lower standards to compete effectively, 
`and on their regulators to let them.'').
---------------------------------------------------------------------------

    Finally, the Bureau believes that its preliminary finding that the 
class proposal would have the effect of achieving greater compliance 
with the law implicates additional benefits beyond those noted above 
with respect to the protection of individual consumers and impacts on 
responsible providers. Federal and State laws that protect consumers 
were developed and adopted because many companies, unrestrained by a 
need to comply with such laws, would engage in conduct that is profit-
maximizing but that lawmakers have determined disserves the public good 
by distorting the efficient functioning of these markets. These Federal 
and State laws, among other things, allow consumer financial markets to 
operate more transparently and to operate with less invidious 
discrimination, and for consumers to make more informed choices in 
their selection of financial products and services.
    Thus, the Bureau believes that by creating enhanced incentives and 
remedial mechanisms to enforce compliance, the class proposal could 
improve the functioning of consumer financial markets as a whole. 
First, enhanced compliance would, over the long term, create a more 
predictable, efficient, and robust regime. Second, the Bureau also 
believes enhanced compliance and more effective remedies could also 
reduce the risk that consumer confidence in these markets would erode 
over time as individuals, faced with the non-uniform application of the 
law and left without effective remedies for unlawful conduct, may be 
less willing to participate in certain sections of the consumer 
financial markets. For all of these reasons, the Bureau believes that 
promoting the rule of law--in the form of accountability under and 
transparent application of the law to providers of consumer financial 
products or services--would be in the public interest as well as for 
the protection of consumers.
    During both the SBREFA process and ongoing outreach with various 
stakeholders, some participants have suggested that the class proposal 
would not be in the public interest because it

[[Page 32866]]

would: (1) Impose costs on providers that would be passed through to 
consumers; (2) reduce incentives for innovation in markets for consumer 
financial products and services; (3) deliver windfalls to named 
plaintiffs and class members; or (4) negatively affect the means 
available to consumers to resolve individual disputes formally and 
informally. Participants in the SBREFA process also asserted that the 
class proposal would have disproportionate impacts on small entities. 
After carefully considering these points and factoring them into its 
analysis as discussed further below and in the discussion of small 
business impact in the Section-by-Section Analysis to proposed Sec.  
1040.4(a), the Bureau preliminarily finds that the class proposal would 
on balance be in the public interest.\425\
---------------------------------------------------------------------------

    \425\ In the Section-by-Section Analysis to proposed Sec.  
1040.4(a), the Bureau specifically addresses certain concerns 
related to the class proposal and its costs. That discussion is 
incorporated in this section 1028(b) analysis by reference. The 
Bureau also in that discussion seeks comment whether it should 
exempt small entities from the proposed rule. The Bureau discusses 
further potential alternatives below in the Bureau's IRFA.
---------------------------------------------------------------------------

    Costs to Providers and Pass-Through to Consumers. As discussed in 
the Section 1022(b)(2) Analysis, the Bureau recognizes that the class 
proposal would impose three types of costs on providers: (1) Costs 
associated with increased compliance, including compliance management 
costs and costs of eschewing potentially illegal but profitable 
practices; (2) costs for legal defense and retrospective and 
prospective remediation; and (3) costs associated with changing 
contracts. As further discussed in that section, the Bureau also 
recognizes that some portion of those costs could be passed through to 
consumers. The Bureau believes, however, that the fact that these costs 
would, at least in the first instance, be incurred by providers or that 
some of the costs could be passed through to consumers does not alter 
its finding that the class proposal would be in the public interest.
    The Bureau believes that compliance, litigation, and remediation 
costs generally are a necessary component of the broader private 
enforcement scheme, and that certain costs are vital to uphold a system 
that vindicates actions brought through the class mechanism. The 
specific marginal costs that would be attributable to the class 
proposal are similarly justified. These costs are justified to protect 
consumers and produce the benefits discussed above. The fact that some 
of these costs, described below, may be passed through does not alter 
the Bureau's belief that it would be in the public interest (and for 
the protection of consumers) for the class proposal to cause providers 
to incur these costs.\426\
---------------------------------------------------------------------------

    \426\ Some stakeholders have suggested that providers would 
incur costs that produce no benefits by engaging in compliance 
management activities that would not result in any changes in the 
providers' behaviors. According to this view, providers would 
sustain an increase in compliance costs without any actual change in 
behavior or added compliance by, for example, double or triple 
checking previous compliance efforts. However, the Bureau would not 
expect a firm to waste money confirming that it already complies 
when it receives no benefit in exchange for that investment. In 
addition, as the examples cited above suggest, class actions can 
assist firms in locating areas where their compliance efforts may be 
insufficient and allow them to focus their increased compliance 
efforts in areas where private actions are most likely.
---------------------------------------------------------------------------

    Further, as noted in the Section 1022(b)(2) Analysis below, the 
Bureau believes that it is important given the size of the markets at 
issue to evaluate cost predictions relative to the number of accounts 
and consumers so as to properly assess the scale of the predictions. 
Given hundreds of millions of accounts across affected providers, the 
hundreds or thousands of competitors in most markets, and the numerical 
estimates of costs as specified below, the Bureau does not believe that 
the expenses due to the additional class settlements that would result 
from this proposed rule would result in a noticeable impact on access 
to consumer financial products or services.\427\ Similarly, the Bureau 
also believes that the potential cost impacts on small providers, and 
individual providers more generally, are not as large as some 
stakeholders have suggested based on the detailed analysis provided 
below that factors in likelihood of litigation, recovery rates, and 
other considerations.
---------------------------------------------------------------------------

    \427\ As is noted below, the impacts might be higher for some 
markets.
---------------------------------------------------------------------------

    Innovation. Some stakeholders have suggested that the proposal 
would disserve the public interest because it would discourage 
innovation. According to this argument, providers would refrain from 
developing or offering products and services that benefit consumers and 
are lawful--or may withdraw existing, beneficial products from the 
market--due to concerns that the products may pose legal risk, for 
instance because they are novel. The Bureau is not currently persuaded 
that this would occur for several reasons.
    First, the Bureau notes that some innovation in consumer financial 
markets can disserve the interest of consumers and the public and that 
deterring such innovation actually would advance the public interest. 
For example, a major cause of the financial crisis was ``innovation'' 
in the mortgage market--innovation that led to the introduction of a 
set of high-risk products and underwriting practices.\428\ Similarly, 
Congress enacted the CARD Act in response to ``innovation'' in the 
credit card marketplace--such as the practice of triggering interest 
rate hikes based on ``universal default''--that made the pricing of 
credit cards more opaque and unpredictable for consumers and distorted 
what was then the second largest consumer credit market.\429\
---------------------------------------------------------------------------

    \428\ See Fin. Crisis Inquiry Comm'n, The Financial Crisis 
Inquiry Report, at 104-05 (2011), available at https://www.gpo.gov/fdsys/pkg/GPO-FCIC/pdf/GPO-FCIC.pdf (discussing creation of a 
larger, new, subprime mortgage market, expanded use of high-risk 
products such as certain adjustable rate mortgages, and looser 
underwriting practices).
    \429\ See Bureau of Consumer Fin Prot., CARD Act Report, at 27, 
74 (2013), available at http://files.consumerfinance.gov/f/201309_cfpb_card-act-report.pdf; 15 U.S.C. 1666i-i.
---------------------------------------------------------------------------

    Conversely, the Bureau notes that some innovation is designed to 
mitigate risk. For example, many banks and credit unions are 
experimenting with ``safe'' checking accounts (accounts that do not 
allow consumers to overdraft) these products are designed to reduce 
overdraft risks to consumers. Similarly, some credit card issuers have 
experimented with products with fewer or no penalty fees as a means of 
reducing risk to consumers. The Bureau believes that to extent that the 
class proposal would affect positive innovations of this type, it would 
tend to facilitate them.
    The Bureau recognizes that there may be some innovation that is 
designed to serve the needs of consumers but that leverages new 
technologies or approaches to consumer finance in ways that raise novel 
legal questions and, in that sense, carry legal risk. The Bureau 
believes that these innovators, in general, consider a variety of 
concerns when bringing their ideas to market. But, even if at the 
margin, the effect of the proposed rule would be to deter certain 
innovations from being launched, the Bureau believes that, on balance, 
that would be a price worth paying in order to achieve the benefits of 
the rule for the public and consumers. The Bureau believes that, in 
general, it is a mark of a well-functioning regulatory regime when 
entities must balance their desire to profit from innovation with the 
need to comply with laws designed to protect consumers.\430\ The Bureau 
thus

[[Page 32867]]

preliminarily finds that the impact of the class proposal on innovation 
supports rather than refutes a finding that the class proposal would be 
in the public interest because it would incentivize providers to reach 
the right balance between innovation in the marketplace and consumer 
protection.
---------------------------------------------------------------------------

    \430\ See Dan Quan, Project Catalyst: We're open to innovative 
approaches to benefit consumers (Oct. 10, 2014), http://www.consumerfinance.gov/blog/category/project-catalyst/ (``Consumer-
friendly innovation can drive down costs, improve transparency, and 
make people's lives better. On the other hand, new products can also 
pose unexpected risks to consumers through dangers such as hidden 
costs or confusing terms.'').
---------------------------------------------------------------------------

    Windfalls. Some stakeholders have suggested that the class proposal 
would allow named plaintiffs in putative class actions to leverage the 
threat of a class action to obtain a windfall individual recovery. 
Others go further and suggest that the class proposal would result in 
windfall recoveries to entire classes on the grounds that the 
certification of a class would induce providers to settle claims with 
little or no merit because of the litigation expenses and risk of 
massive recoveries. Relatedly, some stakeholders have expressed concern 
that small businesses are particularly vulnerable to this scenario and 
that they feel even greater pressure to settle cases upon class 
certification because the value of the claim may constitute a 
substantial portion of the small business's net worth.
    The Bureau recognizes that there is some risk that the class 
proposal would enable some plaintiffs to file putative class actions 
and leverage the threat of class liability to obtain a more favorable 
settlement than could have been obtained in an action filed on an 
individual basis in the first instance. However, the Study finds that 
for most consumers the value of their individual claim is too small to 
be worth pursuing individually, and the Bureau does not believe that 
the ability to file a putative class action would materially change 
consumers' interest in pursuing individual relief. The Section 
1022(b)(2) Analysis quantifies the potential costs from putative class 
actions not settled on a class basis and finds those costs to be 
relatively low.\431\
---------------------------------------------------------------------------

    \431\ The Study demonstrated that the number of putative class 
cases resulting in individual outcomes is itself quite low, showing 
each year an average of100 putative class actions filed in Federal 
courts and a sample of State courts relating to six significant 
markets were resolved in a manner that included an individual 
settlement or a potential individual settlement. Study, supra note 
2, section 6 at 42, fig. 12; id., app. O at 106 tbl. 19 (covering 
settlements that represent nearly a fifth of the population). As a 
matter of absolute impact, individual settlements in 100 cases per 
year (even when extrapolated to other markets and all State courts) 
are not significant enough to pose a substantial per-account cost to 
providers and thus are unlikely to result in a significant price 
increase to consumers, as discussed in Section 1022(b)(2) Analysis 
below.
---------------------------------------------------------------------------

    With respect to the suggestion that the class proposal would result 
in windfalls to entire classes, the Study showed that certification 
almost invariably occurs coincident with a settlement and thus is not 
typically the force that drives settlement. The Study further found 
that not infrequently, settlements follow a decision by a court 
rejecting a dispositive motion (e.g., a motion to dismiss) filed by the 
defendants. Moreover, the Bureau is not aware of any evidence to 
suggest that companies routinely settle cases on a class basis for more 
than their expected value, i.e., more than the exposure to the class 
discounted by an assessment of the likelihood of success.\432\ As 
discussed in the IRFA, the Bureau believes that the impacts on small 
providers are less severe than some stakeholders have argued, given 
that small providers are to class actions and other considerations.
---------------------------------------------------------------------------

    \432\ See, e.g., In re Citigroup Inc. Sec. Litig., 965 F. Supp. 
2d 369, 383 (S.D.N.Y. 2013) (noting that securities settlement was 
relatively low due to ``the risk that the plaintiffs might not 
prevail was significant''); see also Wright, Miller & Kane, 7A Fed. 
Prac. & Proc. Civ. 1797.1, at 82-88 (3d ed.) (identifying factors 
for district court's determination of the fairness of proposed 
relief for a class settlement, including ``the likelihood of the 
class being successful in the litigation'' and ``the amount proposed 
as compared to the amount that might be recovered, less litigation 
costs, if the action went forward''); Reynolds v. Beneficial Nat'l 
Bank, 288 F.3d 277, 285 (7th Cir. 2002) (Posner, J.) (reversing 
order approving settlement agreement where the ``judge made no 
effort to translate his intuitions about the strength of the 
plaintiffs' case, the range of possible damages, and the likely 
duration of the litigation if it was not settled now into numbers 
that would permit a responsible evaluation of the reasonableness of 
the settlement'').
---------------------------------------------------------------------------

    In addition, Congress and the courts also continue to calibrate 
class action procedures to discourage frivolous litigation.\433\ The 
Supreme Court, for example, has rendered a series of decisions making 
clear that Rule 23 ``does not set forth a mere pleading standard'' and 
establishing a number of requirements to subject putative class claims 
to close scrutiny before proceeding on a class basis.\434\ Further, 
Congress has acted to limit frivolous litigation through various steps 
including enactment of CAFA. Similarly, stakeholders successfully 
lobbied Congress to remove an EFTA provision that led to a spike in 
class action litigation.\435\
---------------------------------------------------------------------------

    \433\ Reiter, 442 U.S. at 345 (``District courts must be 
especially alert to identify frivolous claims brought to extort 
nuisance settlements; they have broad power and discretion vested in 
them by Fed. Rule Civ. Proc. 23 with respect to matters involving 
the certification and management of potentially cumbersome or 
frivolous class actions.'').
    \434\ Wal-Mart Stores, Inc. v. Dukes, 564 U.S. 338, 350 (2011).
    \435\ See, e.g., Kevin Bogardus, Banks lobby to repeal ATM fee 
signs, The Hill (June 19, 2012), available at http://thehill.com/business-a-lobbying/233393-bank-lobby-says-congress-should-repeal-atm-signs. Stakeholders are now undertaking similar efforts with 
respect to other substantive statutes.
---------------------------------------------------------------------------

    Individual Dispute Resolution. Some companies and industry trade 
associations have argued that, if the class proposal were adopted, 
providers would likely remove their arbitration agreements entirely and 
this would impair consumers' ability to resolve their individual 
disputes. Other companies have told the Bureau that they would keep 
their arbitration agreements or that they remain undecided on what they 
would do. To the extent that providers would remove their arbitration 
agreements, the Bureau has heard two reasons. First, that if providers 
can no longer block class actions some stakeholders have stated that 
the arbitration agreement serves no purpose. Second, some stakeholders 
have suggested that establishing and maintaining a system to resolve 
disputes in arbitration is costly and that providers might have no 
incentive to provide consumers with the benefits of arbitration if they 
are also required to incur increased costs in defending class actions.
    As for those asserting the first reason, the Bureau believes that, 
to the extent these providers find that the arbitration agreement 
provides no benefit to themselves or their consumers in individual 
disputes, then it is possible the agreement would not be maintained 
under the class proposal. For such providers, however, the Bureau 
believes the arbitration agreement has thus effectively been serving no 
function other than a class action waiver and would have no impact on 
their individual dispute resolution processes.
    As for those asserting this second reason, the Bureau is not 
persuaded for the reasons discussed here and in the Section 1022(b)(2) 
Analysis. These firms must already maintain two systems to the extent 
that most arbitration agreements allow for litigation in small claims 
courts, and companies almost never seek to compel other cases to 
arbitration when first filed in court. The Bureau does not believe 
that, to the extent there is a burden of maintaining arbitration 
agreements to resolve individual disputes, the availability of class 
actions would impact that burden which exists regardless. Companies 
will always have to defend and resolve individual disputes that their 
customers bring--whether in court or in

[[Page 32868]]

arbitration. In these individual disputes, companies will always incur 
defense costs and oftentimes settlement costs. While some companies may 
have to pay fees to the arbitration administrators that they would not 
have to pay in court, the empirical evidence indicates that the 
absolute number of cases in which these fees are incurred is low (and 
that the total fees in any one case are also low).\436\ Moreover, the 
costs of the up front fees would be offset against potential savings 
from arbitration's streamlined discovery and other processes, which 
some stakeholders have argued are a substantial benefit to all parties. 
Thus, the Bureau does not see why the costs of resolving a few cases in 
arbitration, even if somewhat greater than resolving these cases in 
litigation, would alone cause companies to withdraw an option that they 
often assert benefits both themselves and consumers.
---------------------------------------------------------------------------

    \436\ See Study, supra note 2, section 5 at 75-76.
---------------------------------------------------------------------------

    Nor is the Bureau persuaded that if providers eliminated their 
arbitration agreements that doing so would affect their incentives to 
resolve disputes informally. As previously noted, the Bureau recognizes 
that when an individual consumer complains about a particular charge or 
other action, it is often in the financial institution's interest to 
preserve the customer relationship by providing the individual with a 
response explaining that charge and, in some cases, a full or partial 
refund or reversal of the charge or action. That incentive would not be 
affected by the elimination of arbitration agreements. The Bureau is 
skeptical that the risk of individual; litigation is a significant 
driver of companies' decisions to resolve disputes informally given how 
infrequently individual cases are filed either in court or arbitration, 
and the Bureau is also skeptical that if providers were subject to 
court litigation but not arbitration that would substantially change 
their assessment of the risk and hence their willingness to provide an 
informal resolution.
    Thus, the Bureau does not preliminarily find that individual 
dispute resolution (whether formal or informal) is an adequate 
substitute for group litigation that can provide many consumers relief 
in a single proceeding.
    The Bureau seeks comments on its preliminary findings discussed 
above that the class proposal would be in the public interest and for 
the protection of consumers.

D. The Bureau Finds That the Monitoring Proposal Is in the Public 
Interest and for the Protection of Consumers

    The class proposal would not prohibit covered entities from 
continuing to include arbitration agreements in consumer financial 
contracts generally; providers would still be able to include them in 
consumer contracts and invoke them to compel arbitration in court cases 
not filed in court as class actions. In addition, the class proposal 
would not foreclose the possibility of class arbitration so long as the 
consumer chooses arbitration as the forum in which he or she pursues 
the class claims and the applicable arbitration agreement does not 
prohibit class arbitration. Thus, the Bureau separately considers 
whether the other requirement of its proposal--that providers submit 
certain arbitral records to the Bureau (proposed Sec.  1040.4(b)), the 
monitoring proposal)--would be in the public interest and for the 
protection of consumers.
    As explained in Part VI.A, the evidence before the Bureau is 
inconclusive as to the relative efficacy and fairness of individual 
arbitration compared to individual litigation. Thus, the Bureau is not 
proposing to prohibit arbitration agreements entirely. The Bureau 
remains concerned, however, that the potential for consumer harm in the 
use of arbitration agreements in the resolution of individual disputes 
remains. Among these concerns is that arbitrations could be 
administered by biased administrators (as was alleged in the case of 
NAF), that harmful arbitration provisions could be enforced, or that 
individual arbitrations could otherwise be conducted in an unfair 
manner.
    The Study showed that, in the markets covered by the Study, an 
overwhelming majority of arbitration agreements specify AAA or JAMS as 
an administrator (or both) and both administrators have created 
consumer arbitration protocols that contain procedural and substantive 
safeguards designed to ensure a fair process.\437\ While the Bureau 
believes that these safeguards currently apply to the vast majority of 
consumer finance arbitrations that do occur, this could change. 
Administrators may change the safeguards in ways that could harm 
consumers, companies may (and currently do) select other arbitrators or 
arbitration administrators that adopt different standards of conduct or 
operate with no standards at all (e.g., a company may choose an 
individual as an arbitrator who conducts the arbitration according to 
his or her own rules), arbitration agreements may contain provisions 
that could harm consumers, or the use of arbitration to resolve 
consumer disputes may evolve in other ways that the Bureau cannot 
foresee, particularly were the class proposal to be adopted. For these 
reasons, the Bureau preliminarily finds that the proposed rule 
requiring submission of arbitral documents would be in the public 
interest and for the protection of consumers.
---------------------------------------------------------------------------

    \437\ Id., section 2 at 34-40; see generally id., section 4.
---------------------------------------------------------------------------

Overview of the Monitoring Proposal
    The Bureau is neither proposing to restrict the use of arbitration 
agreements with respect to individual arbitrations nor proposing to 
prescribe specific methods or standards for adjudicating individual 
arbitrations. The Bureau is instead proposing a system that would allow 
it and, potentially the public, to review certain arbitration 
materials. The Bureau expects that its proposed requirements would 
bring greater transparency to the arbitration process and allow for the 
Bureau and, potentially, the public to monitor how arbitration evolves.
    Specifically, the Bureau is proposing a regime that would require 
providers to submit five types of documents with respect to any 
individual arbitration case (see proposed Sec.  1040.4(b)(1)): (1) the 
initial claim (whether filed by a consumer or by the provider) and any 
counterclaim; (2) the pre-dispute arbitration agreement filed with the 
arbitrator or arbitration administrator; (3) the award, if any, issued 
by the arbitrator or arbitration administrator; (4) any communications 
from the arbitrator or arbitration administrator with whom the claim 
was filed relating to a refusal to administer or dismissal of a claim 
due to the provider's failure to pay required fees; and (5) any 
communications related to a determination that an arbitration agreement 
does not comply with the administrator's fairness principles.
    Under the monitoring proposal, the Bureau would publish on its Web 
site the materials it receives in some form, with appropriate redaction 
or aggregation as warranted.
The Bureau Believes That the Monitoring Proposal Would Have Several 
Positive Outcomes for Consumers and the Public
    The Bureau preliminarily finds that the monitoring proposal would 
have several positive outcomes that, taken into consideration with 
other relevant factors including costs, would be in the

[[Page 32869]]

public interest and for the protection of consumers.
    First, the monitoring proposal would be for the protection of 
consumers because it would allow the Bureau (and if submissions are 
published, the public) to better understand arbitrations that occur now 
and in the future and to ensure that consumers' rights are being 
protected. The materials the Bureau proposes to collect--similar to the 
AAA materials the Bureau reviewed in the Study--would allow the Bureau 
to continue to monitor how arbitrations and arbitration agreements 
evolve, and allow it to see whether they evolve in ways that harm 
consumers.
    The documents the Bureau proposes to collect would provide the 
Bureau with different insights. For example, collection of arbitration 
claims would provide transparency regarding the types of claims 
consumers and providers are bringing to arbitration. Collecting claims 
would allow the Bureau to monitor the raw number of arbitrations, which 
has fluctuated over time, from at least tens of thousands of provider-
filed arbitration claims per year before mid-2009, to just hundreds per 
year in the AAA set reviewed by the Bureau.\438\ Rapid changes in the 
number of claims might signal a return to large-scale debt collection 
arbitrations by companies and potential consumer protection issues, as 
had occurred in the past with NAF (discussed above in Part II.C).
---------------------------------------------------------------------------

    \438\ See, e.g., Preliminary Results, supra note 2 at 60-62.
---------------------------------------------------------------------------

    The proposed collection of awards would provide insights into the 
types of claims that reach the point of adjudication and the way in 
which arbitrators resolve these claims. Collection of arbitration 
agreements in conjunction with the claims (and awards) would allow the 
Bureau to monitor the impact that particular clauses in arbitration 
agreements have on consumers and providers, the resolution of those 
claims, and how arbitration agreements evolve. Finally, collection of 
correspondence regarding non-payment of fees and non-compliance with 
due process principles would allow the Bureau insight into whether and 
to what extent providers fail to meet the arbitral administrators' 
standards. Those consumers that may be harmed by these providers' non-
payment of fees or failure to adhere to fairness principles would also 
benefit by having those instances reported to the Bureau for potential 
further action. The Bureau believes that it is possible that the 
increased transparency arising from the monitoring proposal and the 
Bureau's publication of materials it receives may deter some unfair 
individual arbitrations because providers would have an interest in 
protecting their reputations and they themselves may be wary to retain 
an arbitrator or arbitration administrator that proceeds in an unfair 
manner.
    Beyond shedding light on the operation of the arbitration system 
writ large, the proposed collection of documents also would enhance the 
Bureau's ability to monitor consumer finance markets for risks to 
consumers. For example, the collection of claims and awards would 
provide the Bureau with additional information about the types of 
potential violations of consumer finance or other laws alleged in 
arbitration and whether any particular providers are facing repeat 
claims or have engaged in potentially illegal practices. At the same 
time, the collection of arbitration agreements and correspondence 
regarding non-payment of fees or non-compliance with fairness standards 
would enable the Bureau to identify providers that may have adopted 
one-sided agreements in an attempt to avoid liability altogether by 
discouraging a consumer from seeking resolution of a claim in 
arbitration.
    Second, the monitoring proposal would be for the protection of 
consumers because it would allow the Bureau to take action against 
providers that are engaging in potentially illegal actions that impede 
consumers' ability to bring claims against their providers. For 
example, if the Bureau became aware that a particular company was 
routinely not paying arbitration fees, it could take action against 
that company or refer its conduct to another regulator. The Bureau 
intends to draw upon all of its statutorily authorized tools to address 
conduct that harms consumers that may occur in the future in connection 
with providers' use of arbitration agreements.
    The Bureau also preliminarily finds that the monitoring proposal 
would be in the public interest for all of the reasons set forth above 
as to why it would be for the protection of consumers and for the 
following additional reasons.
    First, it would allow the Bureau to better evaluate whether the 
Federal consumer finance laws are being enforced consistently. The 
public interest analysis is informed by one of the purposes of the 
Bureau, which is to ``enforce Federal consumer financial law 
consistently.'' \439\ Through the window into arbitrations provided by 
the monitoring proposal, the Bureau would be better able to know 
whether arbitral decisions are applying the laws consistently on an 
ongoing basis and whether any consumer protection issues arise in those 
cases that warrant further action by the Bureau.
---------------------------------------------------------------------------

    \439\ See generally Dodd-Frank section 1021(b) (setting forth 
the Bureau's purposes).
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    Second, by allowing the Bureau access to documents about the 
conduct of arbitrations, the Bureau would be able to learn of and 
assess consumer allegations that providers have violated the law and, 
more generally, determine whether arbitrations proceed in a fair and 
efficient manner. The Bureau believes that creating a system of 
accountability is an important part of any dispute resolution system. 
By creating a mechanism through which the Bureau can monitor whether 
the system is being abused, the Bureau can further the public interest 
in maintaining a functioning, fair, and efficient arbitration system.
    Third, the Bureau preliminarily finds that the monitoring proposal 
would be in the public interest to the extent that the Bureau publishes 
the materials it collects because publication would further the 
Bureau's goal of transparency in the financial markets. The Bureau 
believes that publishing claims would provide transparency by revealing 
to the public the types of claims filed in arbitration and whether 
consumers or providers are filing the claims. Publishing awards would 
provide transparency by revealing how different arbitrators decide 
cases and signaling to attorneys for consumers and providers which 
sorts of cases favor and do not favor consumers, thereby potentially 
facilitating better pre-arbitration case assessment and resolution of 
more disputes by informal means.\440\ Publication may also help develop 
a more general understanding among consumers of the facts and law at 
issue in consumer financial arbitrations.
---------------------------------------------------------------------------

    \440\ The Bureau already publishes certain narratives and 
outcomes data concerning consumer complaints submitted with the 
Bureau. The Bureau has explained that it publishes this material 
because it ``believes that greater transparency of information does 
tend to improve customer service and identify patterns in the 
treatment of consumers, leading to stronger compliance mechanisms 
and customer service. . . . In addition, disclosure of consumer 
narratives will provide companies with greater insight into issues 
and challenges occurring across their markets, which can supplement 
their own company-specific perspectives and lend more insight into 
appropriate practices.'' Bureau of Consumer Fin. Prot., Disclosure 
of Consumer Complaint Narrative Data, 80 FR 15572, 15576 (Mar. 24, 
2015).
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    Further, consumers, public enforcement agencies, and attorneys for 
consumers and providers would be able to review the records and 
identify

[[Page 32870]]

trends that warrant further action including, for example, when firms 
do not pay fees or violate administrators' fairness rules. These groups 
routinely use public databases, such as online court records, decision 
databases, and government complaint databases (e.g., the Bureau's 
complaint database, various states' arbitration disclosure 
requirements, and the FTC's Sentinel database) today in conducting 
their work. Making awards public may also generate public confidence in 
the arbitrators selected for a specific case as well as the arbitration 
system, at least for administrators whose awards tend to demonstrate 
fairness and impartiality.
    In these ways, the monitoring proposal would improve the ability of 
a broad range of stakeholders to understand whether markets for 
consumer financial products and services are operating in a fair and 
transparent manner.
    The Bureau believes that the compliance burden on providers of the 
monitoring proposal would be sufficiently low that, especially given 
the benefits of the proposal, it would not be a significant factor 
weighing against the proposal being in the public interest.\441\ As 
discussed in greater detail in the Section 1022(b)(2) Analysis below, 
the Bureau expects that, unless the use of arbitration changes 
dramatically, the number of arbitrations subject to this part of the 
monitoring proposal would remain low. Most providers would have no 
obligations under the monitoring proposal in any given year because 
most providers do not face even one consumer arbitration in a year. In 
any event, the burden of redacting and submitting materials would be 
relatively minimal.
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    \441\ The Bureau preliminarily finds that none of the remaining 
factors that it previously identified as being relevant to the 
public interest analysis under section 1028 is relevant to the 
analysis whether the monitoring proposal would be in the public 
interest but seeks comment on whether it should consider additional 
or different criteria.
---------------------------------------------------------------------------

    The Bureau has also considered whether the monitoring proposal, in 
making claims submitted in arbitration and decisions resolving those 
claims transparent, would somehow adversely impact the arbitration 
process. While there conceivably could be other negative impacts on 
consumers' engagement in the arbitration process arising from adoption 
of the monitoring proposal, the key potential concern thus far 
identified by the Bureau would be the concern that consumers would be 
less likely to engage in arbitration because they feared that 
submission and possible publication would cause information about them 
to be divulged. However, the Bureau does not believe that this concern 
would materialize because the proposal would require the redaction of 
information that identifies consumers.
    With respect to providers, the Bureau does not believe that they 
should be able to maintain secrecy around their disputes with customers 
(insofar as the Bureau's Consumer Response function publishes the names 
of providers). Furthermore, the Bureau notes that expectations of 
privacy are reduced to the extent arbitration awards and other 
documents containing parties' names and other information are filed 
with a court, such as in an effort to enforce an award. Relatedly, the 
Bureau notes that AAA, which is the largest administrator of consumer 
arbitrations, maintains consumer rules that permit it to publish 
consumer awards, and thus providers are already on notice that 
arbitrations they are involved in might become public.\442\
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    \442\ AAA, Consumer Arbitration Rules (amended effective Sept. 
1, 2014), R-43(c) (``The AAA may choose to publish an award rendered 
under these Rules; however, the names of the parties and witnesses 
will be removed from awards that are published, unless a party 
agrees in writing to have its name included in the award.''). The 
AAA also provides public access to arbitration demands and awards 
for all class arbitrations (including party names). See AAA, Class 
Arbitration Case Docket (last visited May 1, 2016) https://www.adr.org/aaa/faces/services/disputeresolutionservices/casedocket.
---------------------------------------------------------------------------

    The Bureau seeks comment on all aspects of its determination that 
the monitoring proposal would be in the public interest and for the 
protection of consumers. The Bureau also seeks comment on whether 
consumers should be able to opt-out of the Bureau's publication of 
documents related to the arbitrations in which they participate.

VII. Section-by-Section Analysis

    The Bureau is proposing to create 12 CFR part 1040, which would set 
forth regulations regarding arbitration agreements. Below, the Bureau 
explains each of the proposed subsections and commentary thereto for 
proposed part 1040.

Section 1040.1 Authority, Purpose, and Enforcement

    The first section of proposed part 1040 would set forth the 
Bureau's authority for issuing the regulation and the regulation's 
purpose.
1(a) Authority
    Proposed Sec.  1040.1(a) would state that the Bureau is issuing 
this proposed rule pursuant to the authority granted to it by Dodd-
Frank sections 1022(b)(1), 1022(c), and 1028(b). As described in Part 
V, Dodd-Frank section 1022(b)(1) authorizes the Bureau to prescribe 
rules and issue orders and guidance, as may be necessary or appropriate 
to enable the Bureau to administer and carry out the purposes and 
objectives of the Federal consumer financial laws, and to prevent 
evasions thereof. Section 1022(c)(4) authorizes the Bureau to monitor 
for risks to consumers in the offering or provision of consumer 
financial products or services, including developments in markets for 
such products or services. Dodd-Frank section 1028(b) states that the 
Bureau, by regulation, may prohibit or impose conditions or limitations 
on the use of an agreement between a covered person and a consumer for 
a consumer financial product or service providing for arbitration of 
any future dispute between the parties, if the Bureau finds that such a 
prohibition or imposition of conditions or limitations is in the public 
interest and for the protection of consumers. Section 1028(b) further 
states that the findings in such rule shall be consistent with the 
study conducted under Dodd-Frank section 1028(a).
1(b) Purpose
    As part of its authority under Dodd-Frank section 1028(b), the 
Bureau may prohibit or impose conditions or limitations on the use of 
pre-dispute arbitration agreements if the Bureau finds that they are 
``in the public interest and for the protection of consumers.'' 
Proposed Sec.  1040.1(b) would state that the proposed rule's purpose 
is to further these objectives. Dodd-Frank section 1028(b) also 
requires the findings in any rule issued under section 1028(b) to be 
consistent with the Study conducted under section 1028(a), which 
directs the Bureau to study the use of pre-dispute arbitration 
agreements in connection with the offering or providing of consumer 
financial products or services. For the reasons described above in Part 
VI the Bureau believes the preliminary findings in this proposed rule 
are consistent with the Study.

Section 1040.2 Definitions

    In proposed Sec.  1040.2, the Bureau proposes to set forth certain 
terms used in the regulation that the Bureau believes it is appropriate 
to define.
2(a) Class Action
    The substantive provisions of proposed Sec.  1040.4(a)(1), 
discussed below, concern class actions; thus, the Bureau is proposing 
to define ``class action.'' The Bureau believes that the term class 
action is broadly understood to mean a lawsuit in which one or more

[[Page 32871]]

parties seek to proceed as a representative of other similarly situated 
class members pursuant to Rule 23 of the Federal Rules of Civil 
Procedure or any State process analogous to Rule 23. This term refers 
to cases in which one or more parties seek class treatment regardless 
of when class treatment is sought; it should not be limited to cases 
filed initially as class actions. The Bureau intends ``State process 
analogous to Rule 23'' to refer to any State process substantially 
similar to the various iterations of Rule 23 since its adoption. 
Proposed Sec.  1040.2(a) would adopt this definition of class action 
and also clarify that this rule would apply to class actions filed in 
State court. The Bureau seeks comment on whether the proposed 
definition of class action would be appropriate. The Bureau further 
seeks comment on whether the Bureau should use ``State process 
analogous to Rule 23'' or an alternative formulation that may be 
broader or narrower, and what types of cases would be captured or 
excluded by such an alternative formulation.
2(b) Consumer
    Dodd-Frank section 1028(b) authorizes the Bureau to issue 
regulations concerning pre-dispute arbitration agreements between a 
covered person and a ``consumer.'' Dodd-Frank section 1002(4) defines 
the term consumer as an individual or an agent, trustee, or 
representative acting on behalf of an individual. Proposed Sec.  
1040.2(b) would borrow the definition of consumer from the Dodd-Frank 
Act and state that a consumer is an individual or an agent, trustee, or 
representative acting on behalf of an individual. The Bureau seeks 
comment on whether the proposed definition would be appropriate and 
whether it should consider other definitions of the term consumer.
2(c) Provider
    Dodd-Frank section 1028(b) authorizes the Bureau to issue 
regulations concerning pre-dispute arbitration agreements between a 
``covered person'' and a consumer. Dodd-Frank section 1002(6) defines 
the term ``covered person'' as any person that engages in offering or 
providing a consumer financial product or service and any affiliate of 
such a person if such affiliate acts as a service provider to that 
person. Section 1002(19) further defines person to mean an individual, 
partnership, company, corporation, association (incorporated or 
unincorporated), trust, estate, cooperative organization, or other 
entity.
    Throughout the proposed rule, the Bureau uses the term ``provider'' 
to refer to the entity to which the requirements in the proposed rule 
would apply. For example, proposed Sec.  1040.4(a)(1), discussed below, 
would prohibit providers from seeking to rely in any way on a pre-
dispute arbitration agreement entered into after the compliance date 
set forth in proposed Sec.  1040.5(a) (``compliance date'') with 
respect to any aspect of a class action that is related to any of the 
consumer financial products or services covered by proposed Sec.  
1040.3.
    Proposed Sec.  1040.2(c) would define provider as a subset of the 
term covered person. In doing so, proposed Sec.  1040.2(c) would 
clarify that the proposed rule's intended coverage would be within the 
parameters of the Bureau's authority under Dodd-Frank section 1028(b). 
Specifically, proposed Sec.  1040.2(c) would define the term provider 
to mean (1) a person as defined by Dodd-Frank section 1002(19) that 
engages in offering or providing any of the consumer financial products 
or services covered by proposed Sec.  1040.3(a) to the extent that the 
person is not excluded under proposed Sec.  1040.3(b); or (2) an 
affiliate of a provider as defined in proposed Sec.  1040.2(c)(1) when 
that affiliate would be acting as a service provider to the provider 
with which the service provider is affiliated consistent with the 
meaning set forth in 12 U.S.C. 5481(6)(B). The Bureau derives this 
formulation from the definition of covered person in Dodd-Frank section 
1002(6), 12 U.SC. 5481(6)(B).
    The definition of the term ``person'' includes the phrase ``or 
other entity.'' That term readily encompasses governments and 
government entities. Even if the term were ambiguous, the Bureau 
believes--based on its expertise and experience with respect to 
consumer financial markets--that interpreting it to encompass 
governments and government entities would promote the consumer 
protection, fair competition, and other objectives of the Dodd-Frank 
Act. The Bureau also believes that the terms ``companies '' or 
``corporations'' under the definition of ``person,'' on their face, 
cover all companies and corporations, including government-owned or -
affiliated companies and corporations. And even if those terms were 
ambiguous, the Bureau believes--based on its expertise and experience 
with respect to consumer financial markets--that interpreting them to 
cover government-owned or -affiliated companies and corporations would 
promote the objectives of the Dodd-Frank Act.
    The Bureau notes that proposed Sec.  1040.4(a)(1), discussed below, 
would apply to providers with respect to pre-dispute arbitration 
agreements entered into by other persons after the compliance date, 
even if that other person is excluded for coverage by proposed Sec.  
1040.3(b). For further discussion of this issue, see the discussion of 
proposed comment 4-2, below.
    The Bureau intends the phrase ``that engages in offering or 
providing any of the consumer financial products or services covered by 
Sec.  1040.3(a)'' to clarify that the proposed rule would apply to 
providers that use a pre-dispute arbitration agreement entered into 
with a consumer for the products and services enumerated in proposed 
Sec.  1040.3(a). The Bureau also intends this phrase to convey that, 
even if an entity would be a provider under proposed Sec.  1040.2(c) 
because it offers or provides consumer financial products or services 
covered by proposed Sec.  1040.3(a), it would not be a provider with 
respect to products and services that it may provide that are not 
covered by proposed Sec.  1040.3(a).
    Proposed comment 2(c)-1 would further clarify this issue and 
explain that a provider as defined in proposed Sec.  1040.2(c) that 
also engages in offering or providing products or services not covered 
by proposed Sec.  1040.3(a) must comply with this part only for the 
products or services that it offers or provides that are covered by 
proposed Sec.  1040.3(a). The proposed comment would clarify that, 
where an entity would be a provider because it offers or provides at 
least one covered product or service, it need not comply with this part 
with respect to all its products and services; it need comply only with 
respect to those that are covered by proposed Sec.  1040.3(a).
    The Bureau seeks comment on the proposed definition of provider, 
including whether proposed comment 2(c)-1 clarifies the scope of the 
term.
2(d) Pre-Dispute Arbitration Agreement
    Proposed Sec.  1040.2(d) would define the term pre-dispute 
arbitration agreement as an agreement between a provider and a consumer 
providing for arbitration of any future dispute between the parties. 
The Bureau's proposed definition of pre-dispute arbitration agreement 
is based on Dodd-Frank section 1028(b), which authorizes the Bureau to 
regulate the use of such agreements.
    The Bureau believes that the meaning of the term arbitration is 
widely

[[Page 32872]]

understood. As such, the Bureau is not proposing to define it. The 
Bureau seeks comment, however, on whether the term arbitration should 
be defined, and, if so, how and why. The Bureau further notes that, in 
the proposed definition of ``pre-dispute arbitration agreement,'' the 
phrase ``providing for arbitration of any future dispute between the 
parties'' would include agreements between providers and consumers 
under which, if one sues the other in court, either party can invoke 
the arbitration agreement to require that the dispute proceed, if at 
all, in arbitration instead.
    Proposed comment 2(d)-1 would state that a pre-dispute arbitration 
agreement for a consumer financial product or service includes any 
agreement between a provider and a consumer providing for arbitration 
of any future disputes between the parties, regardless of its form or 
structure. The proposed comment would provide two illustrative 
examples: (1) A standalone pre-dispute arbitration agreement that 
applies to a product or service; and (2) a pre-dispute arbitration 
agreement that is included within, annexed to, incorporated into, or 
otherwise made a part of a larger agreement that governs the terms of 
the provision of a product or service. This comment would help clarify 
that ``pre-dispute arbitration agreement'' would not be limited to a 
standalone ``agreement'' but could be a provision within an agreement 
for a consumer financial product or service.
    The Bureau is not aware of any Federal regulation that defines the 
term pre-dispute arbitration agreement but seeks comment on whether the 
proposed text--which restates the relevant statutory provision--would 
provide sufficient guidance as to when an arbitration agreement is 
``pre-dispute.'' This proposed definition of pre-dispute arbitration 
agreement would not include a voluntary arbitration agreement between a 
consumer and a covered person after a dispute has arisen. The Bureau 
seeks comment on whether the Bureau should define or provide additional 
clarification regarding when an arbitration agreement is ``pre-
dispute.''

Section 1040.3 Coverage

    As discussed above, Dodd-Frank section 1028(b) authorizes the 
Bureau to issue regulations concerning agreements between a covered 
person and a consumer ``for a consumer financial product or service'' 
providing for arbitration of any future disputes that may arise. 
Accordingly, proposed Sec.  1040.3 would set forth the products and 
services to which proposed part 1040 applies. Proposed Sec.  1040.3(a) 
generally would provide a list of products and services that would be 
covered by the proposed rule, while proposed Sec.  1040.3(b) would 
provide limited exclusions.
    The Bureau is proposing to cover a variety of consumer financial 
products and services that the Bureau believes are in or tied to the 
core consumer financial markets of lending money, storing money, and 
moving or exchanging money--all markets covered in significant part in 
the Study. These include, for example: (1) Most types of consumer 
lending (such as making secured loans or unsecured loans or issuing 
credit cards), activities related to that consumer lending (such as 
providing referrals, servicing, credit monitoring, debt relief, and 
debt collection services, among others, as well as the purchasing or 
acquiring of such consumer loans), and extending and brokering those 
automobile leases that are consumer financial products or services; (2) 
storing funds or other monetary value for consumers (such as providing 
deposit accounts); and (3) providing consumer services related to the 
movement or conversion of money (such as certain types of payment 
processing activities, transmitting and exchanging funds, and cashing 
checks).
    Proposed Sec.  1040.3(a) would describe the products and services 
in these core consumer financial markets that would be covered by part 
1040. Each component is discussed separately below in the discussion of 
each subsection of proposed Sec.  1040.3(a).\443\ The Bureau notes that 
both banks and nonbanks may provide these products and services. As 
discussed above in connection with the definition of ``provider'' in 
proposed Sec.  1040.2(c) and below in this section and in the Bureau's 
analysis under Dodd-Frank section 1022(b)(2), a covered person under 
the Dodd-Frank Act who engages in offering or providing a product or 
service described in proposed Sec.  1040.3(a) generally would be 
subject to the proposed rule, except to the extent an exclusion in 
proposed Sec.  1040.3(b) applies to that person.
---------------------------------------------------------------------------

    \443\ Following that discussion, an illustrative set of examples 
of persons providing these products and services is included in the 
introduction of the Section-by-Section Analysis to proposed Sec.  
1040.3(b).
---------------------------------------------------------------------------

1040.3(a) Covered Products and Services
    As set forth above, the Bureau's rulemaking authority under Dodd-
Frank section 1028(b) generally extends to the use of an agreement 
between a covered person and a consumer for a ``consumer financial 
product or service'' (as defined in Dodd-Frank section 1002(5)). 
However, as discussed in the Section-by-Section Analysis of proposed 
Sec.  1040.3(b)(5), Dodd-Frank sections 1027 and 1029 (codified at 12 
U.S.C. 5517 and 5519) exclude certain activities by certain covered 
persons, such as the sale of nonfinancial goods or services, including 
automobiles, from the Bureau's rulemaking authority in certain 
circumstances.\444\
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    \444\ However, as also discussed in greater detail in proposed 
Sec.  1040.3(b)(5), even where the person offering or providing a 
consumer financial product or service may be excluded from coverage 
under the regulation, for instance because that party is an 
automobile dealer extending a loan in circumstances that exempt the 
automobile dealer from the rulemaking authority of the Bureau under 
Dodd-Frank section 1029, the rule would still apply to providers of 
other consumer financial products or services (such as servicers or 
debt collectors) in connection with the same loan.
---------------------------------------------------------------------------

    In exercising its authority under section 1028, the Bureau is 
proposing to cover consumer financial products and services in what it 
believes are core markets of lending money, storing money, and moving 
or exchanging money. Accordingly, the Bureau is not, at this time, 
proposing to cover every type of consumer financial product or service 
as defined in Dodd-Frank section 1002(5), particularly those outside 
these three core areas, though the Bureau would continue to monitor 
markets for consumer financial products and services both those that 
would and would not be within the proposed scope and may at a later 
time revisit the scope of this proposed rule.
    In addition, the Bureau is proposing coverage of core product 
markets in a way that the Bureau believes would facilitate compliance 
because several terms in the proposed scope provisions are derived from 
existing, enumerated consumer financial protection statutes implemented 
by the Bureau. In so doing, the Bureau expects that the coverage of 
proposed Part 1040 would incorporate relevant future changes, if any, 
to the enumerated consumer financial protection statutes and their 
implementing regulations and to provisions of Title X of Dodd-Frank 
referenced in proposed Sec.  1040.3(a). For example, changes that the 
Bureau has proposed regarding the definition of an account under 
Regulation E would, if adopted, affect the scope of proposed Sec.  
1040.3(a)(6).
    Specifically, the Bureau is proposing in Sec.  1040.3(a) that 
proposed part 1040 generally would apply to pre-dispute arbitration 
agreements for the products or services listed in proposed Sec.  
1040.3(a) to the extent they are consumer financial products or 
services as defined by 12 U.S.C. 5481(5). As

[[Page 32873]]

proposed comment 3(a)-1 would explain, that provision generally defines 
two types of consumer financial products and services. The first type 
is any financial product or service that is ``offered or provided for 
use by consumers primarily for personal, family, or household 
purposes.'' The second type is a financial product or service that is 
delivered, offered, or provided in connection with the first type of 
consumer financial product or service.
    The Bureau seeks comment on all aspects of its proposed approach to 
coverage in this proposed rulemaking. Specifically, the Bureau seeks 
comment on whether any products or services that the Bureau has 
proposed to cover should not be covered, and whether any types of 
consumer financial products or services that it has not proposed to 
cover should be covered. The Bureau further seeks comment on its 
approach to referencing terms in enumerated consumer financial 
protection statutes and Dodd-Frank sections (and their respective 
implementing regulations) as set forth in proposed Sec.  1040.3, and 
the fact that future changes to these terms may affect the scope of the 
proposed rule.
1040.3(a)(1)
    The Bureau believes that the proposed rule should apply to consumer 
credit and related activities including collecting on consumer credit. 
Specifically, proposed Sec.  1040.3(a)(1) would include in the coverage 
of proposed part 1040 consumer lending under ECOA, 15 U.S.C. 1691 et 
seq., as implemented by Regulation B, 12 CFR part 1002, and activities 
related to that lending.\445\
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    \445\ The related activity of debt collection would be covered 
by proposed Sec.  1040.3(a)(10).
---------------------------------------------------------------------------

    In particular, proposed Sec.  1040.3(a)(1) would cover specific 
consumer lending activities engaged in by persons acting as 
``creditors'' as defined by Regulation B, along with the related 
activities of acquiring, purchasing, selling, or servicing such 
consumer credit. Proposed Sec.  1040.3(a)(1) breaks these covered 
consumer financial products or services into the following five types: 
(1) Providing an ``extension of credit'' that is ``consumer credit'' as 
defined in Regulation B, 12 CFR 1002.2; (2) acting as a ``creditor'' as 
defined by 12 CFR 1002.2(l) by ``regularly participat[ing] in a credit 
decision'' consistent with its meaning in 12 CFR 1002.2(l) concerning 
``consumer credit'' as defined by 12 CFR 1002.2(h); (3) acting, as a 
person's primary business activity, as a ``creditor'' as defined by 12 
CFR 1002.2(l) by ``refer[ring] applicants or prospective applicants to 
creditors, or select[ing] or offer[ing] to select creditors to whom 
requests for credit may be made'' consistent with its meaning in 12 CFR 
1002.2(l); (4) acquiring, purchasing, or selling an extension of 
consumer credit covered by proposed Sec.  1040.3(a)(1)(i); or (5) 
servicing an extension of consumer credit covered by proposed Sec.  
1040.3(a)(1)(i).
1040.3(a)(1)(i) and (ii)
    Proposed Sec.  1040.3(a)(1)(i) would cover providing any 
``extension of credit'' that is ``consumer credit'' as defined by 
Regulation B, 12 CFR 1002.2.\446\ In addition, proposed Sec.  
1040.3(a)(1)(ii) would cover acting as a ``creditor'' as defined by 12 
CFR 1002.2(l) by ``regularly participat[ing] in a credit decision'' 
consistent with its meaning in 12 CFR 1002.2(l) concerning ``consumer 
credit'' as defined by 12 CFR 1002.2(h). Collectively, the coverage 
proposed in Sec.  1040.3(a)(1)(i) and (ii) would reach creditors both 
when they approve consumer credit transactions and extend credit, as 
well as when they participate in decisions leading to the denial of 
applications for consumer credit. ECOA has applied to these activities 
since its enactment in the 1970s, and the Bureau believes that entities 
are familiar with the application of ECOA to their products and 
services. Regulation B, which implements ECOA, defines credit as ``the 
right granted by a creditor to an applicant to defer payment of a debt, 
incur debt and defer its payment, or purchase property or services and 
defer payment therefor.'' 12 CFR 1002.2(j).\447\ By proposing to cover 
extensions of consumer credit and participation in consumer credit 
decisions already covered by ECOA as implemented by Regulation B, the 
Bureau expects that participants in the consumer credit market would 
have a significant body of experience and law to draw upon to 
understand how the proposed rule would apply to them, which would 
facilitate compliance with proposed part 1040.
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    \446\ As noted in proposed comment 3(a)(1)(i)-1, Regulation B 
defines ``credit'' by reference to persons who meet the definition 
of ``creditor'' in Regulation B. 12 CFR 1002.2(l). Persons who do 
not regularly participate in credit decisions in the ordinary course 
of business, for example, are not creditors as defined by Regulation 
B. Id. In addition, by proposing to cover only credit that is 
``consumer credit'' under Regulation B, the Bureau is making clear 
that the proposed rule would not apply to business loans.
    \447\ See also 12 CFR 1002.2(q) (Regulation B provision defining 
the terms ``extend credit'' and ``extension of credit'' as ``the 
granting of credit in any form (including, but not limited to, 
credit granted in addition to any existing credit or credit limit; 
credit granted pursuant to an open-end credit plan; the refinancing 
or other renewal of credit, including the issuance of a new credit 
card in place of an expiring credit card or in substitution for an 
existing credit card; the consolidation of two or more obligations; 
or the continuance of existing credit without any special effort to 
collect at or after maturity'').
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    As indicated in its SBREFA Outline, the Bureau had originally 
considered covering consumer credit under either of two statutory 
schemes: TILA or ECOA and their implementing regulations.\448\ Upon 
further consideration, however, the Bureau believes that using a single 
definition would be simpler and thus it proposes to use the Regulation 
B definitions under ECOA because they are more inclusive. For example, 
unlike TILA and its implementation regulation (Regulation Z, 12 CFR 
1026.2(17)(i)), ECOA and Regulation B do not include a blanket 
exclusion for credit with four or fewer installments and no finance 
charge. Regulation B also explicitly addresses participating in credit 
decisions, and as discussed below in the Section-by-Section Analysis to 
proposed Sec.  1040.3(a)(1)(iii), loan brokering.
---------------------------------------------------------------------------

    \448\ SBREFA Outline at 22.
---------------------------------------------------------------------------

    The Bureau further notes that in many circumstances, merchants, 
retailers, and other sellers of nonfinancial goods or services 
(hereafter, merchants) may act as creditors under ECOA in extending 
credit to consumers. While such extensions of consumer credit would be 
covered by proposed Sec.  1040.3(a)(1), exemptions proposed in Sec.  
1040.3(b) may exclude the merchant itself from coverage. Those 
exemptions are discussed in detail in the corresponding part of the 
Section-by-Section Analysis further below. On the other hand, if a 
merchant creditor were not eligible for any of these proposed 
exemptions with respect to a particular extension of consumer credit, 
then proposed Part 1040 generally would apply to the merchant with 
respect to such transactions. For example, the Bureau believes merchant 
creditors significantly engaged in extending consumer credit with a 
finance charge often would be ineligible for these exemptions.\449\
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    \449\ Certain automobile dealers may still be exempt, however, 
under proposed Sec.  1040.3(b)(5) when they are extending credit 
with a finance charge in circumstances that exclude the automobile 
dealer from the Bureau's rulemaking authority under Dodd-Frank 
section 1029. In addition, certain small entities may still be 
exempt under proposed Sec.  1040.3(b)(5) in certain other 
circumstances, such as those specified in Dodd-Frank section 
1027(a)(2)(D). A merchant that is a government or government 
affiliate also could be exempt under proposed Sec.  1040.3(b)(2).
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1040.3(a)(1)(iii)
    Proposed Sec.  1040.3(a)(1)(iii) would cover persons who, as their 
primary

[[Page 32874]]

business activity, act as ``creditors'' as defined by Regulation B, 12 
CFR 1002.2(l), by engaging in any one or more of the following 
activities covered by Regulation B: referring consumers to other ECOA 
creditors, or selecting or offering to select such other creditors from 
whom the consumer may obtain ECOA credit. Regulation B comment 2(l)-2 
describes examples of persons engaged in such activities.\450\ 
Regularly engaging in these activities generally makes a person a 
creditor under Regulation B, 12 CFR 1002.2(l). Thus proposed Sec.  
1040.3(a)(1)(iii) would only apply to persons who are regularly 
engaging in these activities.\451\
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    \450\ Regulation B comment 2(l)-2 states: ``Referrals to 
creditors. For certain purposes, the term creditor includes such 
persons as real estate brokers, automobile dealers, home builders, 
and home-improvement contractors who do not participate in credit 
decisions but who only accept applications and refer applicants to 
creditors, or select or offer to select creditors to whom credit 
requests can be made.''
    \451\ The Bureau also has proposed a more specific exemption for 
activities that are provided only occasionally. See proposed Sec.  
1040.3(b)(3) and the Section-by-Section Analysis thereto.
---------------------------------------------------------------------------

    In addition, in this proposed rule, the Bureau does not generally 
propose to cover activities of merchants to facilitate payment for the 
merchants' own nonfinancial goods or services.\452\ Accordingly, 
proposed Sec.  1040.3(a)(1)(iii) would only apply to persons providing 
these types of referral or selection services as their primary 
business.\453\ Thus, as proposed comment 3(a)(1)(iii)-1 would clarify, 
a merchant whose primary business activity consists of the sale of 
nonfinancial goods or services generally would not fall into this 
category. Proposed Sec.  1040.3(a)(1)(iii) would not apply, for 
example, to a merchant that refers the consumer to a creditor to help 
the consumer purchase the merchant's own nonfinancial goods and 
services.\454\
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    \452\ As noted above, however, the proposed rule often would 
apply to merchant creditors engaged significantly in extending 
consumer credit with a finance charge.
    \453\ Transmitting or payment processing in similar 
circumstances also generally would not be covered by paragraphs 
(a)(7) and (8) of proposed Sec.  1040.3, as discussed in the 
Section-by-Section Analysis of those provisions below.
    \454\ Of course, if the merchant regularly participates in a 
consumer credit decision as a creditor under Regulation B, proposed 
Sec.  1040.3(a)(1)(ii) could still apply to the merchant, 
particularly in circumstances where no exemptions in proposed Sec.  
1040.4(b) apply to the merchant.
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1040.3(a)(1)(iv) and (v)
    Proposed Sec.  1040.3(a)(1)(iv) and (v) would cover certain 
specified types of consumer financial products or services when offered 
or provided with respect to consumer credit covered by proposed Sec.  
1040.3(a)(1)(i). First, proposed Sec.  1040.3(a)(1)(iv) would cover 
acquiring, purchasing, or selling an extension of consumer credit 
covered by proposed Sec.  1040.3(a)(1)(i). In addition, proposed Sec.  
1040.3(a)(1)(v) would cover servicing of an extension of consumer 
credit covered by proposed Sec.  1040.3(a)(1)(i). With regard to 
servicing, the Bureau is not proposing a specific definition but, 
proposed comment 3(a)(1)(v)-1 would note other examples where the 
Bureau has defined servicing: For the postsecondary student loan market 
in 12 CFR 1090.106 and the mortgage market in Regulation X, 12 CFR 
1024.2(b).\455\
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    \455\ 12 CFR 1090.106 is the Bureau's larger participant rule 
for the postsecondary student loan servicing market. As noted in the 
rule, ``servicing loans'' is a ``consumer financial product or 
service'' pursuant to the Dodd-Frank Act. See Defining Larger 
Participants of the Student Loan Servicing Market, 78 FR 73383, 
73385 n.25 (Dec. 6, 2013) (citing 12 U.S.C. 5481(15)(A)(i) (defining 
``financial product or service,'' including ``extending credit and 
servicing loans'') and 12 U.S.C. 5481(5) (defining ``consumer 
financial product or service'').
---------------------------------------------------------------------------

    The Bureau invites comment on proposed Sec.  1040.3(a)(1) and 
related proposed commentary. In particular, the Bureau requests comment 
on defining coverage in proposed Sec.  1040.3(a)(1) by reference to 
consumer lending activities carried out by ``creditors'' as defined by 
Regulation B, and the activities of acquiring, purchasing, selling, and 
servicing extensions of consumer credit as defined by Regulation B. The 
Bureau also seeks comment on whether this proposed coverage should be 
expanded or reduced or whether there are any alternative definitions 
the Bureau should consider in its proposed coverage of consumer credit 
transactions and related activities. For example, the Bureau requests 
comment on the ``primary business'' limitation in proposed Sec.  
1040.3(a)(1)(iii), including whether the term ``primary business'' 
should be defined and if so, how, or whether a different limitation 
should be used, such as an exclusion for referral or selection 
activities that are incidental to the sale of a nonfinancial good or 
service. In addition, the Bureau notes that a common activity performed 
by creditors and consumer credit servicers is furnishing information to 
a consumer reporting agency, an activity that is covered by the Fair 
Credit Reporting Act (FCRA), 15 U.S.C. 1681s-2. The Bureau therefore 
requests comment on whether such furnishing, by any person covered by 
proposed Sec.  1040.3(a)(1), should also be separately identified as a 
covered product or service.
1040.3(a)(2)
    The Bureau believes the proposed rule should cover brokering or 
extending consumer automobile leases, consistent with the definition of 
that activity in the Bureau's larger participant rulemaking for the 
automobile finance market codified at 12 CFR 1090.108. As the Bureau 
explained in that rulemaking, from the perspective of the consumer, 
many automobile leases function similarly to financing for automobile 
purchase transactions and have a similar impact on the consumer and his 
or her well-being.\456\ Accordingly, proposed Sec.  1040.3(a)(2) would 
extend coverage to brokering or extending consumer automobile leases in 
either of two circumstances identified in 12 CFR 1090.108, each of 
which applies only if the initial term of the lease is at least 90 
days: (1) The lease is the ``functional equivalent'' of an automobile 
purchase finance arrangement and is on a ``non-operating basis'' within 
the meaning of Dodd-Frank section 1002(15)(A)(ii); or (2) the lease 
qualifies as a ``full-payout lease and a net lease'' within the meaning 
of the Bureau's Larger Participant rulemaking for the auto finance 
market, codified at 12 CFR 1001.2(a).\457\ The Bureau seeks comment on 
the coverage of consumer automobile leasing in proposed Sec.  
1040.3(a)(2).
---------------------------------------------------------------------------

    \456\ An automobile pursuant to that regulation means any self-
propelled vehicle primarily used for personal, family, or household 
purposes for on-road transportation and does not include motor 
homes, recreational vehicles, golf carts, and motor scooters. 12 CFR 
1090.108(a).
    \457\ The Bureau finalized a larger participant rule for auto 
financing in 2015. Defining Larger Participants of the Automobile 
Financing Market and Defining Certain Automobile Leasing Activity as 
a Financial Product or Service, 80 FR 37495 (Jun. 30, 2015). That 
rule provides greater detail on the Bureau's approach to defining 
extending or brokering automobile leasing in accordance with the 
Bureau's authority under the Dodd-Frank Act. Id. The provision at 12 
CFR 1001.2(a)(1) covers leases of an automobile where the lease 
``[q]ualifies as a full-payout lease and a net lease, as provided by 
12 CFR 23.3(a), and has an initial term of not less than 90 days, as 
provided by 12 CFR 23.11 . . . .''.
---------------------------------------------------------------------------

1040.3(a)(3)
    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 Sec.  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 Sec.  
1040.3(a)(3)(i), or avoiding foreclosure. With the exception of the 
reference to an extension of consumer credit covered by proposed Sec.  
1040.3(a)(3)(i), these terms derive directly from the definition of 
this consumer financial product or service in

[[Page 32875]]

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 Sec.  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.
---------------------------------------------------------------------------

    \458\ 12 U.S.C. 5481(15)(A)(viii)(II). For examples of the types 
of services that fall within this proposed coverage, see the 
following Bureau enforcement actions: Complaint ] 4, CFPB v. 
Meracord, LLC, No. 3:13-cv-05871 (W.D. Wash. Oct. 3, 2013); 
Complaint ] 4, CFPB v. Global Client Solutions, No. 2:14-cv-06643 
(C.D. Cal. Aug. 25, 2014); Complaint ]] 8-14, CFPB v. Orion 
Processing, LLC, No. 1:15-cv-23070-MGC (S.D. Cal. Aug. 17, 2015).
---------------------------------------------------------------------------

    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 Sec.  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 Sec.  
1040.3(a)(3), including whether the Bureau should consider 
alternatives, and if so, which alternatives.
---------------------------------------------------------------------------

    \459\ SBREFA Outline supra note 331, at 22. See 16 CFR 310.2(o) 
(covering services seeking debt relief for consumers from 
``unsecured creditors or debt collectors'').
    \460\ In addition, the Bureau is concerned that incorporating a 
term from a regulation that applies in the telemarketing context 
only may create confusion, and could reduce protection for consumers 
obtaining debt relief services from providers not engaged in 
telemarketing.
    \461\ See 15 U.S.C. 1681s-2.
---------------------------------------------------------------------------

    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.
1040.3(a)(4)
    The Bureau believes that the proposed rule should apply to 
providing consumers with consumer reports and information specific to a 
consumer from consumer reports, such as by providing credit scores and 
credit monitoring. Specifically, proposed Sec.  1040.3(a)(4) would 
include in the scope of proposed part 1040 providing directly to a 
consumer a consumer report as defined by the FCRA, 15 U.S.C. 1681a(d), 
a credit score, or other information specific to a consumer from such a 
consumer report, except when such consumer report is provided by a user 
covered by 15 U.S.C. 1681m solely in connection with an adverse action 
as defined in 15 U.S.C. 1681a(k) with respect to a product or service 
not covered by any of paragraphs (a)(1) through (3) or paragraphs 
(a)(5) through (10) of proposed Sec.  1040.3.\462\
---------------------------------------------------------------------------

    \462\ In its SBREFA Outline (supra note 331, at 23), the Bureau 
indicated it was considering a proposal to cover credit monitoring 
services. The Bureau believes that it is appropriate to propose 
covering not only services that provide ``monitoring'' of consumer 
credit report information, but also that provide such information on 
a one-off basis. That is, the nature and source of the underlying 
information is what should define this scope of coverage, and not 
the frequency with which the information is provided to the 
consumer.
---------------------------------------------------------------------------

    The FCRA, enacted in 1970, defines which types of businesses are 
consumer reporting agencies. 15 U.S.C. 1681a(f). Consumer reporting 
agencies are the original sources of consumer reports as defined by the 
FCRA.\463\ In general, the consumer reporting agencies provide consumer 
reports to ``users'' of these reports within the meaning of the FCRA 
who may in turn provide the consumer reports or information from them 
to consumers.\464\ The consumer reporting agencies also provide 
consumer reports directly to consumers. The Bureau believes that 
defining this scope of coverage by reference to a statutorily-defined 
type of underlying information, a consumer report, would help providers 
better understand which types of products and services are covered, 
which would facilitate compliance with Part 1040 as proposed.\465\
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    \463\ 15 U.S.C. 1681a(d).
    \464\ 15 U.S.C. 1681m.
    \465\ To the extent a future Bureau regulation were to further 
interpret the definition of consumer report under 15 U.S.C. 
1681a(d), or other terms incorporated into that definition such as a 
consumer reporting agency, 15 U.S.C. 1681a(f), the definition in the 
implementing regulation would be used, in conjunction with the 
statute, to define this component of coverage of this proposed rule.
---------------------------------------------------------------------------

    Proposed Sec.  1040.3(a)(4) therefore would apply to consumer 
reporting agencies when providing such products or services directly to 
consumers, as well as to other types of entities that deliver consumer 
reports or information from consumer reports directly to consumers. For 
example, proposed Sec.  1040.3(a)(4) would cover not only credit 
monitoring services that monitor entries on a consumer's consumer 
credit report on an ongoing basis, but also a discrete service that 
transmits a consumer report as defined by the FCRA, a credit score, or 
other information from a consumer report directly to a consumer. Such 
discrete services may be provided at the consumer's request or as 
required by law, such as via a notice of adverse action on a consumer 
credit application,\466\ in connection with a risk-based pricing notice 
generally required under Regulation V, 12 CFR 1022.72, when a consumer 
receives materially less favorable material terms for consumer credit 
based on the creditor's use of a consumer report, or in connection with 
transmission of results of reinvestigation of a dispute from a consumer 
reporting agency to a consumer pursuant to the FCRA.\467\
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    \466\ See, e.g., 15 U.S.C. 1681j(a) (FCRA provision granting 
consumer right to free annual disclosure from consumer credit report 
file); 15 U.S.C. 1681g(a) (mandating consumer reporting agency 
provide information from the consumer's file to the consumer upon 
request); 15 U.S.C. 1681g(f) (mandating consumer reporting agency 
provide consumer credit score to the consumer upon request); and 15 
U.S.C. 1681m(a) (FCRA provision mandating that user of consumer 
report to provide adverse action notice that includes credit score, 
among other information).
    \467\ See, e.g., 15 U.S.C. 1681i(a)(6) (FCRA provision mandating 
consumer reporting agency to provide the consumer with notice of 
results of reinvestigation of disputed information in the consumer's 
credit report file).
---------------------------------------------------------------------------

    Proposed Sec.  1040.3(a)(4) would not, however, cover users of 
consumer reports who provide those reports or information from them to 
consumers solely in connection with adverse action notices with respect 
to a product or service that is not otherwise covered by proposed Sec.  
1040.3(a). For example, a user of a consumer report providing a 
consumer with a copy of their credit report solely in connection with 
an adverse action notice taken on an application for employment would 
not be covered by proposed Sec.  1040.3(a)(4).

[[Page 32876]]

    The Bureau invites comment on proposed Sec.  1040.3(a)(4), 
including whether the reference to a consumer report as defined in the 
FCRA is appropriate and whether the coverage of proposed Sec.  
1040.3(a)(4) should be expanded or narrowed, and, if so, how. In 
particular, the Bureau requests comment on whether the proposed rule 
also should cover products and services that provide or monitor 
information obtained from sources other than a consumer report under 
the FCRA, for example as part of a broader suite of identity theft 
prevention services, and if so, which such products or services should 
be covered and why. In addition, the Bureau requests comment on whether 
proposed Sec.  1040.3(a)(4) should apply to a broader range of services 
undertaken by consumer reporting agencies as defined by the FCRA that 
may have a bearing on the ability of consumers to participate in the 
credit market and the manner in which they do so. Such activities could 
include conducting investigations of information in consumer reports 
that is disputed by consumers, opting consumers out of information 
sharing, placing a fraud alert on a consumer's credit report, or 
placing a security freeze on a consumer's credit report.
    Finally, the Bureau requests comment on whether the use of 
arbitration agreements by consumer reporting agencies in the provision 
of the products and services described above may have an impact on the 
ability of consumers to pursue or participate in class actions 
asserting claims under FCRA against the consumers reporting agencies 
more generally, and if so, whether the proposed rule should mitigate 
those impacts, and if so, how.
1040.3(a)(5)
    The Bureau believes the proposed rule should apply to deposit and 
share accounts. Proposed Sec.  1040.3(a)(5) would include in the 
coverage of proposed Part 1040 accounts subject to the Truth in Savings 
Act (TISA), 12 U.S.C. 4301 et seq., and its implementing regulations, 
12 CFR part 707, which applies to credit unions, and Regulation DD, 12 
CFR part 1030, which applies to depository institutions.
    TISA created uniform disclosure requirements for deposit and share 
accounts.\468\ For banks, the Bureau's Regulation DD implements TISA. 
For credit unions, the National Credit Union Administration implements 
TISA in its own regulations codified at 12 CFR part 707. TISA has 
existed since 1991 and the Bureau believes that banks and credit unions 
are familiar with when TISA applies to accounts that they may offer. 
Accordingly, the Bureau believes that defining the accounts the Bureau 
proposes cover by reference to terms in TISA, and its implementing 
regulations, Regulation DD and 12 CFR part 707 would facilitate 
compliance with proposed Part 1040. The Bureau invites comment on 
proposed Sec.  1040.3(a)(5), including its reference to TISA, whether 
the Bureau should reference other definitions of deposit or share 
accounts beyond those also included in proposed Sec.  1040.3(a)(6) 
discussed below, and whether this portion of the proposed coverage 
should be expanded or narrowed, and if so, how.
---------------------------------------------------------------------------

    \468\ 12 U.S.C. 4301(b).
---------------------------------------------------------------------------

1040.3(a)(6)
    In addition to coverage of deposit and share accounts as defined by 
(or within the meaning set forth in) TISA in proposed Sec.  
1040.3(a)(5), the Bureau believes the proposed rule should cover other 
accounts as well as remittance transfers subject to EFTA, 15 U.S.C. 
1693 et seq. EFTA applies, for example, to nonbank providers of 
accounts and to many, but not necessarily all, of the deposit and share 
accounts provided by depository institutions. Thus, proposed Sec.  
1040.3(a)(6) would include in the coverage for proposed part 1040 
accounts and remittance transfers subject to EFTA, including its 
implementing regulation, Regulation E, 12 CFR part 1005. EFTA, first 
adopted in 1978, provides a basic framework establishing the rights, 
liabilities, and responsibilities of participants in electronic fund 
and remittance transfer systems and creates rules specific to consumer 
asset accounts and remittance transfers.\469\ The Bureau implements 
EFTA in Regulation E. The Bureau believes that defining this coverage 
by reference to accounts and remittance transfers subject to EFTA as 
implemented by Regulation E would facilitate compliance with proposed 
part 1040.
---------------------------------------------------------------------------

    \469\ See 15 U.S.C. 1693(b); 12 CFR 1005.2(b) (defining 
``account'') and 12 CFR 1005.30(e) (defining ``remittance 
transfer'').
---------------------------------------------------------------------------

    The Bureau notes that it has separately proposed a rule to extend 
the definition of ``account'' to include ``prepaid accounts.'' \470\ As 
noted above, where this proposed rule references terms from another 
statute or its implementing regulations, to the extent that term is 
redefined or the subject of a new interpretation in the future, that 
new definition or interpretation would apply to the use of that term in 
proposed Sec.  1040.3. Here, for example, any new definition of account 
that would include prepaid products would be incorporated into proposed 
Sec.  1040.3(a)(6).
---------------------------------------------------------------------------

    \470\ Prepaid Accounts Under the Electronic Fund Transfer Act 
(Regulation E) and the Truth in Lending Act (Regulation Z), 79 FR 
77101 (Dec. 23, 2014) (hereinafter Prepaid NPRM). The Bureau seeks 
comment on whether the products that would be included in Regulation 
E by that proposed rule should be included in proposed Sec.  
1040.3(a)(6).
---------------------------------------------------------------------------

    The Bureau notes that EFTA also regulates preauthorized electronic 
fund transfers (PEFTs) and store gifts cards and gift certificates. The 
Bureau has not proposed to include those activities as covered products 
or services under proposed Sec.  1040.3(a)(6). The Bureau notes that 
certain gift cards and gift certificates redeemable only at a single 
store or affiliated group of merchants, while subject to Regulation 
E,\471\ are payment devices that merchants use to help consumers pay 
for their own goods or services, which as noted above, the Bureau is 
not proposing to cover except in limited circumstances. In addition, 
PEFTs, while not described as a separate category of coverage, 
generally would be covered when offered as part of a covered product or 
service. For example, the Bureau understands that PEFTs may be offered 
by creditors and servicers of consumer credit under proposed Sec.  
1040.3(a)(1), providers of TISA or EFTA accounts or remittance 
transfers under paragraphs (a)(5) or (6) of proposed Sec.  1040.3, 
funds transmitting services under proposed Sec.  1040.3(a)(7), payment 
processing under proposed Sec.  1040.3(a)(8), or debt collection under 
proposed Sec.  1040.3(a)(10).
---------------------------------------------------------------------------

    \471\ See 12 CFR 1005.20(a).
---------------------------------------------------------------------------

    The Bureau invites comment on proposed Sec.  1040.3(a)(6), 
including the reference to accounts or remittance transfers subject to 
EFTA, as implemented by Regulation E, and whether it should be expanded 
or narrowed. The Bureau also seeks comment on whether the proposed rule 
should cover other types of stored value products and services within 
the meaning of Dodd-Frank Act section 1002(15)(A)(v), and if so, what 
these products and services are, why they should be covered, and how 
they should be defined.
1040.3(a)(7)
    The Bureau believes that the proposed rule should apply to 
transmitting or exchanging funds. Proposed Sec.  1040.3(a)(7) would 
include in the coverage of proposed part 1040 transmitting or 
exchanging funds, except when integral to another product or service 
that is not covered by proposed Sec.  1040.3. Dodd-Frank section 
1002(29) defines transmitting or exchanging funds broadly to include

[[Page 32877]]

receiving currency, monetary value, or payment instruments from a 
consumer for purposes of exchanging or transmitting by any means, 
including, among other things, wire, facsimile, electronic transfer, 
the Internet, or through bill payment services or business that 
facilitate third-party transfers.
    For example, a business that provides consumers with domestic money 
transfers generally would be covered by proposed Sec.  1040.3(a)(7). As 
noted above, however, proposed Sec.  1040.3(a)(7) would not apply to 
transmitting or exchanging funds where that activity is integral to a 
non-covered product or service. Thus, proposed Sec.  1040.3(a)(7) 
generally would not apply, for example, to a real estate settlement 
agent, an attorney, or a trust company or other custodian transmitting 
funds from an escrow or trust account that are an integral part of real 
estate settlement services or legal services. By contrast, a merchant 
who offers a domestic money transfer service as a stand-alone product 
to consumers would be covered by proposed Sec.  1040.3(a)(7). In 
addition, the Bureau believes that mobile wireless third-party billing 
services that engage in transmitting funds would be covered by proposed 
Sec.  1040.3(a)(7), as the Bureau understands that such services would 
not typically be integral to the provision of wireless 
telecommunications services.
    The Bureau seeks comment on proposed Sec.  1040.3(a)(7), including 
whether the Bureau should consider alternatives in defining these 
terms, and if so, particular definitions or changes the Bureau should 
consider and why. For example, the Bureau seeks comment on whether the 
Bureau should define the limitation on this coverage by reference to 
funds transmitting or exchanging that is necessary or essential to a 
non-covered product or service, rather than by reference to such 
activities that are integral to the non-covered product or service.
1040.3(a)(8)
    The Bureau believes that the proposed rule should cover certain 
types of payment and financial data processing. Proposed Sec.  
1040.3(a)(8) therefore would include in the coverage of proposed Part 
1040 any product or service in which the provider or the provider's 
product or service accepts financial or banking data directly from a 
consumer for the purpose of initiating a payment by a consumer via a 
payment instrument as defined 15 U.S.C. 5481(18) \472\ or initiating a 
credit card or charge card transaction for a consumer, except when the 
person accepting the data or providing the product or service accepting 
the data is selling or marketing the nonfinancial good or service for 
which the payment, credit card, or charge card transaction is being 
made. Proposed comment 3(a)(8)-1 would clarify that the definitions of 
the terms credit card and charge card in Regulation Z, 12 CFR 
1026.2(a)(15), apply to the use of these terms in proposed Sec.  
1040.3(a)(8).
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    \472\ Dodd-Frank section 1002(18) defines a ``payment 
instrument'' as ``a check, draft, warrant, money order, traveler's 
check, electronic instrument, or other instrument, payment of funds, 
or monetary value (other than currency).''
---------------------------------------------------------------------------

    The coverage of proposed Sec.  1040.3(a)(8) would not include all 
types of payment and financial data processing, but rather only those 
types that involve accepting financial or banking data directly from 
the consumer for initiating a payment, credit card, or charge card 
transaction. An entity would be covered, for example, by providing the 
consumer with a mobile phone application (or app, for short) that 
accepts this data from the consumer and transmits it to a merchant, a 
creditor, or others. An entity also would be covered by itself 
accepting the data from the consumer at a storefront or kiosk, by 
electronic means on the Internet or by email, or by telephone. For 
example, a wireless, wireline, or cable provider that allows consumers 
to initiate payments to third parties through its billing platform 
would be covered by proposed Sec.  1040.3(a)(8).
    The Bureau notes that the breadth of proposed Sec.  1040.3(a)(8) 
would be limited in several ways. First, the coverage of proposed Sec.  
1040.3(a)(8) would not include merchants, retailers, or sellers of 
nonfinancial goods or services when they are providing payment 
processing services directly and exclusively for purpose of initiating 
payments instructions by the consumer to pay such persons for the 
purchase of, or to complete a commercial transaction for, such 
nonfinancial goods or services. Those types of payment processing 
services are excluded from the type of financial product or service 
identified in Dodd-Frank section 1002(15)(A)(vii)(I). As a result, they 
would not be a consumer financial product or service pursuant to 12 
U.S.C. 5481(5), which is a statutory limitation on the coverage of 
proposed Sec.  1040.3(a). For the sake of clarity, proposed Sec.  
1040.3(a)(8) would state that it would not apply to accepting 
instructions directly from a consumer to pay for a nonfinancial good or 
service sold by the person who is accepting the instructions. In 
addition, proposed Sec.  1040.3(a)(8) would not apply to accepting 
instructions directly from a consumer to pay for a nonfinancial good or 
service marketed by the person who is accepting the instructions. As a 
result of this proposed exception, proposed Sec.  1040.3(a)(8) would 
not reach, for example, a sales agent, such as a travel agent, who 
accepts an instruction from a consumer to pay for a nonfinancial good 
or service that is marketed by the agent on behalf of a third party 
that provides the nonfinancial good or service.
    The Bureau further notes that certain forms of payment processing 
also would be covered by other provisions of proposed Sec.  1040.3(a). 
For example, proposed Sec.  1040.3(a)(1)(v) (servicing of consumer 
credit), Sec.  1040.3(a)(3) (debt relief services), Sec.  1040.3(a)(5) 
(deposit and share accounts), Sec.  1040.3(a)(6) (consumer asset 
accounts and remittance transfers), Sec.  1040.3(a)(7) (transmitting or 
exchanging funds), or Sec.  1040.3(a)(10) (debt collection) could 
involve certain forms of payment processing, whether or not those forms 
also would be covered by proposed Sec.  1040.3(a)(8).
    The Bureau seeks comment on proposed Sec.  1040.3(a)(8), including 
on whether it should adopt a broader, narrower, or different definition 
of covered payment and financial data processing and, if so, why and 
how it should do so. For example, the Bureau seeks comment on whether 
proposed Sec.  1040.3(a)(8) should include an exclusion like the 
exclusion in proposed Sec.  1040.3(a)(7) for products or services that 
are integral to another product or service not covered by proposed 
Sec.  1040.3, and if so, what examples of such products or services 
should be excluded and why.
1040.3(a)(9)
    The Bureau believes that the proposed rule should apply to cashing 
checks for consumers as well as to associated consumer check collection 
and consumer check guaranty services. Proposed Sec.  1040.3(a)(9) would 
include in the coverage of proposed Part 1040 check cashing, check 
collection, or check guaranty services, which are types of consumer 
financial product or service identified in Dodd-Frank section 
1002(15)(A)(vi). The Bureau seeks comment on proposed Sec.  
1040.3(a)(9), including on whether the Bureau should consider 
alternatives in defining this scope of coverage, and if so, particular 
definitions or changes the Bureau should consider and why.

[[Page 32878]]

1040.3(a)(10)
    The Bureau believes that the proposed rule should apply to debt 
collection activities arising from products covered by paragraphs 
(a)(1) through (9) of proposed Sec.  1040.3. Dodd-Frank section 
1002(15)(A)(x) identifies debt collection as a type of consumer 
financial product or service that is separate from, but related to, 
other types of consumer financial products or services. In the proposed 
rule, the Bureau is similarly proposing to include a separate provision 
specifying the coverage of activities relating to debt collection in 
proposed Sec.  1040.3(a)(10). In addition to collections on consumer 
credit as defined under ECOA, other products and services covered by 
proposed Sec.  1040.3(a) may lead to collections; if any of these 
collection activities were not separately covered, collectors in these 
cases could seek to invoke arbitration agreements. Yet the Study showed 
that FDCPA class actions were the most common type of class actions 
filed across six significant markets and that debt collection class 
settlements were by far the most common type of class action settlement 
in all of consumer finance,\473\ which in turn suggests that debt 
collection is an activity in which it is especially important to allow 
for private enforcement, including class actions, to guarantee the 
consumer protections afforded by the FDCPA, among other applicable 
laws. Moreover, particularly in light of the fact that collectors often 
bring suit against consumers and the history discussed above in Part II 
of numerous claims being filed by debt collectors against consumers in 
an arbitral forum where there were serious fairness concerns, the 
Bureau believes that application of the proposed rule to collection 
activities may be one of the most important components of the rule.
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    \473\ Study, supra note 2, section 6 at 19 and section 8 at 12.
---------------------------------------------------------------------------

    Specifically, proposed Sec.  1040.3(a)(10) would apply the 
requirements of proposed Part 1040 to collecting debt that arises from 
any of the consumer financial products or services covered by any of 
paragraphs (a)(1) through (9) of proposed Sec.  1040.3. For clarity, 
proposed Sec.  1040.3(a)(10) would identify the specific types of 
entities that the Bureau understands typically are engaged in 
collecting these debts: (1) A person offering or providing the product 
or service giving rise to the debt being collected, an affiliate of 
such person, or a person acting on behalf of such person or affiliate; 
(2) a purchaser or acquirer of an extension of consumer credit covered 
by proposed Sec.  1040.3(a)(1)(i), an affiliate of such person, or a 
person acting on behalf of such person or affiliate; and (3) a debt 
collector as defined by the FDCPA, 15 U.S.C. 1692a(6). The coverage of 
each of these types of entities engaged in debt collection is discussed 
separately below.
1040.3(a)(10)(i) and (ii)
    Proposed Sec.  1040.3(a)(10)(i) would apply to collection by a 
person offering or providing the covered product or service giving rise 
to the debt being collected, an affiliate of such person,\474\ or a 
person acting on behalf of such person or affiliate. This coverage 
would include, for example, collection by a creditor extending consumer 
credit. The Bureau notes, however, that as with proposed Sec.  
1040.3(a)(1) discussed above, proposed Sec.  1040.3(a)(10)(i) would not 
extend coverage to collection directly by a merchant of debt arising 
from credit it extends for the purchase of its nonfinancial goods or 
services in circumstances where the merchant is exempt under proposed 
Sec.  1040.3(b). Similarly, collection directly by governments or 
government affiliates on credit they extend would be exempt in the 
circumstances described in proposed Sec.  1040.3(b).
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    \474\ As proposed comment 3(a)(10)-2 would clarify, Dodd-Frank 
section 1002(1) defines the term affiliate as ``any person that 
controls, is controlled by, or is under common control with another 
person.'' 12 U.S.C. 5481(1).
---------------------------------------------------------------------------

    In addition, proposed Sec.  1040.3(a)(10)(ii) would cover 
collection activities by an acquirer or purchaser of an extension of 
consumer credit covered by proposed Sec.  1040.3(a)(1), an affiliate of 
such person, or a person acting on behalf of such person or affiliate. 
This coverage would reach such persons even when proposed Sec.  
1040.3(b) would exclude the original creditor from coverage. For 
example, such collection activities by acquirers or purchasers would be 
covered even when the original creditor, such as a government or 
merchant, would be excluded from coverage in circumstances described in 
proposed Sec.  1040.3(b). As a result, collection by an acquirer or 
purchaser of an extension of merchant consumer credit covered by 
Regulation B, such as medical credit, would be covered by proposed 
Sec.  1040.3(a)(10)(ii), even in circumstances where proposed Sec.  
1040.3(b)(5) would exclude the medical creditor from coverage.\475\ In 
other words, although hospitals, doctors, and other service providers 
extending incidental ECOA consumer credit would not be subject to the 
requirements of Sec.  1040.4 to the extent proposed Sec.  1040.3(b)(5) 
would exclude them from coverage because the Bureau lacks authority 
over them under Dodd-Frank section 1027 or they would be excluded under 
another provision of proposed Sec.  1040.3(b), an acquirer or purchaser 
of such consumer credit generally would be subject to proposed Sec.  
1040.4.\476\
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    \475\ ECOA credit includes incidental credit pursuant to 
Regulation B and the commentary specifically notes that hospitals 
and doctors can provide such incidental credit. See 12 CFR 
1002.3(c), comment 1 (``If a service provider (such as a hospital, 
doctor, lawyer, or merchant) allows the client or customer to defer 
the payment of a bill, this deferral of debt is credit for purposes 
of the regulation, even though there is no finance charge and no 
agreement for payment in installments.'').
    \476\ The Bureau also explained in its Debt Collection Larger 
Participant Rulemaking, in analyzing what type of transactions are 
``credit'' under the Dodd-Frank Act, that ``[i]n some situations, a 
medical provider may grant the right to defer payment after the 
medical service is rendered. In those circumstances, the transaction 
might involve an extension of credit.'' Defining Larger Participants 
of the Consumer Debt Collection Market, 77 FR 65775, 65779 (Oct. 31, 
2012). Other regulatory guidance in the past has indicated that ``a 
health care provider is a creditor [under ECOA] if it regularly 
bills patients after the completion of services, including for the 
remainder of medical fees not reimbursed by insurance. Similarly, 
health care providers who regularly allow patients to set up payment 
plans after services have been rendered are creditors.'' See Steven 
Toporoff, The ``Red Flags'' Rule: What Health Care Providers Need to 
Know, Modern Medicine Network (Jan. 11, 2010) (commentary by 
attorney at FTC), available at http://www.modernmedicine.com/modern-medicine/news/modernmedicine/modern-medicine-feature-articles/red-flags-rule-what-healthcare- (last visited May 1, 2016). The Bureau 
is not interpreting ECOA or Regulation B here.
---------------------------------------------------------------------------

    The Bureau believes that many activities involved in collection of 
debts arising from extensions of consumer credit would also constitute 
servicing under proposed Sec.  1040.3(a)(1)(v). However, the Bureau is 
proposing the coverage of collection activities by any other person 
acting on behalf of the provider or affiliate in Sec.  1040.3(a)(10)(i) 
and (ii) to confirm that collection activity by a such other persons 
would be covered even when such other persons do not meet the 
definition of a debt collector under the FDCPA (see proposed Sec.  
1040.3(a)(10)(iii) discussed below) because they are not collecting on 
an account obtained in default.\477\ By proposing coverage of debt 
collection by such other persons, the Bureau also seeks to confirm that 
collection activity would be covered even in contexts in which industry 
may sometimes differentiate between the terms servicing and debt 
collection. For example, in some contexts ``servicing'' may be used in 
the industry to refer to

[[Page 32879]]

activities involving seeking and processing payments on a debt from a 
consumer who is not in default, while ``collections'' may sometimes be 
used by industry to refer to post-default activities.\478\ Both types 
of collection activity would be covered under the proposed rule.
---------------------------------------------------------------------------

    \477\ See 15 U.S.C. 1692a(6)(F)(iii) (defining a debt collector 
to exclude a person collecting on an account ``not in default at the 
time it was obtained'').
    \478\ See FTC, The Structure and Practices of the Debt Buying 
Industry, at n.57 (2013) (``Creditors consider consumers who are 
late in paying as being `delinquent' on their debts. Creditors may 
continue to collect on delinquent debts, but after a period of time 
creditors consider consumers to be in `default' on their debts.'').
---------------------------------------------------------------------------

1040.3(a)(10)(iii)
    As discussed above, some debt collection activities are carried out 
by persons hired by the owner of a debt to collect the debt. The FDCPA 
generally considers such persons to be debt collectors subject to its 
statutory requirements and prohibitions designed to deter abusive 
practices. Allegations of violation of the FDCPA by debt collectors 
also were among the most common type of consumer claim identified in 
the Study, whether in class actions, individual arbitration, or 
individual litigation. Proposed Sec.  1040.3(a)(10)(iii) therefore 
would include in the coverage of proposed part 1040 collecting debt by 
a debt collector as defined by the FDCPA, 15 U.S.C. 1692a(6),\479\ when 
the debt arises from any consumer financial products and services 
described in proposed Sec.  1040.3(a)(1) through (9).
---------------------------------------------------------------------------

    \479\ To the extent a future Bureau regulation were to implement 
the definition of debt collector under 15 U.S.C. 1692a(6), the 
definition in the implementing regulation would be used, in 
conjunction with the statute, to define this component of coverage 
of this proposed rule.
---------------------------------------------------------------------------

    As discussed above, the Bureau believes it is important to cover 
collection on all of the consumer financial products and services 
covered by the rule, since all of these products can generate fees 
that, if not paid, that lead to collection activities by debt 
collectors as defined in the FDCPA. Of course, one of the most common 
types of debt collected by FDCPA debt collectors arises from consumer 
credit transactions. Accordingly, proposed Sec.  1040.3(a)(10)(iii) 
would extend coverage, for example, to collection by a third-party 
FDCPA debt collector acting on behalf of the persons extending credit 
who are ECOA creditors and thus subject to proposed Sec.  
1040.3(a)(1)(i) or their successors and assigns who are subject to 
proposed Sec.  1040.3(a)(1)(iv). The Bureau believes that proposed 
Sec.  1040.3(a)(10)'s references to these existing regulatory regimes 
would facilitate compliance, since the Bureau expects that industry has 
substantial experience with existing contours of coverage under the 
FDCPA and ECOA. As discussed above, proposed Sec.  1040.3(a)(10)(iv) 
would apply proposed Part 1040 to purchasers of consumer credit 
extended by persons over whom the Bureau lacks authority under Dodd-
Frank section 1027 or 1029 or who are otherwise exempt under proposed 
Sec.  1040.3(b). Similarly, proposed Sec.  1040.3(a)(10)(iii) would 
apply to FDCPA debt collectors when collecting on this type of credit 
as well as other debts arising from products or services covered by 
proposed Sec.  1040.3(a)(1) through (9) provided by persons over whom 
the Bureau lacks authority under Dodd-Frank section 1027 or 1029 or who 
are otherwise exempt under proposed Sec.  1040.3(b) .
    The Bureau recognizes that FDCPA debt collectors do not typically 
become party to agreements with consumers for the provision of debt 
collection services; they instead collect on debt incurred pursuant to 
contracts between consumers and creditors or other providers. There 
are, however, a number of ways in which the proposed rule would 
regulate or otherwise affect the conduct of debt collectors. First, to 
the extent that the debt collector is collecting on a debt arising from 
an extension of consumer credit covered by proposed Sec.  1040.3(a)(1), 
any pre-dispute arbitration agreement for that product or service that 
is entered into after the date set forth in proposed Sec.  1040.5(a) 
already would be required under proposed Sec.  1040.4(a)(2) to contain 
a provision that expressly prohibits anyone, including the debt 
collector, from invoking it in response to a class action. Second, 
independent of the above-described contractual restriction, under 
proposed Sec.  1040.4(a)(1), discussed below, the debt collector would 
be prohibited from invoking a pre-dispute arbitration agreement in a 
class action dispute concerning such collection activities. If a pre-
dispute arbitration agreement is the basis for an individual 
arbitration filed by or against the debt collector related to its 
collection activities that are covered by the proposal, then the debt 
collector also would be required to submit to the Bureau the records 
specified in proposed Sec.  1040.4(b). Finally, to the extent that a 
collector becomes party to a contract with individual consumers in the 
course of settling debts, such as a payment plan agreement, and that 
contract includes a pre-dispute arbitration agreement, then proposed 
Sec.  1040.4(a)(2) would require the collector to include the 
prescribed language in that pre-dispute arbitration agreement.\480\
---------------------------------------------------------------------------

    \480\ See proposed comment 4-1.
---------------------------------------------------------------------------

    Proposed comment 3(a)(10)-1 would further clarify that collecting 
debt by persons listed in Sec.  1040.3(a)(1) would be covered with 
respect to the consumer financial products or services identified in 
those provisions, but not for other types of credit or debt they may 
collect, such as business credit.
    The Bureau seeks comment on its proposed debt collection coverage. 
For example, the Bureau requests comment on whether furnishing 
information to a consumer reporting agency covered by the FCRA, 15 
U.S.C. 1681s-2, by any person covered by proposed Sec.  1040.3(a)(10) 
should also be separately identified as a covered product or service. 
The Bureau also seeks comment on whether there are any persons who 
neither provide a product or service covered by any of paragraphs 
(a)(1) through (9) of proposed Sec.  1040.3 nor are an FDCPA debt 
collector nonetheless engage in debt collection on such products or 
services, and if so, whether proposed Sec.  1040.3(a)(10) should be 
expanded to cover such persons, and if so, why and how. Similarly, the 
Bureau requests comment on whether debt collectors as defined in the 
FDCPA would include anyone not already covered by Sec.  1040.3(a)(1)(i) 
and (ii), and if not, whether the proposed rule should simply clarify 
that debt collectors as defined in the FDCPA are covered under proposed 
Sec.  1040.3(a)(1)(i) and (ii), as applicable, rather than separately 
stating their coverage under proposed Sec.  1040.3(a)(10)(iii).
1040.3(b) Exclusions From Coverage
    Proposed Sec.  1040.3(b) would identify the set of conditions under 
which certain persons would be excluded from the coverage of proposed 
part 1040 when providing a specified product or service covered by 
proposed Sec.  1040.3(a).
    The Bureau further notes that certain additional limitations are 
inherent in proposed Sec.  1040.3(a). These limitations arise not only 
from the terms chosen for proposed Sec.  1040.3(a) in general, but also 
from the fact that in a number of places proposed Sec.  1040.3(a) 
references terms from other enumerated consumer financial protection 
statutes and their implementing regulations. For example, a transaction 
is ``credit'' as defined by Regulation B implementing ECOA only if 
there is a ``right'' to defer payment.\481\ These limitations would be 
incorporated into the coverage of

[[Page 32880]]

proposed part 1040, regardless of whether they are explicitly mentioned 
in the text of the regulation or the commentary of the proposed rule.
---------------------------------------------------------------------------

    \481\ See Regulation B comment 2(j)-1 (``Under Regulation B, a 
transaction is credit if there is a right to defer payment of a debt 
. . . .'').
---------------------------------------------------------------------------

    As discussed above, if an exclusion in proposed Sec.  1040.3(b) 
does not apply to a person that offers or provides a product or service 
described in proposed Sec.  1040.3(a), that person would meet the 
definition of a provider in proposed Sec.  1040.2(c) and would be 
subject to the proposed rule. Even if an exclusion in proposed Sec.  
1040.3(b) applies person offering or providing a product or service, 
however, that person may still be covered by part 1040 when providing a 
different product or service described in proposed Sec.  1040.3(a) if 
an exemption in proposed Sec.  1040.3(b) does not apply to that product 
or service.
    For illustrative purposes, the Bureau notes that persons offering 
or providing consumer financial products or services covered by 
proposed Sec.  1040.3(a) described above may include, without 
limitation, banks, credit unions, credit card issuers, certain 
automobile lenders, auto title lenders, small-dollar or payday lenders, 
private student lenders, payment advance companies, other installment 
and open-end lenders, loan originators and other entities that arrange 
for consumer loans, providers of certain automobile leases, loan 
servicers, debt settlement firms, foreclosure rescue firms, certain 
credit service/repair organizations, providers of consumer credit 
reports and credit scores, credit monitoring service providers, debt 
collectors, debt buyers, check cashing providers, remittance transfer 
providers, domestic money transfer or currency exchange service 
providers, and certain payment processors.\482\
---------------------------------------------------------------------------

    \482\ The Bureau discusses the examples as well as other types 
of entities that may be covered in certain circumstances above in 
the Section-by-Section Analysis to proposed Sec.  1040.3. In 
addition, as part of its broader administration of the enumerated 
consumer financial protection statutes and Title X of the Dodd-Frank 
Act, the Bureau continues to analyze the nature of products or 
services tied to virtual currencies.
---------------------------------------------------------------------------

    The Bureau requests comment on the exclusions proposed in Sec.  
1040.4(b), and also on whether the proposed rule should include other 
exclusions. For example, as discussed below in the Section-by-Section 
Analysis to proposed Sec.  1040.4(b), the Bureau requests comment on 
whether the proposed rule should include an exclusion for certain small 
entities. In addition, the Bureau requests comment on how the proposed 
rule should interact with potential regulations, discussed above, that 
may be promulgated by the U.S. Department of Education. The Bureau 
notes, for example, that such a regulation, if adopted, could overlap 
with the Bureau's proposed rule here, which would apply to 
postsecondary education institutions that are significantly engaged in 
provide financing directly to consumers with a finance charge.\483\
---------------------------------------------------------------------------

    \483\ See Press Release, U.S. Dept. of Ed., U.S. Department of 
Education Takes Further Steps to Protect Students from Predatory 
Higher Education Institutions (Mar. 11, 2016) (describing negotiated 
rulemaking agenda for 2015-16 as including a potential regulation 
addressing mandatory arbitration agreements used by higher education 
institutions), available at http://www.ed.gov/news/press-releases/us-department-education-takes-further-steps-protect-students-predatory-higher-education-institutions (last visited May 1, 2016).
---------------------------------------------------------------------------

1040.3(b)(1)
    Proposed Sec.  1040.3(b)(1) would exclude from the coverage of 
proposed part 1040 broker-dealers to the extent they are providing any 
products and services covered by proposed Sec.  1040.3(a) that are also 
subject to specified rules promulgated or authorized by the SEC 
prohibiting the use of pre-dispute arbitration agreements in class 
litigation and providing for making arbitral awards public. The term 
broker-dealer generally refers to persons engaged in the business of 
effecting securities transactions for the account of others or buying 
and selling securities for their own account.\484\ Broker-dealers may 
provide products that are described in proposed Sec.  1040(a). For 
example, broker-dealers may extend credit to allow customers to 
purchase securities. Securities credit is subject to ECOA as recognized 
in Regulation B, 12 CFR 1002.3(b). The Bureau proposes to exclude such 
persons from coverage to the extent providing products and services 
described in proposed Sec.  1040.3(a) because they are already covered 
by existing regulations that limit the application of pre-dispute 
arbitration agreements to class litigation and provide for making 
arbitral awards public.
---------------------------------------------------------------------------

    \484\ See 15 U.S.C. 78c(4)-(5) (defining the terms broker and 
dealer under the Securities Exchange Act).
---------------------------------------------------------------------------

    As discussed above, since 1992, FINRA, a self-regulatory 
organization overseen by the SEC, has required pre-dispute arbitration 
agreements adopted by broker-dealers to include language disclaiming 
the application of the arbitration agreement to class actions filed in 
court.\485\ The SEC, which must authorize FINRA rules, authorized the 
original version of this rule in 1992.\486\ The Bureau also notes that 
claims in FINRA arbitration between customers and broker-dealers are 
filed with FINRA,\487\ which is overseen by the SEC, and all awards 
between customers and broker-dealers under FINRA rules must be made 
public.\488\ Proposed comment 3(b)(1)-1 would clarify that Sec.  
1040.3(b)(1)'s reference to rules authorized by the SEC would include 
those promulgated by FINRA and approved by the SEC, as described above, 
in order that products and services covered by those FINRA rules would 
be excluded from the coverage of proposed part 1040.
---------------------------------------------------------------------------

    \485\ FINRA Rule 2268(f). FINRA, formerly the National 
Association of Securities Dealers, also serves as an arbitral 
administrator for disputes concerning broker-dealers and its rules 
further prohibit broker-dealers from enforcing an arbitration 
agreement against a member of a certified or putative class case. 
FINRA Rule 12204(d).
    \486\ SEC approving release for amendments to NASD Code of 
Arbitration Procedure and Rules of Fair Practice, Exchange Act Rel. 
No. 31371, 1992 WL 324491 (Oct. 28, 1992).
    \487\ FINRA Rule 12302(a) (providing that claimant must file an 
initial claim with the Director of the FINRA Office of Dispute 
Resolution).
    \488\ FINRA Rule 12904(h) (``All awards shall be made publicly 
available.'').
---------------------------------------------------------------------------

    The Bureau invites comment on proposed Sec.  1040.3(b)(1) and 
comment 3(b)(1)-1, including whether such an exclusion from proposed 
part 1040 is appropriate and whether it should be expanded or narrowed, 
and if so, how. In particular, the Bureau seeks comment on the extent 
to which any other person who is acting in an SEC-regulated capacity, 
such as an investment adviser, may also be providing a consumer 
financial product or service that would be subject to proposed Sec.  
1040.3.\489\ For example, the Bureau seeks comment on whether the 
proposed rule should include an exclusion for such persons to the 
extent they are subject to any SEC rule (which does not currently 
exist, but which the SEC could adopt in the future, for example, under 
Dodd-Frank section 921) that is functionally equivalent to the proposed 
rule.
---------------------------------------------------------------------------

    \489\ See Dodd-Frank section 1002(21) (defining person regulated 
by the SEC). See also Dodd-Frank section 1027(i)(1) (providing that 
Dodd-Frank Act Title X provisions may not be construed as altering, 
amending, or affecting the authority of the SEC and that the Bureau 
has no authority to enforce Title X with respect to a person 
regulated by the SEC).
---------------------------------------------------------------------------

    The CFTC has a regulation requiring that pre-dispute arbitration 
agreements in customer agreements for products and services regulated 
by the CFTC be voluntary, such that the customer receives a specified 
disclosure before being asked to sign the pre-dispute arbitration 
agreement, is not required to sign the pre-dispute arbitration 
agreement as a condition of receiving the product or service, and is 
only subject to the pre-dispute arbitration agreement if he or she 
separately signs

[[Page 32881]]

it, among other requirements.\490\ The Bureau has considered whether to 
propose excluding from coverage any consumer financial products and 
services covered by proposed Sec.  1040.3(a) that are subject to the 
CFTC regulation.\491\ That regulation, however, does not ensure 
consumers have access to private remedies in class actions and does not 
provide for transparency of arbitral awards. The Bureau believes that 
this proposed rule can provide important consumer protections for 
providers that might also be subject to the CFTC's regulation. The 
Bureau also believes that complying with both rules would not be unduly 
burdensome for any affected providers, given the limited nature of the 
CFTC rule. The Bureau therefore is not proposing an exemption for those 
persons.
---------------------------------------------------------------------------

    \490\ 17 CFR 166.5.
    \491\ See SBREFA Outline supra note 331, at 23.
---------------------------------------------------------------------------

    Under the proposed rule, any product or service that is subject to 
both the Bureau's proposed rule and the CFTC rule \492\ would therefore 
need to meet the requirements of both rules. For example, any pre-
dispute arbitration agreement would need to be both satisfy the CFTC 
requirements to ensure the contract is voluntary and contain the 
provision mandated by proposed Sec.  1040.4(a)(2).\493\ The Bureau 
seeks comment on which types of products and services might be subject 
to both its proposed rule and the existing CFTC rule, on the incidence 
of potentially-classable disputes over these products or services, on 
the compatibility of its proposed rule with the existing CFTC rule, and 
on whether the Bureau should exempt consumer financial products and 
services that are subject to the CFTC rule or more broadly activities 
that are subject to the jurisdiction of the CFTC under the Commodity 
Exchange Act.\494\
---------------------------------------------------------------------------

    \492\ The Bureau understands that foreign currency spot 
transactions are not covered by the CFTC rule. See 17 CFR 
166.5(a)(ii) (applying CFTC rule to ``retail fore[ign 
]ex[change]''); but see 7 U.S.C. 2(c)(2)(B)(i)(I) (Commodity 
Exchange Act covering retail foreign exchange contracts that provide 
for ``future delivery'') & CFTC and SEC, Further Definition of 
``Swap,'' ``Security-Based Swap,'' and ``Security-Based Swap 
Agreement''; Mixed Swaps; Security-Based Swap Agreement 
Recordkeeping; Final Rule, 77 FR 48208, 48256 (Aug. 13, 2012) (``The 
CEA generally does not confer regulatory jurisdiction on the CFTC 
with respect to spot transactions.'').
    \493\ If a provider offers products or services that are covered 
by the proposed rule, such as consumer credit, and others that are 
not, the provider would be permitted to use contract language that 
is tailored to this circumstance. See proposed Sec.  
1040.4(a)(2)(ii).
    \494\ See Dodd-Frank section 1002(20) (defining ``person 
regulated by the [CFTC]'' as ``any person that is registered, or 
required by statute or regulation to be registered, with the [CFTC], 
but only to the extent that the activities of such person are 
subject to the jurisdiction of the [CFTC] under the Commodity 
Exchange Act.''); see also Dodd-Frank section 1027(j)(1) (providing 
that the Bureau shall have no authority to exercise any power to 
enforce this title with respect to a person regulated by the CFTC).
---------------------------------------------------------------------------

1040.3(b)(2)
    Proposed Sec.  1040.3(b)(2) would exclude from the coverage of 
proposed Part 1040 governments and their affiliates, as defined by 12 
U.S.C. 5481(1), to the extent providing products and services directly 
to consumers in circumstances specified in proposed Sec.  
1040.3(b)(2)(i) or (ii). This proposed exclusion would not apply to an 
entity that is neither a government nor an affiliate of a government 
but provides services to a government or an affiliate of a 
government.\495\
---------------------------------------------------------------------------

    \495\ Dodd-Frank section 1002(1) defines the term affiliate as 
``any person that controls, is controlled by, or is under common 
control with another person.'' 12 U.S.C. 5481(1).
---------------------------------------------------------------------------

    The Bureau believes that private enforcement of consumer protection 
laws, when provided for by statute, is an important companion to 
regulation, supervision over, and enforcement against private providers 
by governments at the local, State, and Federal levels. The Bureau 
believes, however, that financial products and services provided by 
governments and their affiliates directly to consumers who reside 
within territorial jurisdiction of the governments should generally not 
be covered by proposed part 1040 given the unique position that 
governments are in with respect to products and services the 
governments and their affiliates themselves provide directly to their 
own constituents.
    Specifically, proposed Sec.  1040.3(b)(2)(i) would exclude from 
coverage any products and services covered by proposed Sec.  1040.3(a) 
when provided directly by the Federal government and its affiliates. In 
circumstances where proposed Sec.  1040.3(b)(2)(i) would apply, the 
Bureau believes that the Federal government and its affiliates are 
uniquely accountable through the democratic process to consumers to 
whom the Federal government and its affiliates directly provide 
products and services. The Bureau additionally believes that the 
democratic process may compel the Federal government and its affiliates 
to treat consumers fairly with respect to dispute resolution over the 
products and services they provide directly to consumers. For these 
reasons, the Bureau proposes to exempt from coverage of part 1040 
products and services provided directly by the Federal governmental and 
its affiliates to consumers. By limiting this exemption to products and 
services provided directly by the Federal government and its 
affiliates, proposed Sec.  1040.3(b)(2)(i) would not exempt 
nongovernmental entities that provide covered products or services on 
behalf of the Federal government or its affiliates, such as a student 
loan servicer. Proposed comment 3(b)(2)-1 would reiterate this point, 
with respect to the exclusions in proposed Sec.  1040.3(b)(2), and also 
would note that the definition of affiliate in Dodd-Frank section 
1002(1) would apply to the use of the term in proposed Sec.  
1040.3(b)(2).
    Proposed Sec.  1040.3(b)(2)(ii) would exclude from coverage any 
State, local, or tribal government, and any affiliate of a State, 
local, or tribal government, to the extent it is providing consumer 
financial products and services covered by Sec.  1040.3(a) directly to 
consumers who reside in the government's territorial jurisdiction. The 
Bureau believes that such governments and their affiliates are persons 
pursuant to Dodd-Frank section 1002(19) and that a number of such 
governments and their affiliates may provide financial products and 
services that could otherwise be covered by proposed Sec.  1040.3(a). 
In circumstances where proposed Sec.  1040.3(b)(2)(ii) would apply, the 
Bureau believes that governments and their affiliates are uniquely 
accountable through the democratic process to consumers for products 
and services the governments and their affiliates provide directly to 
consumers who reside within their territorial jurisdiction. The Bureau 
additionally believes that the democratic process may compel 
governments and their affiliates to treat consumers who reside within 
the government's territorial jurisdictions fairly with respect to 
dispute resolution over the products and services the governments and 
affiliates provide directly to those consumers. For these reasons, the 
Bureau proposes to exempt from coverage of part 1040 products and 
services provided directly by governments and their affiliates to 
consumers who reside within the territorial jurisdiction of these 
governments.
    By limiting this exclusion to services provided ``directly'' by 
these governments and their affiliates, the proposal would make clear 
that proposed Sec.  1040.3(b)(2)(ii) would not exclude from the 
coverage of part 1040 nongovernmental entities that provide covered 
products or services on behalf of State, local, or tribal governments 
or their affiliates, such as a bank that issues a payroll card account 
for State, local, or tribal government employees or a private debt 
collector that collects on consumer credit extended by a State,

[[Page 32882]]

local, or tribal government. This proposed exemption also would not 
extend to State, local, or tribal governments or their affiliates 
providing products or services to consumers who reside outside the 
territorial jurisdiction of the government. The Bureau believes that 
the democratic process and its accountability mechanisms are not 
generally as strong in protecting consumers who do not reside in the 
territory of the government that is itself, or via a government 
affiliate, providing products or services directly to them. For 
example, because such consumers do not reside in the government's 
territorial jurisdiction, they are not likely to be eligible to vote in 
elections to select representatives in that government or on ballot 
initiatives or other matters that would bind that government or its 
affiliates.\496\
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    \496\ In its SBREFA Outline (supra note 331, at 23), the Bureau 
indicated it was considering a proposal to exempt governments 
providing certain services to consumers outside their jurisdiction. 
As noted here, the Bureau is concerned that democratic 
accountability is not sufficient to ensure consumer protections in 
those circumstances, and therefore is not proposing such an 
exemption.
---------------------------------------------------------------------------

    Accordingly, proposed comment 1040.3(b)(2)-2 would provide examples 
of consumer financial products and services that are offered or 
provided by State, local, or tribal governments or their affiliates 
directly to consumers who reside in the government's territorial 
jurisdiction. These would include the following: (1) A bank that is an 
affiliate of a State government providing a student loan or deposit 
account directly to a resident of the State; and (2) a utility that is 
an affiliate of a State or municipal government providing credit or 
payment processing services directly to a consumer who resides in the 
State or municipality to allow a consumer to purchase energy from an 
energy supplier that is not an affiliate of the same State or municipal 
government. Proposed comment 3(b)(2)-2 would provide examples of 
consumer financial products and services that are offered or provided 
by State, local, or tribal governments or their affiliates directly to 
consumers who do not reside in the government's territorial 
jurisdiction. These would include the following: (1) A bank that is an 
affiliate of a State government providing a student loan to a student 
who resides in another State; and (2) a tribal government affiliate 
providing a short-term loan to a consumer who does not reside in the 
tribal government's territorial jurisdiction and completes the 
transaction via Internet. These examples are illustrative, and non-
exhaustive. The use of the term ``affiliated'' in these examples also 
indicates that this exemption would not apply to services provided by 
persons who are not affiliates of governments. For example, so-called 
``public utilities'' would not be exempt unless they control, are 
controlled by, or are under common control with a government or its 
affiliates. The Bureau requests comment on these proposed examples, and 
on whether other examples should be included.
    The Bureau further notes that the proposed rule would not cover any 
government utility, or other affiliates of governments such as schools, 
when eligible for other exemptions in proposed Sec.  1040.3(b). For 
example, a government would be exempt when providing consumer credit 
for its own services if the government does this below the frequency 
specified in proposed Sec.  1040.3(b)(3), or if the credit does not 
include a finance charge, in which case the exemption in proposed Sec.  
1040.3(b)(5) may apply.
    The Bureau seeks comment on the exclusions in proposed Sec.  
1040.3(b)(2), including on the use of the terms ``government,'' 
``affiliate,'' ``resides,'' and ``territorial jurisdiction'' in 
proposed Sec.  1040.3(b)(2)(i) and (ii), and, if clarifications are 
needed in general or for specific types of governments or governmental 
affiliates, what those should be. The Bureau specifically solicits 
comment on the exclusions in proposed Sec.  1040.3(b)(2) from tribal 
governments under its Policy for Consultation with Tribal 
Governments.\497\ The Bureau also requests comment on whether a 
government affiliate created by a government but which does not qualify 
as an ``arm'' of the government should be covered by this proposed 
exemption.\498\ In particular, the Bureau requests comment on whether 
the proposed exemption should be narrowed so that it does not apply to 
a government affiliate that is not an ``arm'' of the government. 
Finally, the Bureau requests comment on whether the governments or 
government affiliates described in proposed Sec.  1040.3(b)(2) should 
be excluded from coverage entirely, and on whether the exclusions as 
proposed should be expanded to cover additional actors or narrowed to 
cover only certain consumer financial products and services, and if so, 
which products and services.
---------------------------------------------------------------------------

    \497\ Bureau of Consumer Fin. Prot., Policy for Consultation 
with Tribal Governments, (Apr. 22, 2013), available at http://files.consumerfinance.gov/f/201304_cfpb_consultations.pdf.
    \498\ See, e.g., Pele v. Pennsylvania Higher Educ. Assistance 
Authority, 628 Fed. Appx. 870, 873 (4th Cir. 2015) (holding that 
student loan servicing agency created by the state of Pennsylvania 
was not an arm of the state and thus was not exempt from the 
coverage of the Fair Credit Reporting Act) (petition for certiorari 
pending).
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1040.3(b)(3)
    The Bureau proposes in Sec.  1040.3(b)(3) an exemption for a person 
in relation to any product or service listed in a paragraph under 
proposed Sec.  1040.3(a) that the person and any affiliates 
collectively offer or provide to no more than 25 consumers in the 
current calendar year and that it and any affiliates have not provided 
to more than 25 consumers in the preceding calendar year.\499\ For 
example, a person who, together with its affiliates, provides a covered 
product or service to 26 or more consumers in the current calendar year 
or in the previous calendar year would not be eligible for this 
proposed exemption and generally would be required to comply with all 
applicable provisions of the proposed rule starting with the 26th 
consumer to whom the product or service is offered or provided in the 
calendar year.
---------------------------------------------------------------------------

    \499\ As proposed comment 3(b)(3)-1 would make clarify, Dodd-
Frank section 1002(1) defines the term affiliate as ``any person 
that controls, is controlled by, or is under common control with 
another person.'' 12 U.S.C. 5481(1).
---------------------------------------------------------------------------

    The Bureau believes that a threshold of the type described above 
(based upon provision of a product or service to only 25 or fewer 
persons annually) may be appropriate to exclude covered products and 
services from coverage when they are not offered or provided on a 
regular basis for several reasons. First, the Bureau believes that 
services and products offered or provided to only 25 or fewer consumers 
per year are unlikely to cause harms that are eligible for redress in 
class actions under the ``numerosity'' requirement of Federal Rule 23 
governing class actions or State analogues, as discussed above in Part 
II. Second, when covered products or services are offered or provided 
so infrequently, the likelihood of an individual claim in arbitration 
also is especially low. Therefore, the Bureau believes that applying 
the proposed rule to persons who engage in so little activity involving 
a covered product or service is unlikely to have a significant impact 
on consumers. Third, the Bureau believes that excluding covered 
products and services that entities offer or provide so infrequently 
would relieve these entities of the burden of complying with the 
proposed rule for those products and services.
    The Bureau is aware that some of the terms in statutes or their 
implementing regulations referenced in proposed Sec.  1040.3(a) have 
their own exclusions for persons who do not regularly engage

[[Page 32883]]

in covered activity. Except for the definition of remittance transfer 
in Regulation E subpart B, which is incorporated into proposed Sec.  
1040.3(a)(6),\500\ the terms referenced do not specify a particular 
numeric threshold.\501\
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    \500\ The definition of remittance transfer in Regulation E is 
limited to transactions conducted by a remittance transfer provider 
in the normal course of its business. 12 CFR 1005.30(f)(1); see also 
Regulation E comment 30(f)-2 (``[w]hether a person provides 
remittance transfers in the normal course of business depends on the 
facts and circumstances''). Regulation E further provides a safe 
harbor whereby persons providing 100 or fewer transfers in the 
current and prior calendar years are deemed not to be remittance 
transfer providers. 12 CFR 1005.30(f)(2). Thus, the proposed rule 
would not apply to transfers provided by persons who are not 
remittance transfer providers, because such transfers are not 
``remittance transfers'' as defined by Regulation E.
    \501\ For example, the definition of creditor in ECOA and 
Regulation B and debt collector in the FDCPA refer to regular 
activity but do not specify a numeric threshold.
---------------------------------------------------------------------------

    For purposes of this rule, the Bureau believes that a single 
uniform numerical threshold may facilitate compliance and reduce 
complexity, particularly given that application of the proposed rule 
would not just affect consumers' ability to bring class claims under 
specific Federal consumer financial laws, but also other types of State 
and Federal law claims. The proposed 25-consumer threshold also would 
be generally consistent with the threshold for ``regularly extend[ing] 
consumer credit'' under 12 CFR 1026.2(a)(17)(v), which applies certain 
TILA disclosure requirements to persons making more than 25 non-
mortgage credit transactions in a year. The Bureau emphasizes that it 
is proposing this uniform standard in the unique context of this 
proposed rule, and that it expects to continue to interpret thresholds 
under the enumerated consumer financial protection statutes and their 
implementing regulations according to their specific language, 
contexts, and purposes. The Bureau further notes that basing an 
exemption on the level of activity in the current and preceding 
calendar year is consistent with the threshold under 12 CFR 
1026.2(a)(17)(v).
    The Bureau seeks comment on this proposed exclusion from coverage, 
including whether the proposed uniform numerical threshold for 
excluding persons who do not regularly engage in providing a covered 
product or service is warranted and if not, what alternatives should be 
considered. For example, the Bureau seeks comment on whether the 
threshold should be higher or lower, determined by aggregating the 
number of times all covered products are offered or provided, or 
incorporate other elements. The Bureau also seeks comment on the 
proposal to base the exclusion on total activities in the current and 
preceding calendar years. Finally, the Bureau seeks comment on whether 
to adopt a grace period or other transition mechanism for entities when 
they first cross the 25-consumer threshold.
1040.3(b)(4)
    Merchants, retailers, and other sellers of nonfinancial goods and 
services generally may be subject to the proposed rule when acting as 
creditors as defined by Regulation B when they extend consumer credit 
or participate in consumer credit decisions, or when they engage in 
collection on or sale of these consumer credit accounts, unless they 
are excluded from the Bureau's rulemaking authority under Dodd-Frank 
section 1027(a)(2). Section 1027(a)(2)(A) generally excludes these 
activities by a merchant, retailer, or other seller of nonfinancial 
goods or services to the extent that person extends credit directly to 
a consumer exclusively for the purchase of a nonfinancial good or 
service directly from that person. Section 1027(a)(2) also states, 
however, that the general exclusion in section 1027(a)(2)(A) is limited 
by subparagraphs (B) and (C) of section 1027(a)(2).\502\ As a result, 
in several circumstances described in subparagraphs (B) and (C) of 
section 1027(a)(2) (outlined below), the proposed rule generally would 
apply to merchants, retailers, and other sellers of nonfinancial goods 
or services providing extensions of consumer credit covered by proposed 
Sec.  1040.3(a) that is of the type described in section 1027(a)(2)(A) 
(described above). In proposed Sec.  1040.3(b)(4), the Bureau proposes 
one exception to this general rule, for engaging in assignment, sale, 
or other conveyance of a certain type of consumer credit as described 
below.
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    \502\ When the general exclusion in section 1027(a)(2)(A) does 
apply, the merchant would be excluded by proposed Sec.  
1040.3(b)(5). As discussed below, that proposed provision would 
clarify that the proposal would not apply to persons when they are 
excluded from the rulemaking authority of the Bureau by Dodd-Frank 
section 1027 or 1029.
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    To explain this proposed exemption, it is necessary to describe 
further the limitations on the merchant creditor exclusion in Dodd-
Frank section 1027(a)(2). As noted above, there are a number of 
circumstances when merchants engaged in these activities are not 
excluded by Dodd-Frank section 1027(a)(2). Section 1027(a)(2)(B) 
confers authority upon the Bureau generally over such extensions of 
consumer credit and associated debt collection activities by the 
merchants in three circumstances, set forth in subparagraphs (i), (ii), 
and (iii) of section 1027(a)(2)(B) respectively. Subparagraph (i) 
relates to certain circumstances where the merchant, retailer, or other 
seller ``assigns, sells, or otherwise conveys'' a debt to a third 
party. Subparagraph (ii) relates to certain circumstances where the 
amount of credit extended significantly exceeds the value of a good or 
service. Subparagraph (iii), as clarified by Dodd-Frank section 
1027(a)(2)(C), relates to certain circumstances where a merchant 
creditor is engaged significantly in providing consumer financial 
products and services and imposes a finance charge.
    Proposed Sec.  1040.3(b)(4) would provide an exemption from 
coverage under Part 1040 to merchants, retailers, and other sellers of 
nonfinancial goods or services extending consumer credit as described 
in section 1027(a)(2)(A)(i) when only the first of these three 
circumstances described above is present and the second and third of 
these circumstances is not present. If the Bureau did not adopt this 
proposed exemption, then merchants extending credit subject to ECOA by 
allowing consumers to defer payment for goods or services--even without 
imposing a finance charge--would themselves be covered by the proposed 
rule to the extent they were to sell, assign, or otherwise convey that 
credit account, when not in delinquency or default, to a third party 
consistent with Dodd-Frank section 1027(a)(2)(B)(i). Such sale, 
assignment, or conveyance could occur, for example, in certain types of 
commercial borrowing engaged in by merchants, such as factoring, or 
collateralized lines of credit under which the merchant assigns its 
interest in its receivables. However, under the proposed exemption, 
such merchants would not be covered by Part 1040 in this context unless 
the amount of credit they extended significantly exceeds the value of 
the good or service or they engage significantly in extending credit 
with a finance charge.\503\ Thus, unless either of those circumstances 
is present, the proposal would not affect the cost of credit of such 
merchants when they are engaged in such business borrowing activities. 
By contrast, for example, when the merchants are significantly engaged 
in extending consumer credit with a finance charge (generally covered 
by TILA and Regulation Z), however,

[[Page 32884]]

the proposed rule generally would apply.
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    \503\ See Dodd-Frank sections 1027(a)(2)(B)(ii) and (iii); 12 
U.S.C. 5517(a)(2)(B)(ii) and (iii).
---------------------------------------------------------------------------

    Proposed Sec.  1040.3(b)(4)(i) would thus exclude from the coverage 
of proposed part 1040 merchants, retailers, or other sellers of 
nonfinancial goods or services to the extent providing an extension of 
consumer credit covered by proposed Sec.  1040.3(a)(1)(i) and described 
by Dodd-Frank section 1027(a)(2)(A)(i) in connection with a credit 
transaction pursuant to Dodd-Frank section 1027(a)(2)(B)(i) unless the 
same credit transactions are also credit transactions pursuant to Dodd-
Frank section 1027(a)(2)(B)(ii) or (iii). Thus, a merchant who is a 
creditor under Regulation B that is extending consumer credit as 
described in Dodd-Frank section 1027(a)(2)(A)(i) would be eligible for 
this exemption with respect to such consumer credit transactions when 
they are sold, assigned, or otherwise conveyed to a third party, if the 
consumer credit was not extended in an amount that significantly 
exceeded the value of the good or service under section 
1027(a)(2)(B)(ii) and did not have a finance charge under section 
1027(a)(2)(B)(iii) (or it did have a finance charge but the creditor 
was not engaged significantly in that type of lending under section 
1027(a)(2)(C)(i)). Proposed Sec.  1040.3(b)(4) would only exempt a 
merchant, retailer, or seller of the nonfinancial good or service and 
therefore would not affect coverage of other persons who may conduct 
servicing, debt collection activities, or provide covered products and 
services pursuant to proposed Sec.  1040.3(a) in connection with the 
same extension of consumer credit. As discussed below in the Section-
by-Section Analysis to proposed comments 4-1 and 4-2, those providers 
would be subject to the proposed rule.
    Further, the exclusion in proposed Sec.  1040.3(b)(4)(ii) would 
apply to a merchant who purchases or acquires credit extended by 
another merchant in a sale, assignment, or other conveyance that is 
subject to Dodd-Frank section 1027(a)(2)(B)(i). As a result, the 
proposed rule would not apply, for example, to a merchant who, in a 
merger or acquisition transaction, acquires customer accounts of 
another merchant who had extended credit with no finance charge and not 
in an amount that significantly exceeded the value of the goods or 
services (i.e., credit not subject to Dodd-Frank section 
1027(a)(2)(B)(ii) or (iii)).
    The Bureau invites comment on the exception in proposed Sec.  
1040.3(b)(4) including on whether the Bureau should consider 
alternatives in defining this exception, and if so, particular 
definitions or changes the Bureau should consider and why.
1040.3(b)(5)
    The proposed rule would not apply to persons to the extent they are 
excluded from the rulemaking authority of the Bureau under Dodd-Frank 
sections 1027 and 1029. For the sake of clarity, the Bureau proposes to 
make this limitation an explicit exemption in proposed Sec.  
1040.3(b)(5). Proposed Sec.  1040.3(b)(5) thus would clarify that Part 
1040 would not apply to a person to the extent the Bureau lacks 
rulemaking authority over that person or a product or service offered 
or provided by the person under Dodd-Frank sections 1027 and 1029 (12 
U.S.C. 5517 and 5519).
    However, the application of proposed Sec.  1040.4 would be limited 
under proposed Sec.  1040.3(b)(5) only to the extent that sections 1027 
and 1029 constrain the Bureau's authority. Consistent with these 
restraints in sections 1027 and 1029, the Bureau may have section 1028 
rulemaking authority in certain circumstances over a person that 
assumes or seeks to use an arbitration agreement entered into by 
another person over whom the Bureau lacked such authority. Notably, 
entities excluded from Bureau rulemaking authority under sections 1027 
and 1029 may still be covered persons as defined by Dodd-Frank section 
1002(6). Thus, proposed Sec.  1040.4 may apply to a provider that 
assumes or seeks to use an arbitration agreement entered into by a 
covered person over whom the Bureau lacks rulemaking authority under 
Dodd-Frank sections 1027 and 1029 with respect to the activity at 
issue.
    For example, proposed Sec.  1040.4 may apply to a provider that is 
a debt collector as defined in the FDCPA collecting on debt arising 
from a consumer credit transaction originated by a merchant, even if 
the merchant would be exempt under proposed Sec.  1040.3(b)(5) because 
the merchant is excluded from Bureau rulemaking authority under Dodd-
Frank section 1027 for the particular extension of consumer credit at 
issue. As noted in the discussion of proposed Sec.  1040.3(a)(10) 
above, for example, hospitals, doctors, and other service providers 
extending incidental ECOA credit would not be subject to the 
requirements of Sec.  1040.4 to the extent the Bureau lacks rulemaking 
authority over them under Dodd-Frank section 1027. Similarly, proposed 
Sec.  1040.4 may apply to a provider that is acquiring an automobile 
loan originated by an automobile dealer in circumstances where the 
automobile dealer is exempt by proposed Sec.  1040.3(b)(5) because the 
auto dealer is excluded from Bureau rulemaking authority under Dodd-
Frank section 1029.

Section 1040.4 Limitations on the Use of Pre-Dispute Arbitration 
Agreements

    Dodd-Frank section 1028(b) authorizes the Bureau to prohibit or 
impose conditions or limitations on the use of an agreement between a 
covered person and a consumer for a consumer financial product or 
service providing for arbitration of any future dispute between the 
parties, if the Bureau finds that doing so is in the public interest 
and for the protection of consumers. Section 1028(b) also requires that 
the findings in such rule be consistent with the Study conducted under 
Dodd-Frank section 1028(a). Section 1028(d) further states that any 
regulation prescribed by the Bureau under section 1028(b) shall apply 
to any agreement between a consumer and a covered person entered into 
after the end of the 180-day period beginning on the effective date of 
the regulation.\504\ Pursuant to this authority and the findings set 
forth in greater detail in Part VI above, the Bureau proposes Sec.  
1040.4, which would set forth the conditions or limitations that the 
Bureau would impose on providers that use pre-dispute arbitration 
agreements entered into after the compliance date.
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    \504\ For further discussion of the compliance date, see the 
Section-by-Section Analysis to proposed Sec.  1040.5(a), below.
---------------------------------------------------------------------------

    Specifically, proposed Sec.  1040.4 would contain three provisions. 
Proposed Sec.  1040.4(a)(1) would generally prohibit providers from 
seeking to rely in any way on a pre-dispute arbitration agreement 
entered into after the compliance date with respect to any aspect of a 
class action that is related to any of the consumer financial products 
or services covered by proposed Sec.  1040.3. Proposed Sec.  
1040.4(a)(2) would require providers, upon entering into a pre-dispute 
arbitration agreement for a product or service covered by proposed 
Sec.  1040.3 after the compliance date, to include a specified plain-
language provision in their pre-dispute arbitration agreements 
disclaiming the agreement's applicability to class actions. And 
proposed Sec.  1040.4(b) would require a provider that includes a pre-
dispute arbitration agreement in its consumer contracts to submit 
specified arbitral records to the Bureau for any pre-dispute 
arbitration agreement entered into after the compliance date.
    Each of these three proposed provisions contains the phrase 
``entered into.'' To aid interpretation of proposed

[[Page 32885]]

Sec.  1040.4, the Bureau proposes to add in the official 
interpretations a series of examples of what would and would not 
constitute ``entering into'' a pre-dispute arbitration agreement. As 
noted above, the term ``entering into'' appears in Dodd-Frank section 
1028(d), which states that any rule prescribed by the Bureau under 
section 1028(b) shall apply to any pre-dispute arbitration agreement 
``entered into'' after the end of the 180-day period beginning on the 
rule's effective date. The phrase ``entered into'' is not defined in 
section 1028 or anywhere else in the Dodd-Frank Act. The Bureau 
interprets the phrase ``entered into'' generally to include any 
circumstance in which a person agrees to undertake obligations or gains 
rights in an agreement. The Bureau believes that this interpretation 
best effectuates the purposes of section 1028, is practical and clear 
in its meaning, and is reasonable.
    Proposed comment 4-1.i would provide illustrative examples of when 
a provider enters into a pre-dispute arbitration agreement for purposes 
of Sec.  1040.4 and proposed comment 4-1.ii would provide illustrative 
examples of when a provider does not enter into a pre-dispute 
arbitration agreement for purposes of Sec.  1040.4. Proposed comments 
4-1.i.A through C would state that examples of when a provider enters 
into a pre-dispute arbitration agreement include, but are not limited 
to, the following three scenarios. First, proposed comment 4-1.i.A 
would explain that a provider enters into a pre-dispute arbitration 
agreement where it provides to a consumer a new product or service that 
is subject to a pre-dispute arbitration agreement, and the provider is 
a party to the pre-dispute arbitration agreement. The Bureau does not 
interpret this example to include new charges on a credit card covered 
by a pre-dispute arbitration entered into before the compliance date. 
Second, proposed comment 4-1.i.B would explain that a provider enters 
into a pre-dispute arbitration agreement where it acquires or purchases 
a product covered by proposed Sec.  1040.3 that is subject to a pre-
dispute arbitration agreement and becomes a party to that agreement, 
even if the person selling the product is excluded from coverage under 
proposed Sec.  1040.3(b). Third, proposed comment 4-1.i.C would explain 
that a provider enters into a pre-dispute arbitration agreement where 
it adds a pre-dispute arbitration agreement to an existing product or 
service. The Bureau interprets Dodd-Frank section 1028(b) to include 
authority that would allow the Bureau to require that providers comply 
with proposed Sec.  1040.4 to the extent they choose to add pre-dispute 
arbitration agreements to existing consumer agreements after the 
compliance date.
    Proposed comments 4-1.ii would then state that examples of when a 
provider does not enter into a pre-dispute arbitration agreement 
include, but are not limited to, two scenarios. Proposed comment 4-
1.ii.A would state the first scenario--that a provider does not enter 
into a pre-dispute arbitration agreement where it modifies, amends, or 
implements the terms of a product or service that is subject to a pre-
dispute arbitration agreement that was entered into before the 
compliance date. However, a provider would be considered to enter into 
a pre-dispute arbitration agreement where the modification, amendment, 
or implementation constitutes providing a new covered product or 
service. Proposed comment 4-1.ii.A would also address the scenario in 
which a provider modifies, amends, or implements the terms of a pre-
dispute arbitration agreement itself. Proposed comment 4-1.ii.B would 
address the second scenario and would state that a provider does not 
enter into a pre-dispute arbitration agreement where it acquires or 
purchases a product that is subject to a pre-dispute arbitration but 
does not become a party to that agreement. The Bureau believes that the 
phrase entered into an agreement as used in Dodd Frank section 1028 can 
be interpreted to permit application of a Bureau regulation issued 
under the provision to agreements modified or amended after the 
compliance date, in certain circumstances. However, for the purposes of 
this proposal, the Bureau is proposing to interpret the phrase more 
narrowly, as reflected by, for example, proposed comment 4-1.ii.B. The 
Bureau solicits comment on whether, for the purposes of the proposal, 
it should instead interpret the phrase more broadly to encompass 
certain modifications or amendments of an agreement after the 
compliance date and what the impacts of such an interpretation would 
be.
    Proposed Sec.  1040.4, in general, would apply to a provider 
regardless of whether the provider itself entered into a pre-dispute 
arbitration agreement, as long as the agreement was entered into after 
the compliance date.\505\ Proposed comment 4-2 would clarify this by 
explaining how proposed Sec.  1040.4 applies to a provider that does 
not itself enter into a pre-dispute arbitration agreement.
---------------------------------------------------------------------------

    \505\ The Bureau believes this is consistent with Dodd-Frank 
sections 1028(b) and 1028(d), which authorize the Bureau to prohibit 
or impose conditions or limitations on the use of a pre-dispute 
arbitration agreement between a covered person and a consumer 
(section 1028(b)) and state that shall apply to any agreement 
between a consumer and a covered person entered into after the 
compliance date (section 1028(d)).
---------------------------------------------------------------------------

    Proposed comment 4-2 would explain that pursuant to proposed Sec.  
1040.4(a)(1), a provider cannot rely on any pre-dispute arbitration 
agreement entered into by another person after the effective date with 
respect to any aspect of a class action concerning a product or service 
covered by Sec.  1040.3 and pursuant to Sec.  1040.4(b). That comment 
would further clarify that a provider may be required to submit certain 
specified records related to claims filed in arbitration pursuant to 
such pre-dispute arbitration agreements and cross-reference comment 
4(a)(2)-1 which is discussed below. The comment would go on to provide 
an example of a debt collector collecting on covered consumer credit 
that is prohibited by Sec.  1040.4(a)(1) from relying on a pre-dispute 
arbitration agreement entered into by the creditor with respect to a 
class action even when the debt collector does not itself enter a pre-
dispute arbitration agreement. The Bureau seeks comment whether 
proposed comments 4-1 and -2 are helpful in facilitating compliance, 
and whether the Bureau should provide additional or different examples.
4(a) Use of Pre-Dispute Arbitration Agreements in Class Actions
    For the reasons discussed more fully in Part VI and pursuant to its 
authority under Dodd-Frank section 1028(b), the Bureau proposes Sec.  
1040.4(a). Proposed Sec.  1040.4(a)(1) would require that a provider 
shall not seek to rely on a pre-dispute arbitration agreement entered 
into after the compliance date with respect to any aspect of a class 
action that is related to any of the consumer financial products or 
services covered by proposed Sec.  1040.3, unless the court has ruled 
that the class action may not proceed and any appellate review of that 
ruling has been resolved.
    Proposed Sec.  1040.4(a)(2) would generally require providers to 
ensure that any pre-dispute arbitration agreements entered into after 
the compliance date contain a specified provision disclaiming the 
applicability of those agreements to class action cases concerning a 
consumer financial product or service covered by the proposed rule.
    The Bureau notes that proposed Sec.  1040.4(a) would permit an 
arbitration agreement that allows for class

[[Page 32886]]

arbitration, provided that a consumer could not be required to 
participate in class arbitration instead of class litigation. In other 
words, a pre-dispute arbitration agreement that allows a consumer to 
choose whether to file a class claim in court or in arbitration would 
be permissible under proposed Sec.  1040.4(a), although an arbitration 
agreement that permits the claim to only be filed in class arbitration 
would not be permissible.\506\
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    \506\ In its SBREFA Outline, the Bureau noted that it was 
considering an alternative that would have given consumer financial 
services providers discretion to use arbitration agreements that 
required that class proceedings be conducted in arbitration instead 
of court, provided those arbitration proceedings satisfied minimum 
standards of fairness. The Bureau has not heard from any 
stakeholders that this option is preferable to the class proposal. 
Nonetheless, the Bureau will continue to consider feedback regarding 
this alternative.
---------------------------------------------------------------------------

Small Business Review Panel Recommendations
    As discussed above, the Bureau preliminarily finds that the 
proposed rule would be in the public interest and for the protection of 
consumers and would be consistent with the Study. Those findings are 
subject to further revision in light of comments received, however. In 
addition, the Bureau continues to consider recommendations made to it 
by the SBREFA Panel Report as part of the SBREFA process.\507\ Some of 
the broader concerns from SERs regarding whether to adopt the class 
proposal are addressed above in Part VI, as well as below in Part VIII 
(the Section 1022(b)(2) Analysis) and Part IX (the Regulatory 
Flexibility Analysis). In the discussion that follows, the Bureau 
considers other recommendations contained in the Panel Report.
---------------------------------------------------------------------------

    \507\ See supra Part IV (Post-Study Outreach).
---------------------------------------------------------------------------

    As the Panel Report indicates, many of the SERs expressed concern 
about the impacts of limiting the use of pre-dispute arbitration 
agreements in class action litigation. Specifically, the SERs expressed 
concern that defending even one class action litigation--including 
defense counsel fees and any settlements ultimately paid out--could put 
a small entity out of business. In response to these concerns, the 
SBREFA Panel recommended that the Bureau continue to evaluate the costs 
to small entities of defending class actions and how such costs may 
differ from the costs to larger entities.
    This proposed rule's impacts analyses pursuant to section 
1022(b)(2) of the Dodd-Frank Act (Part VIII below) and section 603 of 
the Regulatory Flexibility Act \508\ (Part IX below) examines several 
aspects of costs related to small entities. The Bureau believes that 
small consumer finance entities face class litigation at a lower rate 
than entities that are not small. Depository institutions with less 
than $600 million in assets, for example, make up the vast majority of 
depositories overall; however, only about one Federal class settlement 
per year with depository institutions analyzed in the Study involved 
institutions below that threshold. Further, the magnitude of the 
settlements, measured by payments to class members, is also 
considerably smaller. The documented payments to class members from all 
cases that involve smaller depository institutions added together is 
under $2 million over the five years analyzed in the Study. The 
Bureau's Section 1022(b)(2) Analysis also notes several factors that 
affect how small entities in consumer financial markets may respond to 
the proposed rule in a different manner than larger entities.
---------------------------------------------------------------------------

    \508\ 5 U.S.C. 601, et seq.
---------------------------------------------------------------------------

    Further, despite the fact that the Bureau is not certifying, at 
this time, that the proposed rule would not have a significant economic 
impact on a substantial number of small entities, the Bureau believes 
that the arguments and calculations outlined both in Section 1022(b)(2) 
Analysis, as well as the arguments and calculations that follow, 
strongly suggest that the proposed rule would indeed not have a 
significant economic impact on a substantial number of small entities 
in any of the covered markets. As discussed in greater detail in the 
Section 1022(b)(2) Analysis, while the expected cost per provider from 
the Bureau's rule is about $200 per year from Federal class cases, 
these costs would not be evenly distributed across small providers. In 
particular, the Bureau estimates that about 25 providers per year would 
be involved in an additional Federal class settlement--a considerably 
higher expense than $200 per year. In addition, the additional Federal 
cases filed as class litigation that would end up not settling on class 
basis (121 per year according to the Bureau's estimates) are also 
likely to result in a considerably higher expense that $200. However, 
as noted in the Regulatory Flexibility Analysis, the vast majority of 
the providers covered by the proposal would not experience any of these 
effects.
    The Bureau also notes that, under proposed Sec.  1040.3(b)(4), its 
proposed rule would not apply to any person when providing a product or 
service covered by Sec.  1040.3(a) that the person and any of its 
affiliates collectively provide to no more than 25 consumers in the 
current calendar year and to no more than 25 consumers in the preceding 
calendar year. Consistent with the Panel's recommendation, however, the 
Bureau solicits further feedback on the costs of defending class 
actions and whether those costs may differ or be disproportionate for 
small entities as compared to larger ones.
    The Panel Report reflects a concern expressed by several SERs that 
preventing providers from relying on pre-dispute arbitration agreements 
in class litigation would affect the small entities' ability to obtain 
insurance coverage for class action litigation defense costs, which the 
SERs noted was already expensive. The Panel recommended that the Bureau 
further assess the availability and costs of insurance for small 
entities including impacts on insurance premiums and deductibles and 
any costs related to pursuing unpaid claims against an insurer, 
particularly whether and how insurance covers class action defense 
costs and whether exposure to class actions would impact the cost and 
availability of this insurance.
    As discussed in the Bureau's Section 1022(b)(2) Analysis, the 
Bureau recognizes that, in response to the Bureau's proposal, providers 
may make various investments to reduce the potential financial impacts 
of class litigation. For example, providers might opt for more 
comprehensive insurance coverage that would presumably cover more class 
litigation exposure or would have a higher reimbursement limit. 
However, during the Small Business Review Panel, the SERs noted that it 
often is not clear to them which type of class litigation exposure a 
policy covers nor was it clear that providers typically ask insurers 
about this sort of coverage. The SERs explained that their coverage is 
often determined on a more specialized case-by-case basis that limits 
at least small providers' ability to plan ahead. Larger firms may have 
more sophisticated policies and more systematic understanding of their 
coverage, however, or they may self-insure. Finally, the insurance 
providers might require at least some of the changes to compliance 
discussed above as a prerequisite for coverage or for a discounted 
premium. Consistent with the Panel's recommendation, the Bureau seeks 
comment on whether and, if so, how the rule would affect class action 
litigation defense insurance costs for covered entities.
    Some SERs rejected the Bureau's reasoning, discussed in Part VI, 
that the potential for class action litigation encourages companies to 
comply with relevant consumer finance laws and

[[Page 32887]]

deters companies from practices that may harm consumers. The Panel 
recommended that the Bureau seek comment on whether small entities 
engage in different compliance practices than large entities and that 
the Bureau further analyze the impact of class actions on small 
entities' conduct. As discussed more fully above, the Bureau continues 
to believe that, with respect to both small entities and larger 
entities, the availability of class actions encourages compliance with 
relevant consumer finance laws and deters practices that may harm 
consumers. Consistent with the Panel's recommendation, the Bureau seeks 
comment on the impact of class action exposure on providers' compliance 
and specifically on whether those compliance efforts might differ for 
smaller entities as compared to larger ones.
    A few of the SERs further expressed concern that the Bureau's class 
proposal would expose their businesses to more class litigation which 
could, in turn, increase their companies' litigation defense costs and 
therefore increase the cost of business credit that the entities rely 
on to facilitate their operations. These SERs stated that they believed 
that their lenders would increase the cost of business credit for their 
companies if their companies could no longer rely on arbitration 
agreements in class actions. The Panel recommended that the Bureau 
consider whether there are alternative actions that the Bureau could 
take that would still accomplish the Bureau's goals of encouraging 
increased compliance with relevant consumer financial laws and 
providing relief to harmed consumers while not increasing small 
entities' exposure to class action lawsuits that could increase their 
cost of credit.
    The Bureau has analyzed the potential impacts on small providers' 
own costs of credit and the availability of other alternatives, as 
discussed further in Part IX (the Regulatory Flexibility Analysis). 
Consistent with that more extended discussion and the Panel's 
recommendation, the Bureau seeks comment on whether proposed Sec.  
1040.4(a) would increase the cost of credit for small entities and 
whether there are alternatives to proposed Sec.  1040.4(a) that would 
accomplish the Bureau's objectives while mitigating any potential 
increases to the cost of credit for small entities. The Bureau also 
seeks comment on whether and to what extent commercial lenders inquire 
in the course of underwriting a loan about a potential borrower's 
exposure to class actions or ability to rely on pre-dispute arbitration 
agreements to reduce exposure to class actions.
    The SERs suggested alternatives to the Bureau's class proposal 
that, in their view, would protect small entities from the costs of 
class litigation. One such alternative would be exempting small 
entities from some, or all, of the proposed rule's requirements. 
Accordingly, the Panel recommended that the Bureau evaluate the impact 
of its class proposals on small entities and consider exempting small 
entities from some requirements of the class proposal or consider 
delaying implementation of the rule for small entities.
    At this time, the Bureau is not proposing an exemption for small 
entities because it believes that the availability of class actions 
protects consumers who do business with small entities. While the Study 
shows that small entities are less likely to have arbitration 
agreements than larger entities,\509\ the Bureau is aware that both 
large and small entities commit violations of consumer financial laws 
in ways that harm consumers. The Bureau believes that the availability 
of meaningful relief is important in such cases. Further, it has 
considered the impact of its class proposals on small entities, 
including the concerns expressed by SERs about the cost of litigating 
class actions, and as discussed in Part IX and above believes that they 
would be relatively modest. Consequently, the Bureau seeks comment on 
whether the Bureau should exempt small entities from some or all 
requirements of the proposed rule. The Bureau seeks comment on whether 
adopting a small entity exemption would advance the purposes of the 
proposed rule, namely, the furtherance of the public interest and the 
protection of consumers regarding the use of pre-dispute arbitration 
agreements in agreements for consumer financial products or services.
---------------------------------------------------------------------------

    \509\ See Study, supra note 2, section 2, at 16-17.
---------------------------------------------------------------------------

    In the event the Bureau were to adopt a small entity exemption, the 
Bureau seeks comment on how to formulate such an exemption for all 
small providers or for small providers in particular industries. One 
approach could be to use the Small Business Administration (SBA) size 
standards to determine whether an entity is small, although that could 
involve complexity particularly as to entities that might qualify in 
more than one category.\510\ The Bureau could also use some other 
standard that would apply to all providers based on, for example, the 
volume of covered products or services provided to consumers or revenue 
derived from such products or services. The Bureau could also adopt 
varying standards based on other criteria for each covered market, but 
that could involve the same complexity as using the SBA size standards. 
Apart from what standard the Bureau might adopt, the Bureau also seeks 
comment on whether the Bureau would need to monitor which entities 
would avail themselves of such an exemption and, if so, how the Bureau 
should do so. Finally, the Bureau seeks comment on whether, if it were 
to adopt an exemption, it should monitor exempt entities' reliance on 
arbitration agreements in class actions, such as by requesting that 
such entities submit copies of motions to compel arbitration that they 
file in class action cases.
---------------------------------------------------------------------------

    \510\ SBA has established numerical definitions, or ``size 
standards,'' for all for-profit industries. Size standards represent 
the largest size that a business (including its subsidiaries and 
affiliates) may be to remain classified as a small business concern 
for purposes of qualifying for SBA and other Federal programs. See 
Small Bus. Admin., Table of Small Business Size Standards (updated 
Feb. 26, 2016), available at https://www.sba.gov/content/small-business-size-standards.
---------------------------------------------------------------------------

    Some of the SERs also suggested that, rather than prohibit 
providers from relying on pre-dispute arbitration agreements in class 
actions, the Bureau instead mandate improved disclosures regarding 
arbitration and educate consumers regarding their dispute resolution 
rights. These SERs stated that consumer education could encourage 
consumers to pursue individual claims in small claims court or 
arbitration that they might otherwise abandon or be discouraged from 
pursuing, thereby reducing the need for class action litigation to 
address consumer harms. The SERs thus echoed what some other industry 
participants have told the Bureau--that, rather than limit the use of 
arbitration in any way, the Bureau should advocate for arbitration and 
encourage consumers to take their individual claims before an 
arbitrator. The Panel recommended that the Bureau consider whether, 
through improved disclosure requirements and consumer education 
initiatives, the Bureau could increase consumers' awareness and 
understanding of their available dispute resolution mechanisms and use 
of these mechanisms to resolve disputes and redress consumer harms.
    The Bureau has considered the issue carefully and preliminarily 
concludes that better consumer understanding through either disclosure 
or consumer education would not lead to a material increase in the 
filing of individual claims to the level necessary that would

[[Page 32888]]

alleviate the need for class action litigation to remedy large-scale 
consumer harms. This analysis is described further below in Part IX 
(the Regulatory Flexibility Analysis). As described above in Part VI, 
consumer financial claims often involve claims for such small amounts 
that they are impractical for consumers to pursue on an individual 
basis in any forum--litigation or arbitration. Unlike class actions, 
which permit consumers to pursue their claims as a group and share the 
costs of bringing the claim, increased disclosure and consumer 
education alone would not address this underlying economic obstacle 
that prevents most consumers from obtaining relief for violations of 
law.
    Further, where a provider has violated the law, many consumers may 
be unaware that they have been harmed. Class actions address this 
problem, because, typically, all consumers harmed by a course of 
conduct become part of the class. In contrast, improved disclosures do 
not, because improved awareness of dispute resolution options is not 
likely to affect a consumer's behavior where the consumer does not know 
that the consumer has suffered a legally actionable harm. Thus, the 
Bureau believes that making class actions available to consumers would 
result in consumers being able to pursue their claims on a much greater 
scale than would improving disclosures and increasing consumer 
education.
    Consistent with the Panel's recommendation, and to gather 
additional views about this issue, the Bureau solicits comment on 
whether improved disclosure or consumer education could increase 
consumers' understanding of dispute resolution and use of individual 
arbitration to resolve disputes and redress consumer harms sufficient 
to obviate the need for the class proposal. The Bureau also continues 
to evaluate whether it should provide additional consumer education 
materials regarding dispute resolution rights, in addition to rather 
than in lieu of the proposed interventions.
    Finally, the SERs expressed concern about exposure to class action 
litigation based on certain statutory causes of action that have no 
limit on statutory damages in a class action, such as the TCPA.\511\ 
The SERs stated that a small entity may be unable to absorb a class 
action award or settlement of claims brought under a statute, like the 
TCPA, where damages are uncapped. The Panel recommended that the Bureau 
evaluate and seek comment on whether specific features of particular 
causes of action affect the availability of consumer relief, the 
deterrent effect of class actions, and consequences to small entities 
arising from settlement or recovery for those causes of action.
---------------------------------------------------------------------------

    \511\ The TCPA is a statute implemented by the Federal 
Communications Commission that affords consumers certain rights and 
protections related to telephone solicitations and the use of 
automated telephone equipment, such as automatic dialing systems. 47 
U.S.C. 227. TCPA allows for actual damages (which are awarded 
rarely) or statutory damages (authorized by the statute without 
regard to the degree of harm to the plaintiff) ranging from $500 to 
$1,500 per violation, with each unsolicited call or text message 
considered a separate violation. 47 U.S.C. 227(b)(3). The TCPA does 
not place an aggregate cap on statutory damages in class actions. 
Consequently, statutory damages may be substantial if the same 
conduct applies to a large class of consumers.
---------------------------------------------------------------------------

    The Bureau has considered, but is not at this time proposing, an 
exemption to this part for particular causes of action. The Bureau 
believes that Congress and State legislatures, as applicable, are 
better positioned than the Bureau to establish the appropriate level of 
damages for particular harms under established statutory schemes. While 
the Bureau recognizes the concern, expressed by SERs, among others, 
that particular statutes may create the possibility of disproportionate 
damages awards, the Bureau believes that Congress and the courts are 
the appropriate institutions to address such issues. For example, 
industry groups have lobbied, and may continue to lobby Congress and 
the FCC to amend the TCPA, including its statutory damages scheme.\512\ 
The Bureau believes it is particularly appropriate to defer to Congress 
and the courts on the TCPA, which the Bureau does not administer.\513\ 
The Bureau nevertheless seeks comment on its approach to this issue, 
including whether there are compelling reasons to exclude particular 
causes of action from the proposed rule, bearing in mind that 
legislatures are ultimately charged with setting that balance.
---------------------------------------------------------------------------

    \512\ See, e.g., Letter from U.S. Chamber of Com., et al., to 
FTC, In the Matter of Rules and Regulations Implementing the 
Telephone Consumer Protection Act of 1991, CG Docket No. 02-278 
(Feb. 2, 2015), available at https://www.uschamber.com/sites/default/files/2.2.15-_multi-association_letter_to_fcc_on_tcpa.pdf; 
Credit Union Nat'l Ass'n, CUNA Sends Letter to Energy and Commerce 
Subcommittee about TCPA Order Concerns, CUNA.org (Nov. 17, 2015), 
available at http://www.cuna.org/Legislative-And-Regulatory-Advocacy/Removing-Barriers-Blog/Removing-Barriers-Blog/CUNA-Sends-Letter-to-Energy-and-Commerce-Subcommittee-about-TCPA-Order-Concerns/.
    \513\ The Bureau further notes that the Supreme Court this term 
is considering a challenge that would limit the scope of statutory 
damage claims in class actions. See Spokeo, Inc. v. Robins, cert. 
granted, 135 S. Ct. 1892 (2015).
---------------------------------------------------------------------------

4(a)(1) General Rule
    In furtherance of the Bureau's goal to ensure that class actions 
are available to consumers who are harmed by providers of consumer 
financial products and services, for the reasons discussed above in 
Part VI and in accordance with the Bureau's authority under Dodd-Frank 
section 1028(b), the Bureau proposes Sec.  1040.4(a)(1). Proposed Sec.  
1040.4(a)(1) would require that a provider shall not rely in any way on 
a pre-dispute arbitration agreement entered into after the compliance 
date with respect to any aspect of a class action that is related to 
any of the consumer financial products or services covered by proposed 
Sec.  1040.3 including to seek a stay or dismissal of particular claims 
or the entire action, unless and until the presiding court has ruled 
that the case may not proceed as a class action and, if that ruling may 
be subject to appellate review on an interlocutory basis, the time to 
seek such review has elapsed or the review has been resolved.\514\
---------------------------------------------------------------------------

    \514\ The Bureau notes that the prohibition in proposed Sec.  
1040.4(a)(1) would apply to providers' relying on provisions in pre-
dispute arbitration agreements, as well as on the overall agreement.
---------------------------------------------------------------------------

    Proposed Sec.  1040.4(a)(1) would bar providers from relying on a 
pre-dispute arbitration agreement entered into after the compliance 
date of the rule, as described above, even if the pre-dispute 
arbitration agreement does not include the provision required by Sec.  
1040.4(a)(2). Examples of this scenario include where a provider uses 
preprinted agreements that would be temporarily excepted from proposed 
Sec.  1040.4(a)(2) (see proposed Sec.  1040.5(b)); a debt collector 
with respect to a pre-dispute arbitration agreement entered into after 
the compliance date by a creditor that was excluded from coverage under 
proposed Sec.  1040.3(b); and where a provider has violated proposed 
Sec.  1040.4(a)(2) by failing to amend its agreement to include the 
required provision. The Section-by-Section Analysis to proposed Sec.  
1040.3(a)(10), above, contains additional examples, pertaining to debt 
collection by merchants, of scenarios where proposed Sec.  1040.4(a)(1) 
would apply even where the pre-dispute arbitration agreements itself is 
not required to contain the provision outlined in proposed Sec.  
1040.4(a)(2).
    Proposed Sec.  1040.4(a)(1) would prevent providers from relying on 
a pre-dispute arbitration agreement in a class action unless and until 
the presiding court has ruled that the case may not proceed as a class 
action, and, if the ruling may be subject to interlocutory appellate 
review, the time to seek such

[[Page 32889]]

review has elapsed or the review has been resolved. For example, when a 
case is filed as a putative class action and a court has not yet ruled 
on a motion to certify the class, proposed Sec.  1040.4(a)(1) would 
prohibit a motion to compel arbitration that relied on a pre-dispute 
arbitration agreement. If the court denies a motion for class 
certification and orders the case to proceed on an individual basis, 
and the ruling may be subject to interlocutory appellate review--
pursuant to Rule 23(f) of the Federal Rules of Civil Procedure or an 
analogous State procedural rule--proposed Sec.  1040.4(a)(1) would 
prohibit a motion to compel arbitration based on a pre-dispute 
arbitration agreement until the time to seek appellate review has 
elapsed or appellate review has been resolved. If the court denies a 
motion for class certification and the ruling is either not subject to 
interlocutory appellate review, the time to seek review has elapsed, or 
the appellate court has determined that the case may not proceed as a 
class action, proposed Sec.  1040.4(a)(1) would no longer prohibit a 
provider from relying on a pre-dispute arbitration agreement in the 
case.
    Proposed comment 4(a)(1)-1 provides a non-exhaustive list of 
examples illustrating what it means for a provider to ``rely on a pre-
dispute arbitration agreement with respect to any aspect of a class 
action.'' The proposed comment would provide six examples: Seeking 
dismissal, deferral, or stay of any aspect of a class action (proposed 
comment 4(a)(1)-1.i); seeking to exclude a person or persons from a 
class in a class action (proposed comment 4(a)(1)-1.ii); objecting to 
or seeking a protective order intended to avoid responding to discovery 
in a class action (proposed comment 4(a)(1)-1.iii); filing a claim in 
arbitration against a consumer who has filed a claim on the same issue 
in a class action (proposed comment 4(a)(1)-1.iv); 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 and the appeal has not been resolved (proposed comment 4(a)(1)-
1.v); and 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 granted a motion to dismiss the claim where the court has noted 
that the consumer has leave to refile the claim on a class basis, if 
the time to refile the claim has not elapsed (proposed comment 4(a)(1)-
1.vi).
    One purpose of proposed comments 4(a)(1)-1.iv through vi would be 
to prevent providers from evading proposed Sec.  1040.4(a)(1) by filing 
an arbitration claim against a consumer who has already filed a claim 
on the same issue in a putative class action. The Bureau notes, 
however, that proposed Sec.  1040.4(a)(1) would not prohibit a provider 
from continuing to arbitrate a claim that was filed before the consumer 
filed a class action claim. For example, if a provider files an 
arbitration claim to collect a debt from a consumer, and the consumer 
later files a class action claim, the arbitration of that claim would 
still be permitted to go forward, although, under proposed Sec.  
1040.4(a)(1) the provider could not use the pre-dispute arbitration 
agreement to block the class action.
    The Bureau seeks comment on these examples and whether further 
clarification regarding when this provision would apply in the course 
of litigation would be helpful to providers. Specifically, the Bureau 
seeks comment on whether the language ``claim on the same issue,'' 
which appears in proposed comment 4(a)(1)-1.v and vi, is sufficiently 
limiting and would not prevent, for example, arbitrations involving 
unrelated claims to go forward even if they involve the same consumer. 
The Bureau also seeks comment on whether entities may seek to 
circumvent or evade proposed Sec.  1040.4(a)(1) and whether additional 
clarification would be needed to prevent such circumvention or 
evasion.\515\
---------------------------------------------------------------------------

    \515\ The Bureau notes that it has the authority under Dodd-
Frank section 1022(b)(1) to, among other things, issue orders or 
guidance after a rule to prevent evasions of Federal consumer 
financial law.
---------------------------------------------------------------------------

    Proposed comment 4(a)(1)-2 would state that, in a class action 
concerning multiple products or services only some of which are covered 
by proposed Sec.  1040.3, the prohibition in proposed Sec.  
1040.4(a)(1) applies only to claims that concern the covered products 
or services. The Bureau seeks comment on this comment and whether 
providers need additional clarification regarding the application of 
proposed Sec.  1040.4(a)(1) in class actions for multiple products and 
services, only some of which are covered by proposed Sec.  1040.3.
4(a)(2) Provision Required in Covered Pre-dispute Arbitration 
Agreements
    In furtherance of the Bureau's goal to ensure that class actions 
are available to consumers who are harmed by consumer financial service 
providers, for the reasons discussed above in Part VI and in accordance 
with the Bureau's authority under Dodd-Frank section 1028(b), proposed 
Sec.  1040.4(a)(2) would generally require providers to ensure that 
pre-dispute arbitration agreements contain specified provisions 
explaining that the agreements cannot be invoked in class proceedings. 
These proposed requirements are discussed in greater detail below.
4(a)(2)(i)
    Proposed Sec.  1040.4(a)(2)(i) would state that, except as 
permitted by proposed Sec.  1040.4(a)(2)(ii) and (iii) and proposed 
Sec.  1040.5(b), providers shall, upon entering into a pre-dispute 
arbitration agreement for a product or service covered by proposed 
Sec.  1040.3 after the compliance date, ensure that any such agreement 
contains the following provision:

    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.

    Requiring a provider's arbitration agreement to contain such a 
provision would ensure that consumers, courts, and other relevant third 
parties, including potential purchasers, are made aware when reading 
the agreement that it may not be used to prevent consumers from 
pursuing class actions concerning consumer financial products or 
services covered by the proposed rule. Moreover, to the extent a 
provider attempts to invoke a pre-dispute arbitration agreement, 
consumers could invoke this contractual provision to enforce their 
right to proceed in court for class claims. The Bureau intends this 
provision to be limited to class action cases that concern a consumer 
financial product or service that would be covered by proposed Sec.  
1040.3. In addition, the Bureau intends the phrase ``neither we nor 
anyone else shall use this agreement''--rather than merely ``we shall 
not use this agreement''--to make clear to consumers that the proposed 
rule would bind both the provider that initially enters into the 
agreement and any third party that might later be assigned the 
agreement or otherwise seek to rely on it.
    The Bureau has attempted to draft the proposed contractual 
provision--as well as the contractual provisions in proposed Sec.  
1040.4(a)(2)(ii) and (iii)--to be in plain language. While the Bureau 
does not believe that disclosure requirements or consumer education 
could lead to a material increase in the filing of individual claims, 
the Bureau does believe that consumers who consult their contracts 
should be able to

[[Page 32890]]

access an understandable explanation of their dispute resolution 
rights.
    The Bureau intends the phrase ``contains the following provision'' 
in proposed Sec.  1040.4(a)(2)(i) to clarify that the text specified by 
proposed Sec.  1040.4(a)(2)(i) shall be included as a provision of the 
pre-dispute arbitration agreement, as for example, the FTC's Holder in 
Due Course Rule also requires.\516\ Thus, providers may not--for 
example--include the required language as a separate notice or consumer 
advisory, except in certain circumstances that would be governed by 
proposed Sec.  1040.4(a)(2)(iii). Further, similar to how the Bureau 
understands the provision required by the Holder in Due Course Rule, 
the Bureau intends the provision to create a binding legal obligation. 
As a result, if a consumer or attorney were unaware of proposed Sec.  
1040.4(a)(1), the Bureau expects that the provision required by 
proposed Sec.  1040.4(a)(2)(i) would have a substantially similar legal 
effect through the operation of applicable contract law.
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    \516\ This rule prohibits a person who, in the ordinary course 
of business, sells or leases goods or services to consumers from 
taking or receiving a consumer credit contract that fails to contain 
a provision specified in the regulation stating that any holder of 
the contract is subject to all claims and defenses that the debtor 
could assert against the seller. 16 CFR 433.2.
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    The Bureau seeks comment on proposed Sec.  1040.4(a)(2)(i) 
generally. The Bureau also seeks comment on whether the rule should 
mandate that covered entities insert the provision into their pre-
dispute arbitration agreements. In addition, the Bureau seeks comment 
on whether the provision, as drafted, is in plain language and would be 
understandable to consumers. The Bureau further seeks comment on 
whether the proposed provision would accomplish its purpose of binding 
both the provider that forms an initial agreement with the consumer and 
any future acquirers of it, as well as third parties that may seek to 
rely on it, such as debt collectors.
4(a)(2)(ii)
    Proposed Sec.  1040.4(a)(2)(ii) would permit providers to include 
in a pre-dispute arbitration agreement covering multiple products or 
services--only some of which are covered by proposed Sec.  1040.3--an 
alternative provision in place of the one required by proposed Sec.  
1040.4(a)(2)(i). Proposed Sec.  1040.4(a)(2)(ii) would require this 
alternative provision to contain the following text:

    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 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 that Rule.

    Under proposed Sec.  1040.4(a)(2)(ii), providers using one contract 
for transactions involving both products and services covered by 
proposed Sec.  1040.3 and products and services not covered by proposed 
Sec.  1040.3 would have the option to--but would not be required to--
use the alternative provision. Where contracts cover products and 
services covered by proposed Sec.  1040.3 and products and services not 
covered by proposed Sec.  1040.3, the Bureau believes that the 
alternative provision would improve consumer understanding because the 
alternative provision would more accurately describe consumers' dispute 
resolution rights. As with proposed Sec.  1040.4(a)(2)(i), discussed 
above, the Bureau intends for the text to be included as a provision in 
the pre-dispute arbitration agreement and for the text to have binding 
legal effect.
    The Bureau seeks comment on proposed Sec.  1040.4(a)(2)(ii) 
generally. The Bureau also seeks comment on whether it would be 
appropriate to permit the use of an alternative provision; whether the 
text of the proposed provision would be understandable to consumers; 
whether providers should be permitted to specify which products being 
provided are covered by the Rule; and whether the Bureau should 
consider making the alternative provision mandatory, rather than 
optional, in contracts for multiple products and services, only some of 
which would be covered by the proposed rule.
4(a)(2)(iii)(A) and (B)
    Proposed Sec.  1040.4(a)(2)(iii) would set forth how to comply with 
proposed Sec.  1040.4(a)(2) in circumstances where a provider enters 
into a pre-existing pre-dispute arbitration agreement that does not 
contain either the provision required by proposed Sec.  1040.4(a)(2)(i) 
or the alternative permitted by proposed Sec.  1040.4(a)(2)(ii). Under 
proposed Sec.  1040.4(a)(2)(iii), within 60 days of entering into the 
pre-dispute arbitration agreement, providers would be required either 
to ensure that the agreement is amended to contain the provision 
specified in proposed Sec.  1040.4(a)(2)(iii)(A) or provide any 
consumer to whom the agreement applies with the written notice 
specified in proposed Sec.  1040.4(a)(2)(iii)(B). For providers that 
choose to ensure that the agreement is amended, the provision specified 
by proposed Sec.  1040.4(a)(2)(iii)(A) would be as follows:

    We agree that neither we nor anyone else that later becomes a 
party to this pre-dispute arbitration agreement will use it 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.

    For providers that choose to provide consumers with a written 
notice, the required notice provision specified by Sec.  
1040.4(a)(2)(iii)(B) would be as follows:

    We agree not to use any pre-dispute arbitration 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.

    The Bureau believes that by permitting providers to furnish a 
notice to consumers, in lieu of amending their agreements, the notice 
option afforded by proposed Sec.  1040.4(a)(2)(iii)(B) would yield 
consumer awareness benefits while reducing the burden to providers for 
whom amendment may be challenging or costly. Further, the Bureau 
intends the notice option to ensure that consumers are adequately 
informed even if the provider that enters into a pre-existing agreement 
lacks a legally permissible means for amending the agreement to add the 
required provision. The Bureau notes that, whether the provider elects 
to ensure that the agreement is amended, chooses to provide the 
required notice, or violates proposed Sec.  1040.4(a)(2)(iii) by 
failing to do either of the above, the provider would still be required 
to comply with proposed Sec.  1040.4(a)(1).
    The Bureau seeks comment on proposed Sec.  1040.4(a)(2)(iii). The 
Bureau also seeks comment on whether the text of proposed Sec.  
1040.4(a)(2)(iii)(A) and (B) would be understandable to consumers. The 
Bureau further seeks comment on whether 60 days would be an appropriate 
timeframe for requiring providers to ensure that agreements are amended 
or provide notice, taking into consideration situations where, for 
example, providers are acquiring accounts.
    As discussed in the Bureau's Section 1022(b)(2) Analysis below, 
buyers of medical debt would, in some cases, need to perform due 
diligence to determine how this proposed rule would apply to the debts 
they buy. For example, proposed Sec.  1040.4(a)(2) would require buyers 
of consumer credit,

[[Page 32891]]

including medical credit, when they enter into a pre-dispute 
arbitration agreement to amend the agreement to contain a provision--or 
send the consumer a notice--stating that the debt buyer would not 
invoke that pre-dispute arbitration agreement in a class action. In 
cases that may involve incidental credit under ECOA, debt buyers might 
face additional impacts from the rule from additional due diligence to 
determine which acquired debts arise from credit transactions,\517\ or 
alternatively from the additional class action exposure created from 
sending consumer notices on debts that did not arise from credit 
transactions (i.e., from potential over-compliance). The Bureau seeks 
comment on the extent of these impacts, and whether an exemption from 
the notice requirement in proposed Sec.  1040.4(a)(2) would be 
warranted for buyers of medical debt, or whether the proposed rule 
should allow a medical debt buyer to send a tailored notice to the 
consumer that does not specify whether the underlying debt is covered 
credit in the first instance.
---------------------------------------------------------------------------

    \517\ The Bureau has previously recognized that requiring such 
determinations across an entire portfolio of collection accounts may 
be burdensome for buyers of medical debt because whether such debts 
constitute credit will turn on facts and circumstances that are 
unique to the health care context and of which the debt buyer may 
not be aware. As a result, the Bureau exempted medical debt from 
revenue that must be counted toward larger participant status of a 
debt collector. See Debt Collection Larger Participant Final Rule, 
77 FR 65775, 65780 (Oct. 31, 2012).
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    Proposed comment 4(a)(2)-1 would highlight an important difference 
in the application of proposed Sec.  1040.4(a)(2), as compared with 
proposed Sec.  1040.4(a)(1). Proposed Sec.  1040.4, in general, would 
apply to a provider regardless of whether the provider itself entered 
into a pre-dispute arbitration agreement, as long as the agreement was 
entered into after the compliance date. For example, proposed Sec.  
1040.4(a)(1) would prohibit a debt collector that does not enter into a 
pre-dispute arbitration agreement from moving to compel a class action 
case to arbitration on the basis of that agreement, so long as the 
original creditor entered into the pre-dispute arbitration agreement 
after the compliance date. Proposed Sec.  1040.4(a)(2), in comparison, 
would apply to providers only when they enter into a pre-dispute 
arbitration agreement for a product or service.\518\ Thus, proposed 
Sec.  1040.4(a)(2) would not apply to the debt collector in the example 
cited previously; but it would apply to a debt buyer that acquires or 
purchases a product covered by proposed Sec.  1040.3 and becomes a 
party to the pre-dispute arbitration agreement.\519\ Proposed comment 
4(a)(2)-1 would clarify this distinction by stating that the 
requirements of proposed Sec.  1040.4(a)(2) would not apply to a 
provider that does not enter into a pre-dispute arbitration agreement 
with a consumer.
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    \518\ See proposed Sec.  1040.4(a)(2) (``Upon entering into a 
pre-dispute arbitration agreement for a product or service covered 
by proposed Sec.  1040.3 after the date set forth in Sec.  1040.5(a) 
. . .'' (emphasis added).
    \519\ See proposed comment 4-1.i (providing examples of entering 
into a pre-dispute arbitration agreement).
---------------------------------------------------------------------------

    Proposed comment 4(a)(2)-2 would provide an illustrative example 
clarifying what proposed Sec.  1040.4(a)(2)(iii) requires when a 
provider enters into a pre-dispute arbitration agreement that the 
consumer had previously entered into with another entity and does not 
contain the provision required by proposed Sec.  1040.4(a)(2)(i) or the 
alternative permitted by proposed Sec.  1040.4(a)(2)(ii). The proposed 
comment would explain that such a situation could arise where Bank A is 
acquiring Bank B after the compliance date, and Bank B had entered into 
pre-dispute arbitration agreements before the compliance date. The 
proposed comment would state that if, as part of the acquisition, Bank 
A acquires products of Bank B's that are subject to pre-dispute 
arbitration agreements (and thereby enters into such agreements), 
proposed Sec.  1040.4(a)(2)(iii) would require Bank A to either (1) 
ensure the account agreements are amended to contain the provision 
required by proposed Sec.  1040.4(a)(2)(iii)(A), or (2) deliver the 
notice in accordance with proposed Sec.  1040.4(a)(2)(iii)(B).
    Proposed comment 4(a)(2)-3 would state that providers that elect to 
deliver a notice in accordance with proposed Sec.  1040.4(a)(2)(iii) 
may provide the notice in any way the provider communicates with the 
consumer, including electronically. The proposed comment would further 
explain that 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. The Bureau believes that permitting providers a wide range 
of options for furnishing the notice would accomplish the goal of 
consumer understanding while affording providers flexibility, thereby 
reducing the burden on providers.
    The Bureau seeks comment on proposed comments 4(a)(2)-1, -2, and -
3. The Bureau also seeks comment on whether proposed comment 4(a)(2)-
3's explanation that the notice permitted by proposed Sec.  
1040.4(a)(3) may be provided in any way the provider typically 
communicates with the consumer, including electronically, provides 
adequate clarification to providers while helping ensure that consumers 
receive the notice.
4(b) Submission of Arbitral Records
    While proposed Sec.  1040.4(a) would prevent providers from relying 
on pre-dispute arbitration agreements in class actions, it would not 
prohibit covered entities from maintaining pre-dispute arbitration 
agreements in consumer contracts generally. Providers could still 
invoke such agreements to compel arbitration in cases not filed as 
class actions. Thus, the Bureau has separately considered whether 
regulatory interventions pertaining to these ``individual'' 
arbitrations would be in the public interest and for the protection of 
consumers, as well as whether the findings for such interventions are 
consistent with the Bureau's Study.
    For reasons discussed more fully in Part VI and pursuant to its 
authority under section 1028(b), the Bureau proposes Sec.  1040.4(b), 
which would mandate the submission of certain arbitral records to the 
Bureau. Proposed Sec.  1040.4(b)(1) would require, for any pre-dispute 
arbitration agreement entered into after the compliance date, providers 
to submit copies of specified arbitration records enumerated in 
proposed Sec.  1040.4(b)(1) to the Bureau, in the form and manner 
specified by the Bureau. As with all the requirements in this proposed 
rule, compliance with this provision would be required beginning on the 
compliance date. The Bureau would develop, implement, and publicize an 
electronic submission process that would be operational before this 
date, were proposed Sec.  1040.4(b) to be adopted.
    Proposed Sec.  1040.4(b)(2) would require that providers submit any 
record required pursuant to proposed Sec.  1040.4(b)(1) within 60 days 
of filing by the provider of any such record with the arbitration 
administrator and within 60 days of receipt by the provider of any such 
record filed or sent by someone other than the provider, such as the 
arbitration administrator or the consumer. Proposed Sec.  1040.4(b)(3) 
would set forth the information that providers shall redact before 
submitting records to the Bureau. Proposed Sec.  1040.4(b)(1) through 
(3) are discussed in greater detail below.
    The Bureau notes that proposed Sec.  1040.4(b) would require 
submission only of records arising from arbitrations pursuant to pre-
dispute arbitration agreements entered into after the

[[Page 32892]]

compliance date where one or more of the parties is a provider and the 
dispute concerns a product covered by the rule. The Bureau further 
notes that the provision would apply to both individual arbitration 
proceedings and class arbitration proceedings. If providers participate 
in arbitrations as the result of agreements with consumers to arbitrate 
that are not made until after a dispute has arisen, proposed Sec.  
1040.4(b) would not require submission of such records. Proposed Sec.  
1040.4(b) further would provide that copies of records should be 
submitted, to ensure that providers do not submit original documents.
    As noted above, the Bureau proposes Sec.  1040.4(b) pursuant to its 
authority under Dodd-Frank sections 1028(b) and 1022(c)(4). Section 
1022(c)(4) authorizes the Bureau to ``gather information from time to 
time regarding the organization, business conduct, markets, and 
activities of covered persons and service providers.'' The Bureau notes 
that it is not proposing to obtain information in this rule for the 
purpose of gathering or analyzing the personally identifiable financial 
information of consumers. Proposed Sec.  1040.4(b)(3) would require 
providers to redact information that could directly identify 
consumers.\520\
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    \520\ Pursuant to Dodd-Frank section 1022(c)(4)(C), the Bureau 
may not obtain information under its section 1022(c)(4) authority 
``for the purpose of gathering or analyzing the personally 
identifiable financial information of consumers.''
---------------------------------------------------------------------------

    As discussed above, the Bureau is not now proposing to ban pre-
dispute arbitration agreements entirely, nor is it proposing to 
prohibit specific practices in individual arbitration other than the 
use of pre-dispute arbitration agreements to block class actions. 
Nevertheless, the Bureau will continue to evaluate the impacts on 
consumers of arbitration and arbitration agreements. To the extent 
necessary and appropriate, the Bureau intends to draw upon all of its 
statutorily authorized tools to address conduct that harms consumers. 
Specifically, the Bureau will continually analyze all available sources 
of information, including, if the proposed rule is finalized, 
information submitted to the Bureau pursuant to proposed Sec.  
1040.4(b) as well as other information garnered through its 
supervisory, enforcement, and market monitoring activities. The Bureau 
will draw upon these sources to assess trends pertinent to its 
statutory mission, including trends in the use of arbitration 
agreements; the terms of such agreements; and the procedures, conduct, 
and results of arbitrations.
    Among other regulatory tools, the Bureau may consider conducting 
additional studies on consumer arbitration pursuant to Dodd-Frank 
section 1028(a) for the purpose of evaluating whether further 
rulemaking would be in the public interest and for the protection of 
consumers; improving its consumer education tools; or, where 
appropriate, undertaking enforcement or supervisory actions.\521\
---------------------------------------------------------------------------

    \521\ The Bureau interprets section 1028 to allow it, as 
appropriate, to further study the use of pre-dispute arbitration 
agreements and, if appropriate, to promulgate rules that would 
prohibit or impose conditions or limitations on the use of a pre-
dispute arbitration agreement or to amend any rule that it would 
finalize pursuant to this proposal.
---------------------------------------------------------------------------

    The Bureau notes that the question of whether the use of individual 
arbitration in consumer finance cases is in the public interest and for 
the protection of consumers is discrete from the question of whether 
some covered persons are engaged in unfair, deceptive, or abusive acts 
or practices in connection with their individual arbitration 
agreements. The Bureau intends to use its supervisory and enforcement 
authority as appropriate to evaluate whether specific practices in 
relation to arbitration--such as the use of particular provisions in 
agreements or particular arbitral procedures--constitute unfair, 
deceptive, or abusive acts and practices pursuant to Dodd-Frank section 
1031. The Bureau will pay particular attention to any provisions in 
arbitration agreements that might function in such a way as to deprive 
consumers of their ability to pursue their claims in arbitration. For 
example, in certain circumstances, an agreement that requires consumers 
to resolve disputes, in arbitration or otherwise, in person in a 
particular location regardless of the consumer's location could violate 
Dodd-Frank section 1031. In certain circumstances, requiring consumers 
to resolve claims in a systematically biased forum or before a biased 
decision-maker, in a forum that does not exist, or in a forum that does 
not have a procedure to allow a consumer to bring a claim could 
similarly violate Dodd-Frank section 1031. The Bureau is actively 
monitoring the use of such practices that may function in such a way as 
to deprive consumers of their ability to pursue their claims in 
arbitration and will continue to evaluate them in accordance with all 
applicable law and the full extent of the Bureau's authorities.
    Consumer advocates and some other stakeholders have expressed 
concern that a proposal under consideration similar to proposed Sec.  
1040.4(b) that the Bureau described in its SBREFA Outline would allow 
the Bureau to monitor certain arbitration trends, but not to monitor or 
quantify the claims that consumers may have been deterred from filing 
because of the existence of a pre-dispute arbitration agreement. In 
particular, consumer advocates and some other stakeholders have 
expressed concern that pre-dispute arbitration agreements discourage 
consumers from filing claims in court or in arbitration and discourage 
attorneys from representing consumers in such proceedings. Consumer 
attorneys have noted, for example, that arbitration does not allow them 
to file cases that can develop the law (because the outcomes are 
usually private and do not have precedential effect) and, thus, they 
are wary of expending limited resources.\522\ The Bureau acknowledges 
that its proposal would provide limited insight into how and whether 
arbitration agreements discourage filing of claims, but it nonetheless 
seeks comment on whether the proposed collection of the arbitral 
records specified in proposed Sec.  1040.4(b) would permit the Bureau--
and the public, to the extent the Bureau publishes the records 
(discussed below)--to monitor arbitration and detect practices that 
harm consumers.
---------------------------------------------------------------------------

    \522\ See, e.g., Arbitration: Is It Fair When Forced? Hearing 
before the S. Comm. on the Judiciary, 112th Cong. 177 (2011) 
(Prepared Statement of F. Paul Bland, Senior Attorney, Public 
Justice), at 81-82.
---------------------------------------------------------------------------

    Proposed comment 4(b)-1 would clarify that, to comply with the 
submission requirement in proposed Sec.  1040.4(b), providers would not 
be required to submit the records themselves if they arranged for 
another person, such as an arbitration administrator or an agent of the 
provider, to submit the records on the providers' behalf. Proposed 
comment 4(b)-1 would also make clear, however, that the obligation to 
comply with proposed Sec.  1040.4(b) nevertheless remains on the 
provider and, thus, the provider must ensure that such person submits 
the records in accordance with proposed Sec.  1040.4(b). This proposed 
comment anticipates that arbitration administrators may choose to 
provide this service to providers.
    The Bureau seeks comment on its approach to arbitration agreements 
generally and all aspects of its proposal to collect certain arbitral 
records. The Bureau further seeks comment on known and potential 
consumer harms in individual arbitration. In particular, it seeks 
comment on whether it should consider fewer, more, or different 
restrictions on individual arbitration, whether it should prohibit 
individual arbitration altogether and whether it has accurately 
assessed the harm to consumers that occurs when covered

[[Page 32893]]

entities include pre-dispute arbitration agreements. As for its 
proposal to collecting arbitral records, the Bureau seeks comment on 
whether doing so will further the Bureau's stated goal of monitoring 
potential harms in providers' use of arbitration agreements as well as 
the underlying legal claims. Further, the Bureau seeks comment on 
whether proposed comment 4(b)-1 provides adequate clarification 
regarding the fact that the proposed rule would allow third parties to 
fulfill companies' obligations under proposed Sec.  1040.4(b). In 
addition, the Bureau seeks comment on its plan to make an electronic 
submission process operational before the compliance date, including 
what features of such a system would be useful to providers, their 
agents, or the general public.
Publication of Arbitral Records
    The Bureau intends to publish arbitral records collected pursuant 
to proposed Sec.  1040.4(b)(1). The Bureau is considering whether to 
publish such records individually or in the form of aggregated data. 
Prior to publishing such records, the Bureau would ensure that they are 
redacted, or that the data is aggregated, in accordance with applicable 
law, including Dodd-Frank section 1022(c)(8), which requires the Bureau 
to ``take steps to ensure that proprietary, personal, or confidential 
consumer information that is protected from public disclosure under 
[the Freedom of Information Act or the Privacy Act] . . . is not made 
public under this title.''
    The Bureau seeks comment on the publication of the records that 
would be required to be submitted by proposed Sec.  1040.4(b)(1), 
including whether it should limit any publication based on consumer 
privacy concerns arising out of the publication of such records after 
their redaction pursuant to proposed Sec.  1040.4(b)(3) or if providers 
would have other confidentiality concerns. In addition, the Bureau 
seeks comment on whether it should publish arbitral records 
individually or in the form of aggregated data.
    The Bureau also seeks comment on whether there are alternatives to 
publication by the Bureau--such as publication by other entities--that 
would further the purposes of publication described above.
Small Business Review Panel
    During the Small Business Review Panel process, the SERs expressed 
some concern about the indirect costs of requiring submission of 
arbitral claims and awards to the Bureau, such as whether the 
requirement might cause the cost of arbitration administration to 
increase and whether it might require companies to devote employee 
resources to redacting consumers' confidential information before 
submission. The SERs also expressed concern about the possibility of 
the Bureau publishing arbitral claims and awards (as was set forth in 
the SBREFA Outline) due to perceived risks to consumer privacy, impacts 
on their companies' reputation, and fear that publication of data 
regarding claims and awards might not present a representative picture 
of arbitration.
    In response to these and other concerns raised by the SERs, the 
Panel recommended that the Bureau seek comment on whether the 
publication of claims and awards would present a representative picture 
of arbitration. The Panel also recommended that the Bureau continue to 
assess whether and by how much the proposal to require submission of 
arbitral records would increase the costs of arbitration including 
administrative fees or covered entities' time. In addition, the Panel 
recommended that the Bureau consider the privacy and reputational 
impacts of publishing claims and awards for both the businesses and 
consumers involved in the dispute. The Bureau appreciates the SERs' 
concern about privacy risks and has sought to mitigate these risks by 
proposing the redaction requirements in proposed Sec.  1040.4(b)(3), 
described below. The Bureau understands the SERs' concerns that 
publishing certain arbitral records could affect companies' reputations 
or paint an unrepresentative picture of arbitration (for example, by 
publishing awards, but not settlements). However, the Bureau notes that 
published court opinions also have this effect (in that settlements are 
typically not public), and the Bureau is not aware of any distinctions 
specific to arbitration in this respect. The Bureau has considered 
several aspects of the costs of its proposed submission requirement in 
its Section 1022(b)(2) Analysis, below. However, the Bureau continues 
to assess each of these issues and believes public comment would assist 
the Bureau in its assessment. Consistent with the SERs' recommendation, 
the Bureau seeks comment on each of the above issues.
4(b)(1) Records To Be Submitted
    As stated above, proposed Sec.  1040.4(b) would require that, for 
any pre-dispute arbitration agreement entered into after the compliance 
date, providers submit a copy of the arbitration records specified by 
proposed Sec.  1040.4(b)(1) to the Bureau, in the form and manner 
specified by the Bureau.\523\ Proposed Sec.  1040.4(b)(1) would list 
the arbitral records that providers would be required to submit to the 
Bureau. As with all the requirements in this proposed rule, compliance 
with this provision would be required for pre-dispute arbitration 
agreements entered into after the compliance date.
---------------------------------------------------------------------------

    \523\ The Bureau anticipates that it would separately provide 
technical details pertaining to the submission process.
---------------------------------------------------------------------------

4(b)(1)(i)
    Proposed Sec.  1040.4(b)(1)(i) would require, in connection with 
any claim filed by or against the provider in arbitration pursuant to a 
pre-dispute arbitration agreement entered into after the compliance 
date, that providers submit (A) the initial claim form and any 
counterclaim; (B) the pre-dispute arbitration agreement filed with the 
arbitrator or administrator; (C) the judgment or award, if any, issued 
by the arbitrator or arbitration administrator; and (D) if an 
arbitrator or arbitration administrator refuses to administer or 
dismisses a claim due to the provider's failure to pay required filing 
or administrative fees, any communication the provider receives from 
the arbitrator or an arbitration administrator related to such a 
refusal.
    Proposed Sec.  1040.4(b)(1)(i)(A) would require providers to submit 
any initial claims filed in arbitration pursuant to a pre-dispute 
arbitration agreement and any counterclaims. By ``initial claim,'' the 
Bureau means the filing that initiates the arbitration, such as the 
initial claim form or demand for arbitration. The Bureau believes that 
collecting claims would permit the Bureau to monitor arbitrations on an 
ongoing basis and identify trends in arbitration proceedings, such as 
changes in the frequency with which claims are filed, the subject 
matter of the claims, and who is filing the claims. Based on the 
Bureau's expertise in handling and monitoring consumer complaints as 
well as monitoring private litigation, the monitoring of claims would 
also help the Bureau identify business practices that harm consumers. 
The Bureau seeks comment on its proposal to require submission of 
claims. The Bureau also seeks comment on whether further clarification 
of the meaning of ``claim,'' either in proposed Sec.  1040.2 or in 
commentary, would be helpful to providers. In addition, the Bureau also 
seeks comment on whether it should collect the response by the opposing 
party, if any, in addition to the claim. The Bureau further seeks 
comment on whether providers would encounter

[[Page 32894]]

other obstacles in complying with the proposed submission requirement 
and, if so, what those obstacles are.
    Proposed Sec.  1040.4(b)(1)(i)(B) would require providers to 
submit, in connection with any claim filed in arbitration by or against 
the provider, the pre-dispute arbitration agreement filed with the 
arbitrator or arbitration administrator. The Bureau notes that, due to 
concerns relating to burden on providers and the Bureau itself, the 
Bureau is not proposing to collect all pre-dispute arbitration 
agreements that are provided to consumers. Instead, it is proposing 
only to require submission in the event an arbitration filing 
occurs.\524\ By collecting the pre-dispute arbitration agreement, the 
Bureau would be able to monitor the impact that particular clauses in 
the agreement have on the conduct of an arbitration. For example, 
collecting pre-dispute arbitration agreements pursuant to which 
arbitrations were filed--combined with collecting judgments and awards 
pursuant to proposed Sec.  1040.4(b)(1)(i)(C)--may permit the Bureau to 
gather information about whether clauses specifying that the parties 
waive certain substantive rights when pursuing the claim in arbitration 
affect outcomes in arbitration. The Bureau seeks comment on its 
proposal to require submission of pre-dispute arbitration agreements 
when arbitration claims are filed.
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    \524\ Pursuant to Regulation Z, credit card issuers are already 
required to submit their consumer agreements to the Bureau (although 
the Bureau has temporarily suspended this requirement). See 12 CFR 
1026.58. The Bureau has also proposed to collect prepaid account 
agreements. Prepaid NPRM, supra note 470.
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    Proposed Sec.  1040.4(b)(1)(i)(C) would require providers to submit 
the judgment or award, if any, issued by the arbitrator or arbitration 
administrator in an arbitration subject to proposed Sec.  1040.4(b). 
This proposed requirement would be intended to reach only awards issued 
by an arbitrator that resolve an arbitration and not settlement 
agreements where they are not incorporated into an award. The Bureau 
believes that the proposed submission of these awards would aid the 
Bureau in its ongoing review of arbitration and help the Bureau assess 
whether arbitrations are being conducted fairly and without bias. The 
Bureau seeks comment on this aspect of the proposal and on whether it 
should consider requiring the submission of records that are not awards 
but that also close arbitration files.
    Proposed Sec.  1040.4(b)(1)(i)(D) would apply where an arbitrator 
or arbitration administrator refuses to administer or dismisses a claim 
due to the provider's failure to pay required filing or administrative 
fees. If this occurs, proposed Sec.  1040.4(b)(1)(i)(D) would require 
the provider to submit any communication the provider receives from the 
arbitration administrator related to such a refusal or dismissal. With 
regard to communications relating to nonpayment of fees, the Bureau 
understands that arbitrators or administrators, as the case may be, 
typically refuse to administer an arbitration proceeding if filing or 
administrative fees are not paid. The Bureau understands that 
arbitrators or administrators will typically send a letter to the 
parties indicating that the arbitration has been suspended due to 
nonpayment of fees.\525\ Pre-dispute arbitration agreements often 
mandate that the provider, rather than the consumer, pay some of the 
consumer's arbitration fees.\526\
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    \525\ See AAA, Consumer Arbitration Rules, supra note 130 at 32; 
JAMS, Streamlined Arbitration Rules and Procedures, supra note 132 
at 9 (effective July 1, 2014).
    \526\ Study, supra note 2, section 5 at 58.
---------------------------------------------------------------------------

    Where providers successfully move to compel a case to arbitration 
(and obtain its dismissal in court), but then fail to pay the 
arbitration fees, consumers may be left unable to pursue their claims. 
The Study identified at least 50 instances of such non-payment of fees 
by companies in cases filed by consumers.\527\ The Bureau is proposing 
Sec.  1040.4(b)(1)(i)(D) to permit it to monitor non-payment of fees by 
providers whose consumer contracts include pre-dispute arbitration 
agreements and whether particular entities appear to be not paying fees 
as part of a tactical effort to avoid arbitration, which essentially 
forecloses a consumer's ability to bring a claim if the claim is 
governed by a pre-dispute arbitration agreement. The Bureau further 
expects that requiring submission of communications related to non-
payment of fees would discourage providers from engaging in such 
activity.
---------------------------------------------------------------------------

    \527\ Study, supra note 2, section 5 at 66 n.110. The Bureau has 
similarly received consumer complaints involving entities' alleged 
failure to pay arbitral fees.
---------------------------------------------------------------------------

    Proposed Sec.  1040.4(b)(1)(i)(D) would require providers to submit 
communications from arbitration administrators related to the dismissal 
or refusal to administer a claim for nonpayment of fees even when such 
nonpayment is the result of a settlement between the provider and the 
consumer. The Bureau believes this requirement would prevent providers 
who are engaging in strategic non-payment of arbitration fees to claim, 
in bad faith, ongoing settlement talks to avoid the disclosure to the 
Bureau of communications regarding their non-payment. The Bureau 
anticipates that companies submitting communications pursuant to 
proposed Sec.  1040.4(b)(1)(i)(D) could indicate in their submission 
that nonpayment resulted from settlement and not from a tactical 
maneuver to prevent a consumer from pursuing the consumer's claim. 
Further, as stated above in the discussion of proposed Sec.  
1040.4(b)(1)(i)(C), the Bureau would not be requiring submission of the 
underlying settlement agreement or notification that a settlement has 
occurred.
    The Bureau seeks comment on proposed Sec.  1040.4(b)(1)(D). In 
addition, the Bureau seeks comment on the submission of communications 
from arbitration administrators related to the dismissal or refusal to 
administer a claim for nonpayment of fees even when such nonpayment is 
the result of a settlement between the provider and the consumer, 
including whether doing so would serve the policy goal of discouraging 
non-payment of arbitral fees by providers. The Bureau also seeks 
comment on the impact such a requirement would have on providers.
4(b)(1)(ii)
    Proposed Sec.  1040.4(b)(1)(ii) would require providers to submit 
to the Bureau any communication the provider receives from an 
arbitrator or arbitration administrator related to a determination that 
a provider's pre-dispute arbitration agreement that is entered into 
after the compliance date for a consumer financial product or service 
covered by proposed Sec.  1040.3 does not comply with the 
administrator's fairness principles, rules, or similar requirements, if 
such a determination occurs. The Bureau is concerned about providers' 
use of arbitration agreements that may violate arbitration 
administrators' fairness principles or rules. Several of the leading 
arbitration administrators maintain fairness principles or rules, which 
the administrators use to assess the fairness of the company's pre-
dispute arbitration agreement.\528\ These administrators may refuse to 
hear an arbitration if the company's arbitration

[[Page 32895]]

agreement does not comply with the relevant principles or rules.\529\ 
Some administrators will also review a company's agreement 
preemptively--before an arbitration claim has been filed--to determine 
if the agreement complies with the relevant principles or rules.\530\
---------------------------------------------------------------------------

    \528\ See AAA Consumer Due Process Protocol, supra note 131; 
JAMS, Policy on Consumer Arbitrations Pursuant to Pre-Dispute 
Clauses Minimum Standards of Procedural Fairness (effective July 15, 
2009), available at http://www.jamsadr.com/files/Uploads/Documents/JAMS-Rules/JAMS_Consumer_Min_Stds-2009.pdf (hereinafter JAMS Minimum 
Standards of Procedural Fairness).
    \529\ See AAA Consumer Arbitration Rules, supra note 130, at 10; 
JAMS Streamlined Arbitration Rules and Procedures, supra note 132, 
at 6.
    \530\ See AAA Consumer Arbitration Rules, supra note 130, at 16.
---------------------------------------------------------------------------

    The Bureau believes that requiring submission of communications 
from administrators concerning agreements that do not comply with 
arbitration administrators' fairness principles or rules would allow 
the Bureau to monitor which providers could be attempting to harm 
consumers or discourage the filing of claims in arbitration by 
mandating that disputes be resolved through unfair pre-dispute 
arbitration agreements. The Bureau also believes that requiring 
submission of such communications could further discourage covered 
entities from inserting pre-dispute arbitration agreements in consumer 
contracts that do not meet arbitrator fairness principles. The Bureau 
notes that, pursuant to proposed Sec.  1040.4(b)(1)(ii), communications 
that the provider receives would include communications sent directly 
to the provider as well as those sent to a consumer or a third party 
where the provider receives a copy.
    Proposed comment 4(b)(1)(ii)-1 would clarify that, in contrast to 
the other records the Bureau proposes to collect under proposed Sec.  
1040.4(b)(1), proposed Sec.  1040.4(b)(1)(ii) would require the 
submission of communications both when the determination occurs in 
connection with the filing of a claim in arbitration as well as when it 
occurs if no claim has been filed. Proposed comment 4(b)(1)(ii)-1 would 
state further that, if such a determination occurs with respect to a 
pre-dispute arbitration agreement that the provider does not enter into 
with a consumer, submission of any communication related to that 
determination is not required. The Bureau understands that providers 
may submit pre-dispute arbitration agreements to administrators, which 
review such agreements for compliance with rules even where an arbitral 
claim has not been filed.\531\ The proposed comment would state that, 
if the provider submits a prototype pre-dispute arbitration agreement 
for review by the arbitration administrator and never actually includes 
it in any consumer agreements, the pre-dispute arbitration agreement 
would not be entered into and thus submission to the Bureau of 
communication related to a determination made by the administrator 
concerning the pre-dispute arbitration agreement would not be required. 
The Bureau believes that this clarification is needed to avoid 
discouraging providers from submitting prototype pre-dispute 
arbitration agreements to administrators for their review.
---------------------------------------------------------------------------

    \531\ Beginning September 1, 2014, a business that intends to 
provide the AAA as a potential arbitrator in a consumer contract 
must notify the AAA at least 30 days before the planned effective 
date of the contract and provide a copy of the arbitration agreement 
to the AAA. AAA Consumer Arbitration Rules, supra note 130 at 16.
---------------------------------------------------------------------------

    Proposed comment 4(b)(1)(ii)-2 would clarify that what constitutes 
an administrator's fairness principles or rules pursuant to proposed 
Sec.  1040.4(b)(ii)(B) should be interpreted broadly. That comment 
would further provide current examples of such principles or rules, 
including the AAA's Consumer Due Process Protocol and the JAMS Policy 
on Consumer Arbitrations Pursuant to Pre-Dispute Clauses Minimum 
Standards of Procedural Fairness.\532\
---------------------------------------------------------------------------

    \532\ AAA Consumer Due Process Protocol, supra note 131; JAMS 
Minimum Standards for Procedural Fairness, supra note 528. The 
Bureau notes that it would be offering these specific principles or 
rules merely to assist providers with compliance; this comment does 
not represent an endorsement by the Bureau of these specific 
principles or rules.
---------------------------------------------------------------------------

    The Bureau seeks comment on proposed Sec.  1040.4(b)(1)(ii)(B) and 
proposed comments 4(b)(1)(ii)(B)-1 and -2. The Bureau also seeks 
comment on whether these provisions would encourage providers to comply 
with their arbitration administrators' fairness principles or rules. In 
addition, the Bureau seeks comment on whether there are other examples 
of fairness principles the Bureau should list or concerns regarding the 
principles that the Bureau has proposed to list as examples.
4(b)(2) Deadline for Submission
    Proposed Sec.  1040.4(b)(2) would state that a provider shall 
submit any record required by proposed Sec.  1040.4(b)(1) within 60 
days of filing by the provider of any such record with the arbitration 
administrator and within 60 days of receipt by the provider of any such 
record filed or sent by someone other than the provider, such as the 
arbitration administrator or the consumer. The Bureau proposes a 60-day 
period for submitting records to the Bureau to allow providers a 
sufficient amount of time to comply with these requirements. The Bureau 
proposes what it believes is a relatively lengthy deadline because it 
expects that providers will continue to face arbitrations 
infrequently,\533\ and, as a result, may be relatively unfamiliar with 
the requirements of proposed Sec.  1040.4(b).
---------------------------------------------------------------------------

    \533\ See Study, supra note 2, section 5 at 20 (stating that, 
from 2010 to 2012, 1,847 individual AAA cases, or about 616 per 
year, were filed for six consumer financial product markets).
---------------------------------------------------------------------------

    The Bureau also notes that, as proposed comment 4(b)-1 indicates, 
providers would comply with proposed Sec.  1040.4(b) if another person, 
such as an arbitration administrator, submits the specified records 
directly to the Bureau on the provider's behalf, although the provider 
would be responsible for ensuring that the person submits the records 
in accordance with proposed Sec.  1040.4(b).
    This proposed 60-day period is consistent with feedback the Bureau 
received from the SERs during the Small Business Review panel process 
who expressed concern that a short deadline might burden companies 
given the relative infrequency of arbitration and, thus, their 
potential unfamiliarity with this particular requirement. The Bureau 
seeks comment on whether 60 days would be a sufficient period for 
providers to comply with the requirements of proposed Sec.  1040.4(b).
4(b)(3) Redaction
    Proposed Sec.  1040.4(b)(3) would require providers to redact 
certain specific types of information that can be used to directly 
identify consumers before submitting arbitral records to the Bureau 
pursuant to proposed Sec.  1040.4(b)(1). The Bureau endeavors to 
protect the privacy of consumer information. Additionally, as discussed 
more fully above, the Bureau proposes Sec.  1040.4(b), in part, 
pursuant to its authority under Dodd-Frank section 1022(c)(4), which 
provides that the Bureau may not obtain information ``for the purpose 
of gathering or analyzing the personally identifiable financial 
information of consumers.'' The Bureau has no intention of gathering or 
analyzing information that directly identifies consumers. At the same 
time, the Bureau seeks to minimize the burden on providers by providing 
clear instructions for redaction.
    Accordingly, the Bureau proposes Sec.  1040.4(b)(3), which would 
require that providers, before submitting arbitral records to the 
Bureau pursuant to proposed Sec.  1040.4(b), redact nine specific types 
of information that directly identify consumers. The Bureau believes 
that these nine items would be easy for providers to identify and, 
therefore, that redacting them would

[[Page 32896]]

impose minimal burden on providers. Proposed comment 4(b)(3)-1 would 
clarify that providers are not required to perform the redactions 
themselves and may assign that responsibility to another entity, such 
as an arbitration administrator or an agent of the provider.
    Pursuant to proposed Sec.  1040.4(b)(3)(i) through (v), the Bureau 
would require providers to redact names of individuals, except for the 
name of the provider or arbitrator where either is an individual; 
addresses of individuals, excluding city, State, and zip code; email 
addresses of individuals; telephone numbers of individuals; and 
photographs of individuals from any arbitral records submitted to the 
Bureau. The Bureau notes that, with the exception of the names of 
providers or arbitrators where either are individuals, information 
related to any individuals--not merely the consumer to whom the 
consumer financial product is offered or provided--would be required to 
be redacted pursuant to proposed Sec.  1040.4(b)(3)(i) through (v). 
This would include names or other items of information relating to 
third-party individuals, such as individual employees of the provider.
    Proposed Sec.  1040.4(b)(3)(ii) would require redaction of street 
addresses of individuals, but not city, State, and zip code. The Bureau 
believes that collecting such high-level location information for 
arbitral records could, among other things, help the Bureau match the 
consumer's location to the arbitral forum's location in order to 
monitor issues such as whether consumers are being required to 
arbitrate in remote fora, and assist the Bureau in identifying any 
local or regional patterns in consumer harm as well as arbitration 
activity. The Bureau believes that collecting city, State, and zip code 
would pose limited privacy risk and that any residual risk would be 
balanced by the benefit derived from collecting this information.
    Proposed Sec.  1040.4(b)(3)(vi) through (ix) would require 
redaction from any arbitral records submitted to the Bureau, of account 
numbers; social security and tax identification numbers; driver's 
license and other government identification numbers; and passport 
numbers. These redaction requirements would not be limited to 
information for individual persons because the Bureau believes that the 
privacy of any account numbers, social security, or tax identification 
numbers should be maintained, to the extent they may be included in 
arbitral records.
    The Bureau notes that it is not broadly proposing to require 
providers to redact all types of information that could be deemed to be 
personally identifiable financial information (PIFI). Because Federal 
law prescribes an open-ended definition of PIFI,\534\ the Bureau 
believes that broadly requiring redaction of all PIFI could impose a 
significant burden on providers while affording few, if any, additional 
protections for consumers relative to the redactions the Bureau is 
proposing to require. As such, the list of items in proposed Sec.  
1040.4(b)(3)(i) through (ix) identifies the examples of PIFI that the 
Bureau anticipates are likely to exist in the arbitral records that 
would be submitted under Sec.  1040.4(b)(1). The Bureau's preliminary 
view is that the list of items strikes the appropriate balance between 
protecting consumer privacy and imposing a reasonable redaction burden 
on providers.
---------------------------------------------------------------------------

    \534\ Personally identifiable financial information is defined 
in 12 CFR 1016.3(q)(1).
---------------------------------------------------------------------------

    The Bureau seeks comment on its approach of requiring these 
redactions and on the burden to providers of this redaction 
requirement. The Bureau also seeks comment on whether it should require 
redaction of a consumer's city, State, and zip code, in addition to the 
consumer's street address. In addition, the Bureau seeks comment on 
whether it should require redaction of any additional types of consumer 
information, including other types of information that may be 
considered PIFI and that are likely to be present in the arbitral 
records. The Bureau further seeks comment on whether any of the items 
described in proposed Sec.  1040.4(b)(3)(i) through (ix), such as 
``account number,'' should be further defined or clarified. Finally, 
the Bureau also seeks comment on whether the scope of any of the items 
should be expanded; for example, whether ``passport number'' should be 
expanded to include the entire passport.

Section 1040.5 Compliance Date and Temporary Exception

    Proposed Sec.  1040.5 would set forth the compliance date for part 
1040 as well as a limited and temporary exception to compliance with 
proposed Sec.  1040.4(a)(2) for certain consumer financial products and 
services.
5(a) Compliance Date
    Dodd-Frank section 1028(d) provides that any regulation prescribed 
by the Bureau under section 1028(b) shall apply to any agreement 
between a consumer and a covered person entered into after the end of 
the 180-day period beginning on the effective date of the regulation, 
as established by the Bureau. The Bureau interprets the statutory 
language ``shall apply to any agreement . . . entered into after the 
end of the 180-day period beginning on the effective date'' to mean 
that the proposed rule may apply beginning on the 181st day after the 
effective date, as this day would be the first day ``after the end of 
the 180-day period beginning on the effective date of the regulation.'' 
The Bureau proposes that the proposed rule establish an effective date 
of 30 days after publication of a final rule in the Federal Register. 
Were this 30-day period finalized, the requirements of the proposed 
rule would apply beginning on the 211th day after publication of the 
rule in the Federal Register.
    The Bureau believes that stating in the regulatory text the 
specific date on which the rule would begin to apply and adopting a 
user-friendly term such as ``compliance date'' for this date would 
improve understanding among providers of their obligations, and 
consumers of their rights, under the rule. As such, proposed Sec.  
1040.5(a) would state that compliance with this part is required for 
any pre-dispute arbitration agreement entered into after the date that 
is 211 days after publication of the rule in the Federal Register; the 
Bureau would instruct the Office of the Federal Register to insert a 
specific date upon publication in the Federal Register. Proposed Sec.  
1040.5(a) would also adopt the term ``compliance date'' to refer to 
this date. As discussed above, the Bureau is proposing commentary to 
proposed Sec.  1040.4. Specifically, proposed comment 4-1 which would 
provide examples of when a provider does and does not ``enter into'' an 
agreement after the compliance date.
    The Bureau expects that most providers, with the exception of 
providers that would be covered by proposed Sec.  1040.5(b), discussed 
below, would be able to comply with proposed Sec.  1040.4(a)(2) by the 
211th day after publication of a final rule. Typically, contracts that 
contain pre-dispute arbitration agreements are standalone documents 
provided in hard copy or electronic form. These contracts are provided 
to the consumer at the time of contracting by either the provider or a 
third party (for example, a grocery store where a consumer can send 
remittances through a remittance transfer provider). The Bureau 
believes that, for all providers--except those that would be covered by 
the temporary exception in proposed Sec.  1040.5(b)--a 211-day period 
would give providers sufficient time to revise their agreements to 
comply with proposed Sec.  1040.4(a)(2) (and to make any other changes 
required by the rule)

[[Page 32897]]

and would give providers using hard-copy agreements sufficient time to 
print new copies and, to the extent necessary, deliver them to the 
needed locations. The Bureau anticipates that providers could continue 
to provide non-compliant hard-copy agreements as long as they 
simultaneously gave consumers a notice or amendment including the 
required provision as part of the agreement.
    As noted above, the Bureau proposes a 30-day effective date. The 
Bureau has chosen 30 days based on the Administrative Procedure Act, 
which requires that, with certain enumerated exceptions, a substantive 
rule be published in the Federal Register not less than 30 days before 
its effective date.\535\ In the Bureau's view, a longer period before 
the effective date would not be needed to facilitate compliance, given 
that Dodd-Frank section 1028(d) mandates an additional 180-day period 
between the effective date and the compliance date. For the reasons 
discussed above, the Bureau believes that a 211-day period between 
Federal Register publication and the compliance date would afford most 
providers--with the exception of providers that would covered by 
proposed Sec.  1040.5(b)--sufficient time to comply. The Bureau 
reiterates that this 211-day period includes the effective date; thus, 
by virtue of setting this effective date, no additional time would be 
added to this 211-day period.
---------------------------------------------------------------------------

    \535\ 5 U.S.C. 553(d).
---------------------------------------------------------------------------

    The Bureau seeks comment on whether a different formulation would 
provide greater clarity to providers and consumers as to when the 
rule's requirements would begin to apply. In addition, the Bureau seeks 
comment on whether a period of 211 days between publication of a final 
rule in the Federal Register and the rule's compliance date constitutes 
sufficient time for providers to comply with proposed Sec.  
1040.4(a)(2) and, if not, what an appropriate effective date should 
be.\536\
---------------------------------------------------------------------------

    \536\ The Bureau notes that if an electronic submission system 
is not ready by the effective date, the Bureau may consider delaying 
the effective date of proposed Sec.  1040.4(b).
---------------------------------------------------------------------------

5(b) Exception for Pre-Packaged General-Purpose Reloadable Prepaid Card 
Agreements
    As described above in the Section-by-Section Analysis to proposed 
Sec.  1040.5(a), that provision would specify the rule's compliance 
date--the date on which the rule's requirements would begin to apply--
and that such date would be 211 days after publication of a final rule 
in the Federal Register. Starting on this date, providers would, among 
other things, be required to ensure that the pre-dispute arbitration 
agreement contains the provision required by proposed Sec.  
1040.4(a)(2)(i) or an alternative provision permitted by proposed Sec.  
1040.4(a)(2)(ii). As described above, the Bureau expects that most 
providers would be able to comply with proposed Sec.  1040.4(a)(2)(i) 
or (ii) by the 211th day after publication of a final rule.
    However, for certain products, there may be additional factors that 
would make compliance by the 211th day challenging. The Bureau has 
concerns about whether providers of certain types of prepaid cards 
would be able to ensure that only compliant products are offered for 
sale or provided to consumers after the compliance date. Prepaid cards 
are typically sold in an enclosed package that contains a card and a 
cardholder agreement. These packages are typically printed well in 
advance of sale and are distributed to consumers through third-party 
retailers such as drugstores, check cashing stores, and convenience 
stores.\537\ As a result, to comply with the rule by the compliance 
date, providers would need to search each retail location at which 
their products are sold for any non-compliant packages; remove them 
from the shelves; and print new packages, which could likely incur 
considerable expense. The Bureau believes that this represents a unique 
situation not present with other products and services that would be 
covered by proposed Part 1040.
---------------------------------------------------------------------------

    \537\ See Prepaid NPRM, supra note 470, at 77106-07.
---------------------------------------------------------------------------

    For these reasons, proposed Sec.  1040.5(b) would establish a 
limited exception from proposed Sec.  1040.4(a)(2)'s requirement that 
the provider's pre-dispute arbitration agreement contain the specified 
provision by the compliance date. Proposed Sec.  1040.5(b) would state 
that proposed Sec.  1040.4(a)(2) shall not apply to a provider that 
enters into a pre-dispute arbitration agreement for a general-purpose 
reloadable prepaid card if certain conditions are met. For a provider 
that cannot contact the consumer in writing, proposed Sec.  
1040.5(b)(1) would set forth the following requirements: (1) The 
consumer acquires the card in person at a retail store; (2) the 
agreement was inside of packaging material when it was acquired; and 
(3) the agreement was packaged prior to the compliance date of the 
rule. For a provider that has the ability to contact the consumer in 
writing, proposed Sec.  1040.5(b)(2) would require that the provider 
meet all of the requirements specified in proposed Sec.  1040.5(b)(1) 
as well as one additional requirement; within 30 days of obtaining the 
consumer's contact information, the provider notifies the consumer in 
writing that the pre-dispute arbitration agreement complies with the 
requirements of proposed Sec.  1040(a)(2) by providing an amended pre-
dispute arbitration agreement to the consumer.
    In the Bureau's view, this exception would permit prepaid card 
providers to avoid the considerable expense of pulling and replacing 
packages at retail stores while adequately informing consumers of their 
dispute resolution rights, where feasible, due to the notification 
requirement in proposed Sec.  1040.5(b)(2). The Bureau notes that 
proposed Sec.  1040.5(b)(2) would not impose on providers an obligation 
to obtain a consumer's contact information. Where providers are able to 
contact the consumer in writing, the Bureau expects that they could 
satisfy proposed Sec.  1040.5(b)(2) by, for example, sending the 
compliant agreement to the consumer when the consumer calls to register 
the account and provides a mailing address or email address; sending 
the revised terms when the provider sends a personally-embossed card to 
the consumer; or communicating the new terms on the provider's Web 
site.
    Proposed comment 5(b)(2)-1 would clarify that the 30-day period 
would not begin to elapse until the provider is able to contact the 
consumer. Proposed comment 5(b)(4)-1 would also provide illustrative 
examples of situations where the provider has the ability to contact 
the consumer, including when the provider obtains the consumer's 
mailing address or email address.
    Importantly, providers who avail themselves of the exception in 
proposed Sec.  1040.5(b) would still be required to comply with 
proposed Sec.  1040.4(a)(1) and proposed Sec.  1040.4(b) as of the 
compliance date. As such, providers who avail themselves of this 
exception would still be prohibited, as of the compliance date, from 
relying on a pre-dispute arbitration agreement entered into after the 
compliance date with respect to any aspect of a class action concerning 
any of the consumer financial products or services covered by proposed 
Sec.  1040.3, pursuant to proposed Sec.  1040.4(a)(1). The amended pre-
dispute arbitration agreement submitted by providers in accordance with 
proposed Sec.  1040.5(b)(4) would be required to include the provision 
required by proposed Sec.  1040.4(a)(2)(i) or the alternative permitted 
by proposed Sec.  1040.4(a)(2)(ii). And providers would also still be 
required to submit certain arbitral records to the Bureau, pursuant to 
proposed Sec.  1040.4(b), in connection

[[Page 32898]]

with pre-dispute arbitration agreements entered into after the 
compliance date. Further, the Bureau does not anticipate that 
permitting prepaid providers to sell existing card stock containing 
non-compliant agreements would affect consumers' shopping behavior, as, 
currently, consumers are typically unable to review the enclosed terms 
and conditions before purchasing a prepaid product in any event 
(although the Bureau would expect that corresponding product Web sites 
would contain an accurate arbitration agreement).
    The Bureau seeks comment on whether the temporary exception in 
proposed Sec.  1040.5(b) is needed, and, if so, on the exception as 
proposed. While the Bureau believes that the term ``general-purpose-
reloadable prepaid card'' has an accepted meaning, the Bureau seeks 
comment on whether a definition of this term or additional 
clarification regarding its meaning would be helpful to providers. 
Additionally, the Bureau seeks comment on whether the exception should 
use a different term describing prepaid products. The Bureau also seeks 
comment on whether the proposed exception should be available to 
providers of other products--instead of, or in addition to, prepaid 
products--or whether the exception's coverage should not be limited 
based on product type, but based on other criteria.
    The Bureau also seeks comment on whether requiring providers who 
take advantage of the exception in proposed Sec.  1040.5(b) to make 
available a compliant pre-dispute arbitration agreement within 30 days 
after the provider becomes aware that the agreement has been provided 
to the consumer would be a feasible process for providers while also 
adequately protecting consumers. Further, the Bureau seeks comment on 
whether alternatives to the proposed exception would better accomplish 
the objectives of furthering consumer awareness of their dispute 
resolution rights and ensuring consumers receive accurate disclosures 
without imposing excessive costs on providers. One alternative, for 
example, could be for the Bureau to prohibit providers from selling 
non-compliant agreements after the compliance date, except for 
agreements that were printed prior to a specified number of days (such 
as 90 or 120 days) before the compliance date.

VIII. Dodd-Frank Act Section 1022(b)(2) Analysis

A. Overview

    In developing this proposed rule, the Bureau has considered the 
potential benefits, costs, and impacts required by section 1022(b)(2) 
of the Dodd-Frank Act. Specifically, section 1022(b)(2) calls for the 
Bureau to consider the potential benefits and costs of a regulation to 
consumers and covered persons (which in this case would be the 
providers subject to the proposed rule), including the potential 
reduction of access by consumers to consumer financial products or 
services, the impact on depository institutions and credit unions with 
$10 billion or less in total assets as described in section 1026 of the 
Dodd-Frank Act, and the impact on consumers in rural areas.
    The Bureau requests comment on the preliminary analysis presented 
below as well as submissions of additional data that could inform the 
Bureau's analysis of the benefits, costs, and impacts of the proposed 
rule. The Bureau has consulted, or offered to consult with, the 
prudential regulators, the Federal Housing Finance Agency, the Federal 
Trade Commission, the U.S. Department of Agriculture, the U.S. 
Department of Housing and Urban Development, the U.S. Department of the 
Treasury, the U.S. Department of Veterans Affairs, the U.S. Commodities 
Futures Trading Commission, the U.S. Securities and Exchange 
Commission, and the Federal Communications Commission including 
consultation regarding consistency with any prudential, market, or 
systemic objectives administered by such agencies.
    The Bureau has chosen to consider the benefits, costs, and impacts 
of the proposed provisions as compared to the status quo in which some, 
but not all, consumer financial products or services providers in the 
affected markets (see proposed Sec.  1040.2(c), defining the entities 
covered by this rule as ``providers'') use arbitration agreements.\538\ 
The baseline considers economic attributes of the relevant markets and 
the existing legal and regulatory structures applicable to providers. 
The Bureau seeks comment on this baseline.
---------------------------------------------------------------------------

    \538\ The Bureau has discretion in each rulemaking to choose the 
relevant provisions to discuss and to choose the most appropriate 
baseline for that particular rulemaking. A potential alternative 
baseline for this rulemaking is the baseline of a hypothetical 
future state of the world where ``class actions against businesses 
would be all but eliminated.'' See Brian Fitzpatrick, The End of 
Class Actions?, 57 Ariz. L. Rev. 161 (2015). Such a baseline could 
be justified because the use of class-eliminating arbitration 
agreements may continue to grow over time. See also Myriam Gilles, 
Opting Out of Liability: The Forthcoming, Near-Total Demise of the 
Modern Class Action, 104 Mich. L. Rev. 373 (2005); Jean Sternlight, 
As Mandatory Binding Arbitration Meets the Class Action, Will the 
Class Action Survive?, 42 Wm. & Mary L. Rev. 1 (2000-2001). Indeed, 
in Section 2 of the Study, the Bureau documents a slight but gradual 
increase in the adoption of arbitration agreements by industry in 
particular markets. See generally Study, supra note 2, section 2. 
See also Peter Rutledge & Christopher Drahozal, Sticky Arbitration 
Clauses--the Use of Arbitration Clauses after Concepcion and Amex, 
67 Vand. L. Rev. 955 (2014). The Bureau believes that this trend is 
likely to continue, but for simplicity and transparency, the Bureau 
assumes that, if the proposed rule is not finalized, the future 
prevalence of arbitration agreements would remain the same as the 
current prevalence. The estimated impact, both of benefits and 
costs, would be significantly larger if the Bureau had instead used 
the hypothetical future state of universal adoption of arbitration 
agreements as the baseline, because the baseline that the Bureau 
actually uses assumes that a significant amount of class litigation 
remains regardless of whether the proposed rule is finalized.
---------------------------------------------------------------------------

    The Bureau invites comment on all aspects of the data that it has 
used to analyze the potential benefits, costs, and impacts of the 
proposed provisions.\539\ However, the Bureau notes that in some 
instances, the requisite data are not available or are quite limited. 
In particular, with the exception of estimating consumer recoveries 
from Federal class settlements, data with which to quantify the 
benefits of the proposed rule are especially limited. As a result, 
portions of this analysis rely in part on general economic principles 
and the Bureau's expertise in consumer financial markets to provide a 
qualitative discussion of the benefits, costs, and impacts of the 
proposed rule. The Bureau discusses and seeks comment on several 
alternatives, including ones that would be applicable to larger 
entities as well, in the Regulatory Flexibility Analysis below.
---------------------------------------------------------------------------

    \539\ The estimates in this analysis are based upon data 
obtained and statistical analyses performed by the Bureau. This 
includes much of the data underlying the Study and some of the 
Study's results. The collection of the data underlying the Study is 
described in the relevant sections and appendices of the Study. Some 
of the data was collected from easily accessible sources, such as 
the data underlying the Bureau's analysis of Federal class 
settlements. Other data is confidential, such as the data underlying 
the Bureau's analysis of the pass-through of costs of arbitration 
onto interest rates for large credit card issuers. The Bureau also 
collected additional information from trade groups on the prevalence 
of arbitration agreements used in markets that were not analyzed in 
Section 2 of the Study. The collection of data from trade groups is 
discussed further below in Part VIII and in Part IX.
---------------------------------------------------------------------------

    In this analysis, the Bureau focuses on the benefits, costs, and 
impacts of the main aspects of the proposed rule: (1) The requirement 
that providers with arbitration agreements include a provision in the 
arbitration agreements they enter into in the future stating that the 
arbitration agreement cannot be invoked in class litigation; and (2) 
the

[[Page 32899]]

related prohibition that would forbid providers from invoking such an 
agreement in a case filed as a class action. Thus, given the baseline 
of the status quo, the analysis below focuses on providers that 
currently have arbitration agreements.
    The effect of the proposal on arbitration of individual disputes, 
both the indirect effect of the class provision discussed above and the 
direct effect of provisions that would require the reporting of certain 
arbitral records to the Bureau for monitoring purposes, is relatively 
minor. The Bureau is aware of only several hundred consumers 
participating in such disputes each year and the Bureau does not expect 
a sizable increase, regardless of whether the proposed rule is 
finalized.\540\ If anything, the number of such disputes might decrease 
if the proposed rule results in some providers removing arbitration 
agreements altogether. As discussed below, there is no reliable 
evidence on whether this would occur.
---------------------------------------------------------------------------

    \540\ These numbers come from a single arbitration provider, the 
AAA, for several consumer finance markets. See generally Study, 
supra note 2, section 5. Based on the analysis of consumer financial 
contracts in Section 2 of the Study, it is likely that the AAA 
accounts for the majority of arbitrations in several large consumer 
financial markets (checking and credit cards, for example).
---------------------------------------------------------------------------

    Providers that currently use arbitration agreements can be divided 
into two categories. The first category is comprised of providers that 
currently include arbitration agreements in contracts they make with 
consumers. For these providers, which constitute the vast majority of 
providers using arbitration agreements, the Bureau believes that the 
proposed class rule would result in the change from virtually no 
exposure to class litigation to at least as much exposure as is 
currently faced by those providers with similar products or services 
that do not use arbitration agreements.
    The second category includes providers that invoke arbitration 
agreements contained in consumers' contracts with another person. This 
category includes, for example, debt collectors and servicers who, when 
sued by a consumer, invoke an arbitration agreement contained in the 
original contract formed between the original provider and the 
consumer. For these providers, the additional class litigation exposure 
caused by the proposed rule would be somewhat less than the increase in 
exposure for providers of the first type because the providers in this 
second category are not currently uniformly able to rely on arbitration 
agreements in their current operations. For example, debt collectors 
typically collect both from consumers whose contracts with their 
original creditor contain arbitration agreements and from consumers 
whose contracts with their original creditor do not contain arbitration 
agreements. Thus, these debt collectors already face class litigation 
risk, but if the proposal were adopted, this risk would be increased, 
at most, in proportion to the fraction of the providers' consumers 
whose contracts contain arbitration agreements.\541\ The actual 
magnitude by which debt collectors' risk would be increased would 
likely be lower because even when a consumer's contract contains an 
arbitration agreement today, the ability of the debt collector to rely 
upon it varies across arbitration agreements and depends on the 
applicable contract and background law.\542\
---------------------------------------------------------------------------

    \541\ For example, if half of consumers on whose debts a debt 
collector collects have arbitration agreements in their contracts, 
then the debt collector's class litigation risk would at most double 
if the proposed rule is finalized as proposed.
    \542\ See Study, supra note 2, section 6 at 54 n.94.
---------------------------------------------------------------------------

    The analysis below applies to both types of providers. For 
additional clarity and to avoid unnecessary duplication, the discussion 
is generally framed in terms of the first type of provider (which faces 
virtually no exposure to class claims today), unless otherwise noted. 
The Bureau estimates below the number of additional Federal class 
actions and putative class proceedings that are not settled on a class 
basis for both types of provider.
Description of the Market Failure and Economic Framework
    Before considering the benefits, costs, and impacts of the proposed 
provisions on consumers and covered persons, as required by Section 
1022(b)(2), the Bureau believes it may be useful to provide the 
economic framework through which it is considering those factors in 
order to more fully inform the rulemaking, and in particular to 
describe the market failure that is the basis for the proposed 
rule.\543\ The Bureau's economic framework assumes that when Congress 
and States have promulgated consumer protection laws that are 
applicable to consumer financial products and services (``the 
underlying laws'') they have done so to address a range of market 
failures, for example asymmetric information. The underlying laws need 
enforcement mechanisms to ensure providers conform their behavior to 
these laws. In analyzing and proposing the class proposal, the Bureau 
is focusing on a related market failure: reduced incentives for 
providers to comply with the underlying laws. The reduced incentives 
for providers to comply are due to an insufficient level of private 
enforcement.
---------------------------------------------------------------------------

    \543\ Although section 1022(b)(2) does not require the Bureau to 
provide this background, the Bureau does so as a matter of 
discretion to more fully inform the rulemaking.
---------------------------------------------------------------------------

    While the Bureau assumes that the underlying laws are addressing a 
range of market failures, it also recognizes that compliance with these 
underlying laws requires some costs. There are out-of-pocket costs 
required to, e.g., distribute required disclosures or notices, 
investigate alleged errors, or resolve disputes. There are opportunity 
costs in, for example, forgoing adjustments in interest rates, limiting 
penalty fees, or limiting calling hours for debt collections. And, 
there are costs associated with establishing a compliance management 
system which, e.g., trains and monitors employees, reviews 
communications with consumers, and evaluates new products or features.
    The Bureau believes, based on its knowledge and expertise, that the 
current incentives to comply are weaker than the economically efficient 
levels. It further believes that conditions are such that this implies 
that the economic costs of increased compliance (due to the additional 
incentives provided by the proposed rule) are justified by the economic 
benefits of this increased compliance. If these conditions do not hold 
in particular cases, the increased compliance due to the proposed rule 
would likely lower economic welfare. The data and methodologies 
available to the Bureau do not allow for an economic analysis of these 
premises on a law-by-law basis.\544\ However, for purposes of this 
discussion, the Bureau assumes that these conditions hold.
---------------------------------------------------------------------------

    \544\ The Bureau seeks comment and data that would allow further 
analysis of how to determine the point at which strengthening 
incentives might become inefficient.
---------------------------------------------------------------------------

    The Study shows that class litigation is currently the most 
effective private enforcement mechanism for most claims in markets for 
consumer financial products or services in providing monetary 
incentives (including forgone profits due to in-kind or injunctive 
relief) for providers to comply with the law.\545\ During the years 
covered by the Study, providers paid out hundreds of millions of 
dollars per year in class relief and related litigation expenses in 
consumer finance cases.\546\ Class actions

[[Page 32900]]

also resulted in substantial but difficult to quantify prospective 
relief. This compares to the purely retrospective relief and other 
expenses related to about 1,000 individual lawsuits in Federal courts 
filed by consumers with respect to five of the largest consumer finance 
markets, a similar number of individual arbitrations, and a similar 
number of small claims court cases filed by consumers.\547\ Individual 
consumer finance lawsuits filed in state courts (other than small 
claims courts) add some additional modest volume, but the Bureau does 
not believe that they change the magnitude of the differential between 
class and individual relief. In other words, the monetary incentives 
for providers to comply with the law due to the threat of class actions 
are substantially greater than those due to the threat of consumers 
bringing individual disputes against providers.
---------------------------------------------------------------------------

    \545\ As discussed further below, if class litigation is 
generally meritless then it does not provide an incentive for 
providers to comply with the law.
    \546\ See generally Study, supra note 2, section 8. As discussed 
further below, with regard to providing monetary incentives to 
increase investment in complying with the law, both relief to 
consumers and litigation expenses serve to increase the strength of 
deterrence incentives. See Richard Posner, Economic Analysis of Law, 
8th ed. (2011) 785-92. In particular, effectively evoking the logic 
of Pigouvian taxes, he notes, ``what is most important from an 
economic standpoint is that the violator be confronted with the 
costs of his violation--this preserves the deterrent effect of 
litigation--not that he pays them to his victims.''
    \547\ See Study, supra note 2, section 1 at 11, 15-16. The 
Bureau could not quantify providers' spending on individual 
adjudications for a variety of reasons, most importantly that 
settlement terms of these cases are most often private.
---------------------------------------------------------------------------

    The relative efficacy of class litigation--as compared to 
individual dispute resolution, either in courts or in front of an 
arbitrator--in achieving these incentives is not surprising. As 
discussed in Part VI, the potential legal harm per consumer arising 
from violations of law by providers of consumer financial products or 
services is frequently low in monetary terms. Moreover, consumers are 
often unaware that they may have suffered legal harm. For any 
individual, the monetary compensation a consumer could receive if 
successful will often not be justified by the costs (including time) of 
engaging in any formal dispute resolution process even when a consumer 
strongly suspects that a legal harm might have occurred. This is 
confirmed by the Study's nationally representative survey of 
consumers.\548\ In economic terms, these are negative-value legal 
claims (claims where costs of pursuing a remedy do not justify the 
potential rewards). When thousands or millions of consumers may have 
individual negative-value legal claims, class actions can provide a 
vehicle to combine these negative-value legal claims into a single 
lawsuit worth bringing.\549\
---------------------------------------------------------------------------

    \548\ See generally Study, supra note 2, section 3. In 
particular, while being presented with a hypothetical situation of a 
clearly erroneous charge on their credit card bill that the provider 
is unwilling to remedy, 1.4 percent of consumers surveyed stated 
that they would seek legal advice or sue using an attorney, and 0.7 
percent of consumers stated that they would seek legal remedies 
without mentioning an attorney. Id., section 3 at 18.
    \549\ See, e.g., Posner, supra note 546 at 785-92. See also 
Louis Kaplow & Steven Shavell, Fairness versus Welfare, 114 Harv. L. 
Rev. 961 (2001), at 1185 n. 531 (``[C]lass actions are valuable when 
they allow claims that would otherwise be brought individually to 
proceed jointly at lower cost due to the realization of economies of 
scale. In addition, our analysis emphasizes that, when legal costs 
exceed the stakes, there may be no suits and thus no deterrence; 
aggregating claims also solves this problem (although it is still 
possible that the aggregated claim may not be socially desirable if 
the benefit from improved behavior is sufficiently small).'').
---------------------------------------------------------------------------

    The Bureau's economic framework also takes into account other 
incentives that may cause providers to conform their conduct to the 
law; there are at least two other important mechanisms, which are both 
described here. The first incentive is the economic value for the 
provider to maintain a positive reputation with its customers, which 
will create an incentive to comply with the law to the extent such 
compliance is correlated with the provider's reputation. As the Study 
shows, many consumers might consider switching to a competitor if the 
consumer is not satisfied with a particular provider's 
performance.\550\ In part in response to this and to other reputational 
incentives (including publicly accessible complaint databases), many 
providers have developed and administer internal dispute resolution 
mechanisms.\551\ The second incentive is to avoid supervisory actions 
or public enforcement actions by Federal and state regulatory bodies, 
such as the Bureau. In response to this, many providers have developed 
compliance programs, particularly where they are subject to ongoing 
active supervision by Federal or state regulators.
---------------------------------------------------------------------------

    \550\ The Study only considered the credit card market. See 
Study, supra note 2, section 3 at 18. This finding might not be 
generalizable to any market where consumers face a significantly 
higher cost of switching providers.
    \551\ The Bureau notes that an incentive to act to preserve good 
reputation with the consumers is not necessarily the same as an 
incentive to comply with the law, especially when consumers are not 
even aware of the legal harm.
---------------------------------------------------------------------------

    However, economic theory suggests that these other incentives 
(including reputation and public enforcement) are insufficient to 
achieve optimal compliance (again, assuming that the current levels of 
compliance are below those that would be economically efficient),\552\ 
and the Bureau's experience similarly confirms that these mechanisms do 
not completely solve the market failure that the class proposal would 
attempt to address. Given the Bureau's assumptions outlined above, 
economic theory suggests that any void left by weakening any one of 
these incentives will not be filled completely by the remaining 
incentives.
---------------------------------------------------------------------------

    \552\ See, e.g., Carl Shapiro, Consumer Information, Product 
Quality, and Seller Reputation, 13 Bell J. of Econ. 20 (1982) for 
reputation and Posner supra note 546, section 13.1 for 
complementarity with public enforcement. Note that earlier economic 
literature suggested that reputation alone, coupled with competitive 
markets, could lead to an efficient outcome. See, e.g., Benjamin 
Klein & Keith B. Leffler, The Role of Market Forces in Assuring 
Contractual Performance, 89 J. of Polit. Econ. 4 (1981). However, 
formal modeling of this issue revealed that earlier intuition was 
incomplete. See Carl Shapiro, Premiums for High Quality Products as 
Returns to Reputations, 98 Q. J. of Econ. 4 (1983).
---------------------------------------------------------------------------

    Reputation concerns will create the incentive for a firm to comply 
with the law only to the extent legally compliant or non-compliant 
conduct would be visible to consumers and affect the consumer's desire 
to keep doing business with the firm, and even then, with a lag.\553\ 
Thus, there is an incentive for firms to underinvest in compliance 
because consumers will not notice the non-compliant conduct resulting 
from underinvestment for some time or may not view the non-compliant 
conduct as sufficient to affect the consumer's willingness to do 
business with the firm.\554\
---------------------------------------------------------------------------

    \553\ In addition, the non-compliance would have to be 
sufficiently egregious to cause consumers to want to switch given 
switching costs, and some consumers might not be able to switch ex-
post at all depending on the product in question.
    \554\ See Shapiro, supra note 552. This underinvestment is a 
perpetual, rather than a temporary phenomenon: A firm underinvests 
today because consumers will not become aware of today's 
underinvestment until tomorrow, but then the firm also underinvests 
tomorrow because tomorrow's consumers will not become aware of 
tomorrow's underinvestment until the day after tomorrow, and so on. 
Moreover, competition is not a panacea in this model: Every firm 
rationally underinvests in compliance.
---------------------------------------------------------------------------

    Economic theory also suggests that regardless of whether relief is 
warranted under the law, the provider has a relatively strong incentive 
to correct issues only for the consumers who complain directly about 
particular practices to the provider--as those are the consumers for 
whom the provider's reputation is most at risk--and less of an 
incentive to correct the same issues for other consumers who do not 
raise them or who may be unaware that the practices are occurring. 
Accordingly, the providers' incentive to comply due to reputational 
concerns is, in part, driven by the fraction of consumers who could 
become aware of the issue. In addition, with such informal dispute 
resolution, correcting issues for a particular

[[Page 32901]]

consumer could mean waiving a fee or reducing a charge, in what a 
provider may call a ``one time courtesy,'' instead of changing the 
provider's procedures prospectively even with regard to the individual 
consumer.
    Furthermore, economic theory suggests that providers will decide 
how to resolve informal complaints by weighing the expected 
profitability of the consumer who raises the complaint against the 
probability that the consumer will indeed stop patronizing the 
provider, rather than legal merit per se. In the Bureau's experience, 
some companies implement this through profitability models which are 
used to cabin the discretion of customer service representatives in 
resolving individual disputes. Indeed, providers may be more willing to 
resolve disputes favorably for profitable consumers even in cases where 
the disputes do not have a legal basis, than for non-profitable 
consumers with serious legal claims. Thus, reputation incentives do not 
always coincide with complying with the law.
    Public enforcement could theoretically bring some of the same cases 
that are not going to be brought by private enforcement absent the 
proposed rule. However, public enforcement resources are limited 
relative to the thousands of firms in consumer financial markets. 
Public enforcement resources also focus only on certain types of claims 
(for instance, violations of state and Federal consumer protection 
statutes but not the parties' underlying contracts).\555\ In addition, 
other factors may be at play, such as public prosecutors could be more 
cautious or have other, non-consumer finance priorities. For all these 
reasons, public enforcement can and will not entirely fill the void 
left by the lack of private enforcement. The Study is consistent with 
this prediction, suggesting that there is limited overlap between the 
two types of enforcement.\556\
---------------------------------------------------------------------------

    \555\ See Part VI.
    \556\ See generally Study, supra note 2, section 9.
---------------------------------------------------------------------------

    The Bureau has considered arguments that arbitration agreements 
provide a sufficiently strong incentive to providers to address 
consumers' concerns and obviate the need to strengthen private 
enforcement mechanisms. One reason suggested is that many such 
agreements contain fee-shifting provisions that require providers to 
pay consumers' up front filing fees.\557\ Some stakeholders have 
posited that the (ostensible) ease and low up front cost of arbitration 
may change many negative-value individual legal claims into positive-
value arbitrations that, in turn, create an additional incentive for 
providers to resolve matters internally.\558\ In principle, if 
arbitration agreements had the effect of transforming negative-value 
claims into positive ones, that would affect not just providers' 
incentives to resolve individual cases (as stakeholders have posited) 
but also their incentives to comply with the law ex ante.
---------------------------------------------------------------------------

    \557\ The argument depends on arbitration being easy for 
consumers to engage in and costly to the providers. Thus, the 
providers seek to resolve all consumer disputes internally, under 
the threat that aggrieved consumers can (ostensibly easily) escalate 
the disputes to (ostensibly more expensive) arbitration.
    \558\ Note that a provider does not have to know, for example, 
during a consumer's call to the provider's service phone line 
whether this particular consumer will file for arbitration. The 
provider can wait until the consumer files for arbitration, and then 
resolve the matter with the consumer without paying any fees related 
to arbitration.
---------------------------------------------------------------------------

    As noted above, however, there is little if any empirical support 
for such an argument. The Bureau has only been able to document several 
hundred consumers per year actually filing arbitration claims,\559\ and 
the Bureau is unaware that providers have routinely concluded that 
considerably more consumers were likely to file.
---------------------------------------------------------------------------

    \559\ See generally Study, supra note 2, section 5.
---------------------------------------------------------------------------

    Additionally, the Bureau believes that this argument is flawed 
conceptually as well. The Bureau disagrees that, even for consumers who 
are aware of the legal harm, the presence of arbitration agreements 
changes many negative-value individual legal claims into positive-value 
arbitrations and, in turn, creates additional incentives for providers 
to resolve matters internally. Notably, consumers weigh several other 
costs before engaging in any individual dispute resolution process, 
including arbitration. It still takes time for a consumer to learn 
about the process, to prepare for the process, and to go through the 
process. There is also still a risk of losing and, if so, of possibly 
having initial filing fees shifted back to the consumer.
    In addition, where arbitration agreements exist, consumers are 
still, in practice, more likely to use formal dispute resolution 
mechanisms (including small claims courts) than arbitration, and this 
suggests that arbitration does not turn negative-value claims 
positive.\560\
---------------------------------------------------------------------------

    \560\ See Study, supra note 2, section 1 at 15 (providers 
typically do not invoke arbitration agreements in individual cases). 
The Study showed that the presence of small claims court carve-outs 
in the majority of clauses. See Study, supra note 2, section 2 at 
33.
---------------------------------------------------------------------------

    In general, if the extant laws were adopted to solve some other 
underlying market failures, it means that, by definition, the market 
could not resolve these failures on its own. Therefore, given the 
Bureau's assumptions outlined above, a practice (arbitration agreements 
that can be invoked in class litigation) that lowers providers' 
incentive to follow these laws is a market failure since it allows the 
underlying market failures to reappear. The providers (and the market 
in general) are unable (do not find it profitable) to resolve this 
market failure for the same reasons (and frequently additional other 
reasons) that the providers could not (did not find it profitable to) 
solve the underlying market failures in the first place.\561\
---------------------------------------------------------------------------

    \561\ This argument also illustrates why form language regarding 
arbitration agreements is fundamentally different from standardized 
language regarding other contract terms, and is not necessarily 
efficient. The debate about the efficiency of boilerplate language, 
from the perspective of law and economics, is whether boilerplate 
language allows for more efficient contracting between the firm and 
the customer, thus enhancing both parties' welfares, or whether 
boilerplate language allows the firm to take advantage of its 
customer in a welfare-reducing manner, with this advantage 
potentially remaining even if the market is competitive. The same 
arguments apply to contracts of adhesion. See, e.g., Symposium, 
``Boilerplate'': Foundations of Market Contracts, 104 Mich. L Rev. 
No. 5 (2006). Any law restricting two parties' freedom to contract 
(for example, a mandatory disclosure or a limit on some financing 
terms in a consumer finance statute) introduces the following 
friction: To comply with the law, these two parties will agree to a 
different contract or not contract at all. Each of these options was 
available to the parties before the law was adopted, but at the time 
the parties chose to contract more efficiently from the parties' 
perspectives, at least to the extent that both parties had a choice. 
However, to the extent that the law was adopted to fix a market 
failure, this friction is exactly what is preventing that market 
failure from occurring: The introduction of the contracting friction 
is necessary for the underlying market failure to be alleviated, as 
opposed to being a potential source of inefficiency that could be 
reduced by using boilerplate contracts. That underlying market 
failure could be, for example, a negative externality exerted by the 
firm's and its customer's contract on third parties. In a 
theoretical model, this would imply that the laws were endogenously 
chosen to correct pre-existing market failures. And this fact means 
that an ability to sign an efficient contract from the bilateral 
perspective that lowers the incentives to comply with the law is 
welfare-reducing since this law was supposedly passed exactly to 
ensure that the incentive to comply with the law is there and 
because this incentive alleviates another market failure.
---------------------------------------------------------------------------

Overview of Effects of the Proposed Rule
    The proposed rule would require providers to include language in 
their arbitration agreements stating that the agreement cannot be used 
to block a class action with respect to those consumer financial 
products and services that would be covered by the

[[Page 32902]]

proposed rule and would prohibit providers from invoking such an 
agreement in a case filed as a class action with respect to those 
consumer financial products and services. The proposed rule would also 
prohibit third-party providers facing class litigation from relying on 
such arbitration agreements. The Bureau believes that the proposed rule 
would have three main effects on providers with arbitration agreements: 
(1) They would have increased incentives to comply with the law in 
order to avoid class litigation exposure; (2) to the extent they do not 
act on these incentives or acting on these incentives does not prevent 
class litigation filed against them, the additional class litigation 
exposure would ultimately result in additional litigation expenses and 
potentially additional class settlements; and (3) they would incur a 
one-time cost of changing language in consumer contracts entered into 
180 days after the rule's effective date, or an ongoing cost associated 
with providing contract amendments or notices in the case of providers 
who acquire pre-existing contracts that lack the required language in 
their arbitration agreements. Below, the Bureau refers to these three 
effects as, respectively, the deterrence effect, the additional 
litigation effect, and the administrative change effect.
    In this Section 1022(b)(2) Analysis, the Bureau abides by standard 
economic practice, and omits non-economic considerations which the 
Bureau considers above in Part VI (the Findings). In standard economic 
practice, individuals' well-being results primarily from tangible 
impacts and is affected by direct costs or payments, changes in 
behavior, and so on. Conceptually, it also includes less concrete 
impacts on individuals, such as their ``degree of aesthetic 
fulfillment, their feelings for others, or anything else they might 
value, however intangible.'' \562\ However, such items can be 
extraordinarily difficult to discern and evaluate in practice. 
Moreover, economic theory does not generally recognize the value of 
intangible impacts to society at large apart from costs or benefits 
that accrue to specific individual consumers or providers.\563\
---------------------------------------------------------------------------

    \562\ Kaplow & Shavell, supra note 549 at 968.
    \563\ ``Conversely, welfare economics omits any factor that does 
not affect any individual's well-being.'' Id.
---------------------------------------------------------------------------

    To take one example specific to this rulemaking, the economic 
conception of well-being would count any value that consumers derive 
from perceiving class settlements as indications that justice is being 
served and the rule of law is being upheld, but it would not recognize 
as an economic benefit any value to society at large from justice being 
served.\564\ And in practice, with regard to the value that individual 
consumers derive from such considerations, the Bureau is unaware of any 
applicable studies that would allow the Bureau to assess the strength 
of this value separate and apart from deterrence, relief, or other 
tangible benefits.\565\
---------------------------------------------------------------------------

    \564\ Id. at 975 (``[P]eople might feel upset if wrongdoers 
escape punishment, quite apart from any view people might have about 
the effect of punishment on the crime rate.'').
    \565\ See, e.g., Christopher Anderson & Louis Putterman, Do Non-
Strategic Sanctions Obey the Law of Demand? The Demand for 
Punishment in the Voluntary Contribution Mechanism, 54 Games and 
Econ. Beh. 1 (2006); Jeffrey Carpenter, The Demand for Punishment, 
62 J. of Econ. Beh. & Org. 522 (2007) for two examples of such 
studies using lab experiments with college students.
---------------------------------------------------------------------------

    Another example would be the impact on some consumers of lost 
privacy that could result when providers would be required to send 
redacted arbitration records about them to the Bureau. Unlike the 
impact on consumers when their data becomes public in a data breach, 
the impact of the lost privacy that the proposed rule could create is 
generally something that, if it exists, the Bureau does not have the 
ability to assess meaningfully, especially given the nature of the 
proposed redactions. And, as discussed above with the value that 
consumers may derive from the rule of law being upheld, the Bureau is 
unaware of any applicable studies that would allow the Bureau to assess 
the strength of this privacy value.
    Accordingly, while as discussed in Part VI above, the Bureau 
believes that the proposal is in public interest due, in part, to 
reinforcing the rule of law, the discussion in this section considers 
the standard economic concept of individual well-being and focuses in 
particular on more tangible impacts on individual consumers and 
providers that are readily ascertainable in the framework under which 
the Bureau is assessing the costs and benefits of the proposed rule for 
purposes of this Section 1022(b)(2) Analysis.\566\
---------------------------------------------------------------------------

    \566\ The Bureau has discretion in any rulemaking to choose an 
appropriate scope of analysis with respect to potential benefits and 
costs. In this rulemaking, the Bureau, as a matter of discretion, 
has chosen to focus on the tangible, economic impacts on individual 
consumers and providers.
---------------------------------------------------------------------------

The Deterrence Effect
    As discussed above, class litigation exposure provides a deterrence 
incentive to providers, above and beyond other incentives they may have 
to comply with the law. So long as the level of class litigation 
exposure is related to the level of providers' compliance with laws 
(that is, so long as class litigation is not brought randomly without 
regard to the level of compliance and thus is meritless in general), 
providers would want to ensure more compliance than if there was no 
threat of class litigation.\567\ Given the Bureau's assumptions 
outlined above, economic theory suggests that providers who are immune 
from class litigation currently under-comply from the economic welfare 
perspective, and therefore this additional deterrence is 
beneficial.\568\ For this purpose, both the cost of class relief and 
the cost of related litigation is counted as contributing to the size 
of the strengthened compliance incentives.\569\
---------------------------------------------------------------------------

    \567\ See, e.g., Kaplow & Shavell supra note 549 at 1166, (``In 
many areas of law . . . a primary reason to permit individuals to 
sue is that the prospect of suit provides an incentive for desirable 
behavior in the first instance.'').
    \568\ See Gary Becker, Crime and Punishment: An Economic 
Approach, 76 J. Pol. Econ. 169 (1968). See also Shapiro, supra note 
552; Posner, supra note 546. See discussion above on why other 
incentives to comply, such as public enforcement and reputation, are 
often insufficient or could be made more effective and efficient by 
introducing private enforcement as well.
    \569\ See Kaplow & Shavell, supra note 549.
---------------------------------------------------------------------------

    At least two sources might inform a provider's determination of its 
profit-maximizing level of compliance in a regime in which there is 
potential class action exposure for non-compliance. First, the 
potential exposure can cause a provider to devote increased resources 
to monitoring and evaluating compliance, which can in turn lead the 
provider to determine that its compliance is not sufficient given the 
risk of litigation. Second, the potential exposure to class litigation 
can cause a provider to monitor and react to class litigation or 
enforcement actions (that could result in class litigation) against its 
competitors, regardless of whether the provider previously believed 
that its compliance was sufficient.
The Additional Litigation Effect
    A class settlement could result in three types of relief to 
consumers: (1) Cash relief (monetary payments to consumers); (2) in-
kind relief (free or discounted access to a service); and (3) 
injunctive relief (a commitment by the defendant to alter its behavior 
prospectively, including the commitment to stop a particular practice 
or follow the law).
    When a class action is settled, the payment from the provider to 
consumers is intended to compensate class members for injuries suffered 
as a result of actions asserted to be in violation of the law and is a 
benefit to

[[Page 32903]]

those consumers. However, this benefit to consumers is also a cost to 
providers.\570\ This payment from the provider to consumers in and of 
itself is, in economic terms, a transfer,\571\ regardless of whether 
this payment is a remedy for a legal wrong or restitution of providers' 
previous ill-gotten gains from consumers that led to the class action 
in the first place. To effectuate the transfer there are also other 
costs involved, such as spending on attorneys (both the plaintiff's and 
the defendant's) and providers' management and staff time, making any 
such transfer payment in and of itself (i.e., absent any consideration 
of its deterrent impact) economically inefficient.\572\ These costs are 
incurred both in cases with an eventual class settlement and in cases 
that ultimately are dismissed by motion, abandoned, or settled on an 
individual basis, although the magnitude of the costs may vary 
depending upon how a case is resolved.\573\ Thus, economic theory views 
class actions that result solely in cash relief as inefficient (i.e., 
absent any consideration of its deterrent impact). More generally, 
under standard economic theory, any delivery system for formal or 
informal compensation of victims for violations of law is typically 
inefficient unless this system of remedies deters at least some of 
these violations before they occur.
---------------------------------------------------------------------------

    \570\ There might also be an associated increase in prices due 
to firms passing on the cost of these payments back to consumers. 
See the discussion on pass-through below.
    \571\ ``Benefit and cost estimates should reflect real resource 
use. Transfer payments are monetary payments from one group to 
another that do not affect total resources available to society.'' 
Office of Mgmt. & Budget, Exec. Office of the President, Circular A-
4, Regulatory Analysis, (Sept. 17, 2003) at 38, available at https://www.whitehouse.gov/sites/default/files/omb/assets/omb/circulars/a004/a-4.pdf. See Richard Posner, Cost-Benefit Analysis: Definition, 
Justification, and Comment on Conference Papers, 29 J. of Leg. 
Studies 1153, 1155 (Univ. of Chi. Press 2000) (``In the discussion 
at the conference John Broome offered as a counterexample to the 
claim that efficiency in the Kaldor-Hicks sense is a social value 
the forced uncompensated transfer of a table from a poor person to a 
rich person. I agree that allowing the transfer would not improve 
social welfare in any intelligible sense. But it would not be 
Kaldor-Hicks efficient when one considers the incentive effects.'').
    \572\ As noted above, these other costs still contribute to the 
deterrence incentive.
    \573\ Given the Bureau's assumptions outlined above, because of 
these costs, from the perspective of economic theory, the best 
outcome is the one where the possibility of class litigation results 
in optimal compliance, and this optimal compliance in turn results 
in no actual class litigation occurring.
---------------------------------------------------------------------------

    Much of the discussion above also applies to in-kind and injunctive 
relief. In-kind relief is intended to compensate class members for 
injuries suffered as a result of actions asserted to be in violation of 
the law in ways other than by directly providing them with money. 
Injunctive relief is typically intended to stop or alter the 
defendant's practices that were asserted to be in violation of law. 
Both forms of relief benefit consumers. However, this benefit to 
consumers is also frequently a cost to providers (e.g., if the practice 
that the provider agrees to halt was profitable, the loss of that 
profit is a cost to the provider). To effectuate the relief there are 
some similar transaction costs involved as with monetary relief, such 
as spending on attorneys (both the plaintiff's and the defendant's) and 
providers' management time.
    Unlike with monetary relief, however, the benefits to consumers of 
in-kind and injunctive relief may not be a mirror image of the costs to 
providers, and the cost of providing the relief might be lower than 
consumer's value of receiving the relief.\574\ In that event, 
litigation could be viewed as efficient from the perspective of 
economic theory independent of any deterrent effect.
---------------------------------------------------------------------------

    \574\ This is more likely to be the case where there were also 
pre-existing negotiation frictions that prevented a Coasian outcome. 
The Coase Theorem, applied to this context, postulates that a firm 
provides a service to its customer if and only if the customer 
values the service more than its costs. When the Coase Theorem 
holds, such a delivery system of formal or informal relief will 
typically be inefficient, since the efficiency of the interaction 
between the firm and its consumer would have already been maximized 
before any relief occurred. As noted in Ronald Coase, The Problem of 
Social Cost, 3 J. of L. & Econ. 1 (1960), absent transaction costs, 
the Coase Theorem holds. However, again as Coase notes, presence of 
transaction costs might result in such a solution not materializing. 
In general, economic theory behind optimal choices by firms in such 
contexts is ambiguous, at least as long as a solution consistent 
with the Coase Theorem is not available because of a particular pre-
existing market friction (transactions costs). See, e.g., A. Michael 
Spence, Monopoly, Quality & Regulation, 6 Bell J. of Econ. 417 
(1975). For a somewhat more accessible treatment (at a cost of 
assuming away several issues), see Richard Craswell, Passing on the 
Cost of Legal Rules: Efficiency and Distribution in Buyer-Seller 
Relationships, 43 Stan. L. Rev. 361 (1991).
---------------------------------------------------------------------------

The Administrative Change Effect
    The proposed class rule would mandate that providers with 
arbitration agreements include a provision in their future contracts 
stating that the provider cannot use the arbitration agreement to block 
a class action. This administrative change would require providers to 
incur expenses to change their contracts going forward, and amend 
contracts they acquire or provide a notice.\575\ However, there would 
also be benefits related to this proposed requirement: Any eventual 
litigation could proceed more smoothly due to the lack of need for 
courts or arbitrators to analyze whether the Bureau's rule indeed 
applies in the particular case (to the extent that the provider has 
complied with the proposed rule's language requirement). The new 
contract language could reduce legal fees and the time spent in court 
for both parties in class litigations. Moreover, to the extent 
providers adopt arbitration agreements that comply, attorneys would not 
need to be familiar with the Bureau's rule to know that an arbitration 
agreement could not be invoked in class litigation.
---------------------------------------------------------------------------

    \575\ As discussed further below, providers like debt buyers or 
indirect auto lenders would need to provide notices to consumers 
upon purchase of consumer debt with an arbitration agreement that 
does not adhere to the proposed rule's mandated provision.
---------------------------------------------------------------------------

B. Potential Benefits and Costs to Covered Persons

Overview
    Given that providers using arbitration agreements have chosen to do 
so and would be limited in their ability to continue doing so by the 
proposed rule, these providers are unlikely to experience many notable 
benefits from the Bureau's proposed rule.\576\ Rather, the benefits of 
the proposed rule would flow largely to consumers, as discussed in 
detail in the next part of this section.
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    \576\ The Bureau believes that it is possible that some 
providers without arbitration agreements would benefit from the 
proposed rulemaking. Their rivals' costs would increase, and thus 
providers without arbitration agreements benefit to the extent that 
cost increase is passed through to consumers (or to the extent 
rivals change their aggressive practices). See Steven C. Salop and 
David T. Scheffman, Raising Rivals' Costs, 73 a.m. Econ. Rev. 267 
(1983). However, the Bureau believes that the magnitude of this 
benefit is relatively low. In addition, the Bureau acknowledges that 
these providers without arbitration agreements would lose the option 
going forward to adopt an arbitration agreement that could be 
invoked in class litigation. As discussed above, economic theory 
treats a constraint on a party's options as imposing costs on that 
party, though given that these providers currently do not have 
arbitration agreements, the Bureau believes that the magnitude of 
this cost is also relatively low. Thus, for the ease of presentation 
and due to the low magnitude of these benefits and costs, the Bureau 
focuses its analysis only on providers that currently have 
arbitration agreements.
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    Providers' costs correspond directly to the three aforementioned 
effects of the proposed rule: (1) Providers would experience costs to 
the extent they act on additional incentives for ensuring more 
compliance with the law; (2) providers would spend more to the extent 
that the exposure to additional class litigation materializes into 
additional litigation; and (3) providers would incur a one-time 
administrative change cost or ongoing amendment or notices costs. The 
Bureau considers each of these effects in turn. To the extent providers 
would pass these costs through to consumers, providers' costs

[[Page 32904]]

would be lower. Providers' pass-through incentives are discussed 
further below.
Covered Persons' Costs Due to Additional Compliance
    Persons exposed to class litigation have a significant monetary 
incentive to avoid class litigation. The proposed rule would prohibit 
providers from using arbitration agreements to limit their exposure to 
class litigation. As a result, providers may attempt to lower their 
class litigation exposure (both the probability of being sued and the 
magnitude of the case if sued) in a multitude of other ways. All of 
these ways of lowering class litigation exposure would likely require 
incurring expenses or forgoing profits. The investments in (or the 
costs of) avoiding class litigation described below, and other types of 
investments for the same purpose, would likely be enhanced by 
monitoring the market and noting class litigation settlements by the 
competitors, as well as actions by regulators. Providers would also 
likely seek to resolve any uncertainty regarding the necessary level of 
compliance by observing the outcomes of such litigation. These 
investments might also reduce providers' exposure to public 
enforcement.
    The Bureau has previously attempted to research the costs of 
complying with Federal consumer financial laws as a general matter, and 
found that providers themselves often lack the data on compliance 
costs.\577\ Even if basic data were available on how much money 
providers invest in legal compliance generally--as distinct from 
investments in customer service, general risk management, and related 
undertakings and functions--it is difficult to isolate the marginal 
compliance costs related to particular deterrence and to quantify any 
additional investment that would occur in the absence of arbitration 
agreements. Specifically, any differences in compliance-related 
expenditures between firms that have and do not have arbitration 
agreements may be the result of other underlying factors such as a 
general difference in risk tolerance and management philosophy. Thus, 
given the data within its possession, the Bureau is unable to quantify 
these costs. The Bureau again requests comment and data, if available.
---------------------------------------------------------------------------

    \577\ See Bureau of Consumer Fin. Prot., Understanding the 
Effects of Certain Deposit Regulations on Financial Institutions' 
Operations (2013), available at http://files.consumerfinance.gov/f/201311_cfpb_report_findings-relative-costs.pdf, for challenges in 
general and for a description of the amount of resources spent 
collecting compliance information from seven banks with respect to 
their compliance to parts of four regulations. A significant part of 
the challenge is that providers typically do not track their 
compliance costs and it is not possible to calculate them from the 
standard accounting metrics.
---------------------------------------------------------------------------

    The Bureau believes that, as a general matter, the proposed rule 
would increase some providers' incentives to invest in additional 
compliance. The Bureau believes that the additional investment would be 
significant, but cannot predict precisely what proportion of firms in 
particular markets would undertake which specific investments (or forgo 
which specific activities) described below.
    However, economic theory offers general predictions on the 
direction and determinants of this effect. Whether and how much a 
particular provider would invest in compliance would likely depend on 
the perceived marginal benefits and marginal costs of investment. For 
example, if the provider believes that it is highly unlikely to be 
subject to class litigation and that even then the amount at stake is 
low (or the provider is willing to file for bankruptcy if necessary to 
ward off a case), then the incentive to invest is low. Conversely, if 
the provider believes that it is highly likely to be subject to class 
litigation and that the amount at stake would be large if it is sued, 
then the incentive to invest is high.
    Providers' calculus on whether and how much to invest in compliance 
may also be affected by the degree of uncertainty over whether a given 
practice is against the law, as well as the size of the stakes. Where 
uncertainty levels are very high and providers do not believe that they 
can be reduced by seeking guidance from legal counsel or regulators or 
by forgoing a risky practice that creates the uncertainty, providers 
may have less incentive to invest in lowering class litigation exposure 
under the logic that such actions will not make any difference in light 
of the residual uncertainty about the underlying law. In the limit, if 
a provider believes that class litigation is completely unrelated to 
compliance, then the provider will rationally not invest in lowering 
class litigation exposure at all: the deterrence effect is going to be 
absent. Nonetheless, the Bureau believes that many providers know that 
class litigation is indeed related to their actual compliance with the 
law and adherence to their contracts with consumers.\578\ Moreover, 
because court cases, rulemakings, and other regulatory activities 
address areas of legal uncertainty over time, the Bureau believes that 
providers at a minimum would have incentives to respond to class 
litigation against them and their competitors and to respond to other 
new legal developments as they occur.
---------------------------------------------------------------------------

    \578\ This is hard to measure empirically and the Bureau 
requests comments on or submissions of any empirical studies that 
have measured the merit of class actions involving consumer 
financial products or services. The Bureau is aware of some 
empirical literature on this question involving securities but does 
not believe that this literature directly applies in this context. 
See, e.g., Joel Seligman, The Merits Do Matter: A Comment on 
Professor Grundfest's ``Disimplying Private Rights of Action Under 
the Federal Securities Laws: The Commission's Authority,'' 108 Harv. 
L. Rev. 438 (1994).
---------------------------------------------------------------------------

Examples of Investments in Avoiding Class Litigation
    Providers who decide to make compliance investments might take a 
variety of specific actions with different cost implications. First, 
providers might spend more on general compliance management. For 
example, upon the effective date of the rule, if finalized, a provider 
might decide to go through a one-time review of its policies and 
procedures and staff training materials to minimize the risks of future 
class litigation exposure. This review might result in revisions to 
policies and additional staff training. There might also be an ongoing 
component of costs arising from periodic review of policies and 
procedures and regularly updated training for employees, as well as 
third-party service providers, to mitigate conduct that could create 
exposure to class litigation.\579\ Moreover, there might be additional 
costs to the extent that laws change, class litigation cases are 
publicized, or new products are developed. Both the one-time and the 
ongoing components could also include outside audits or legal reviews 
that the provider might perform.
---------------------------------------------------------------------------

    \579\ The providers that already have a compliance management 
system with an audit function could, for example, increase the 
frequency and the breadth of audits.
---------------------------------------------------------------------------

    Second, providers might incur costs due to changes in the consumer 
financial products or services themselves. For example, a provider 
might conclude that a particular feature of a product makes the 
provider more susceptible to class litigation, and therefore decide to 
remove that feature from the product or to disclose the feature more 
transparently, possibly resulting in additional costs or decreased 
revenue. Similarly, a provider might update its product features based 
on external information, such as actions against the provider's 
competitors by either regulators or private actors. The ongoing 
component could also include changes to the general product design 
process. Product design could consume more time and expense due to 
additional rounds of legal and compliance review. The additional

[[Page 32905]]

exposure to class litigation could also result in some products not 
being developed and marketed primarily due to the risk associated with 
class litigation.
    Some of the compliance changes that providers might make are 
relatively inexpensive changes in business processes that nonetheless 
are less likely to occur in the absence of class litigation exposure. 
Three examples of such investments in compliance follow. First, under 
the Fair Debt Collection Practices Act, debt collectors are not allowed 
to contact a consumer at an unusual time or place which the collector 
knows or should know to be inconvenient to the consumer.\580\ However, 
it is highly unlikely that even a consumer who is aware of this rule 
will bring an individual lawsuit or an individual arbitration over a 
single contact because it will require considerable time on the 
consumer's part, which is likely to be an even higher burden for 
consumers subject to debt collection than for other types of consumers. 
To the extent that a debt collector wants to minimize class litigation 
exposure, however, it could develop a procedure to avoid such contacts.
---------------------------------------------------------------------------

    \580\ 15 U.S.C. 1692(a)
---------------------------------------------------------------------------

    As a second example, consider a bank stopping an Automated Clearing 
House (ACH) payment to a third party at a consumer's request. While 
important to a consumer, absent the possibility of class litigation, 
the bank's primary incentive to ensure that the ACH payment is 
discontinued is to maintain a positive reputation with this particular 
consumer.\581\ It is highly unlikely that a consumer would sue 
individually if the bank fails to take action, and it might even be 
unlikely that the consumer would switch to another bank because of that 
failure, especially given the switching costs entailed in such a move. 
However, a bank could invest in developing proper procedures to ensure 
that such payments are stopped at most three business days after a 
consumer's request as required under prevailing law.
---------------------------------------------------------------------------

    \581\ A bank would have to stop such payments in at most three 
business days after a consumer's request. See 15 U.S.C. 1693e(a).
---------------------------------------------------------------------------

    The third example is a creditor sending a consumer an adverse 
action notice explaining the reasons for denial of a credit 
application.\582\ While knowing when and why a denial has occurred may 
be important to an individual consumer, it is unlikely that a consumer 
would bring an individual suit based on the failure to provide such a 
notice (some consumers will not even know they are entitled to one) or 
on its content (consumers will not generally be in a position to know 
whether the reason given is legally sufficient or accurate). The 
consumer is more likely to seek credit from another source, or simply 
to proceed unaware of the reasons why they are not able to access 
credit. However, a creditor could invest in improving its notice 
procedures and content.
---------------------------------------------------------------------------

    \582\ A creditor would have to send such a notice. See 15 U.S.C. 
1681m(a).
---------------------------------------------------------------------------

Covered Persons' Costs Due to Additional Class Litigation: Description 
of Assumptions Behind Numerical Estimates
    Additional investments in compliance are unlikely to eliminate 
additional class litigation completely, at least for some 
providers.\583\ Thus, if the class proposal is finalized, those 
providers that are sued in a class action would also incur expenses 
associated with additional class litigation. The major expenses to 
providers in class litigation are payments to class members and related 
expenses following a class settlement, plaintiff's legal fees to the 
extent that the provider is responsible for paying them following a 
class settlement, the provider's legal fees and other litigation costs 
(in all cases regardless of how it is resolved), and the provider's 
management and staff time devoted to the litigation.
---------------------------------------------------------------------------

    \583\ For example, as noted above, some providers might choose 
to forgo sufficient additional investment in compliance.
---------------------------------------------------------------------------

    To provide an estimate of costs related to class settlements of 
incremental class litigation that would be permitted to proceed under 
the proposed rule, the Bureau developed estimates using the data 
underlying the Study's analysis of Federal class settlements over five 
years (2008-12), the Study's analysis of arbitration agreement 
prevalence, and additional data on arbitration agreement prevalence 
collected by the Bureau through outreach to trade associations in 
several markets during the development of this proposal.\584\ The 
Bureau had classified each case in the Study by the North American 
Industry Classification System (NAICS) code that most closely 
corresponded to the consumer financial product or service at issue in 
the case.\585\
---------------------------------------------------------------------------

    \584\ See generally Study, supra note 2, sections 2 and 8. 
During the SBREFA process, the Bureau sought and obtained permission 
from OMB to conduct a survey of trade groups (and potentially 
providers) in order to assess the prevalence of arbitration 
agreements in the markets for which prevalence was not reported in 
the Study. Unless the trade groups had an exact estimate, the Bureau 
asked the trade group representatives to pick one of four options 
for the prevalence of arbitration agreements in a given market, with 
the percentages in the brackets also mentioned: (1) Barely any 
providers use arbitration agreements [0 percent-20 percent]; (2) 
some providers but fewer than half use arbitration agreements [20 
percent-50 percent]; (3) more than half but not the vast majority 
use arbitration agreements [50 percent-80 percent]; and (4) the vast 
majority use arbitration agreements [80 percent-100 percent]. The 
Bureau then inquired whether this number would change if the 
question had been asked to just small providers. For the markets for 
which prevalence was analyzed in the Study, the Bureau converted the 
estimate from the Study into one of these four ranges. Finally, the 
Bureau utilized the midpoint of each range for this quantification 
exercise (for example, assuming that 35 percent of providers use 
arbitration agreements if the trade group reported that some, but 
less than half [20 percent-50 percent] of providers use arbitration 
agreements). See Part IX below for further description of the data 
received from the trade groups. Any inaccuracy in the prevalence 
numbers affects the estimates below. For example, if prevalence is 
actually higher in a particular market than the number used by the 
Bureau, then the actual costs to providers (and benefits to 
consumers) would be higher. In this example, the increases in across 
all markets costs to providers and benefits to consumers (stemming 
from the relief to class members) are not necessarily symmetric, 
since the Bureau's estimates are market-by-market.
    \585\ See U.S. Census Bureau, North American Industry 
Classification System (2012), available at http://www.census.gov/eos/www/naics/.
---------------------------------------------------------------------------

    To estimate the impact of the rule the Bureau used the Study data 
to estimate the percentage of providers in each market with an 
arbitration agreement today. The Bureau assumed that the class 
settlements that occurred involved providers without an arbitration 
agreement. The Bureau was then able to calculate the incidence and 
magnitude of class action settlements for those providers in each 
market and use these calculations to estimate the impact of the 
proposed rule going forward in each market if the providers who 
currently have arbitration agreements were no longer insulated from 
class actions.
    The Bureau's estimation of additional Federal class litigation 
costs is based upon the set of Federal class settlements analyzed in 
the Study, with adjustments to align those data with the scope of the 
proposed rule, which is somewhat narrower.\586\ The Study sought to 
identify all class action settlements involving any of the enumerated 
consumer financial statutes under Title X of the Dodd-Frank Act. The 
proposed rule is narrower in scope. Due to its narrower scope, the 
proposed rule would only have an impact on those entities within the 
proposed coverage when they offer products and services subject to the 
proposed rule, rather than

[[Page 32906]]

the broader scope of the research of Federal class actions in the 
Study. Additionally, the proposed rule would not have an impact on 
cases in which arbitration agreements cannot play a role today, either 
because the law does not allow them to be used for the type of dispute 
at issue or that type of dispute does not involve a written contract 
with the consumer on which the defendant in the case could rely to 
invoke arbitration.\587\ The set of Federal class settlements the 
Bureau uses to estimate impact therefore excludes 117 Federal class 
settlements analyzed in Section 8 of the Study.\588\ In addition, to 
avoid underestimating the effects, the estimates in this section of the 
proposed rule also include 10 additional class settlements identified 
through the Section 8 search methodology which may be within the scope 
of the proposed rule and affected by it but which had not been counted 
in the data analyzed in Section 8.
---------------------------------------------------------------------------

    \586\ The Study's Section 8 analyzed class settlements of claims 
under enumerated consumer laws, unless excluded as described in the 
methodology for Section 8. See Study, supra note 2, Appendix S at 
129. In addition, class settlements of claims concerning consumer 
financial products or services more generally were included, even if 
claims were not raised under enumerated consumer laws. Id.
    \587\ Persons offering or providing similar products or services 
might be covered by the proposed rule in some circumstances; the 
Bureau's estimates are not a legal determination of coverage.
    \588\ See Appendices A and B hereto for additional details on 
adjustments in three other cases.
---------------------------------------------------------------------------

    The resulting set of 312 cases used to estimate impact of the 
proposed rule on Federal class litigation are identified in Appendix A 
hereto, along with a list of the 117 excluded cases described above in 
Appendix B. The Bureau notes that the total amount of payments and 
attorney's fees--the two statistics that the Bureau uses for its 
estimates in this Section 1022(b)(2) Analysis--for the 312 cases are 
not materially different than the totals for the aforementioned cases 
from the 419 used in the Study. That is largely a function of the fact 
that the additions and subtractions were for the most part relatively 
small class actions that did not contribute materially to the amount of 
aggregate gross or net relief.
    With regard to the Bureau's estimations overall, the accuracy of 
the estimates is limited by the difficulty that often arises in data 
analysis of disentangling causation and correlation, namely unobserved 
factors than can affect multiple outcomes. As noted above, the core 
assumptions underlying the Bureau's estimates are that the settlements 
identified in the Study were all brought against providers without an 
arbitration agreement and that providers with arbitration agreements 
affected by the rule would be subject to class settlements to the same 
extent as providers without arbitration agreements today. The first 
assumption is a conservative one: It is likely that some of the 
settlements involved providers with arbitration agreements that they 
either chose not to invoke or failed to invoke successfully, in which 
event the Bureau's incidence estimates here are overstated. On the 
other hand, similar to issues discussed above with regard to estimating 
compliance-related expenditures, it may be that some other underlying 
factor (such as a general difference in risk tolerance and management 
philosophy) might prompt providers that use arbitration agreements 
today to take a different approach to underlying business practices and 
product structures than providers who otherwise appear similar but have 
never used arbitration agreements. This might make providers who use 
arbitration agreements today more prone to class litigation than 
providers who do not, and increase both the costs to providers and 
benefits to consumers discussed below.
    The Bureau also generally assumed for purposes of the estimation 
that litigation data from 2008 to 2012 were representative of an 
average five-year period. However, the Bureau recognizes that the 
Bureau's own creation in 2010 may have increased incentives for some 
providers to increase compliance investments, although it did not begin 
enforcement actions until 2012. To the extent that the existence and 
work of the Bureau, including its supervisory activity and enforcement 
actions, increased compliance since 2010 in the markets the proposed 
rule would affect, the estimates of costs to providers and the benefits 
to consumers going forward would be overestimates.
    To provide a more specific illustration of the Bureau's 
methodology, suppose for example that out of 1,000 providers in a 
particular market (NAICS code), 20 percent currently use arbitration 
agreements, and the Bureau found 40 class litigation settlements over 
five years. That implies that 800 providers (1,000--1,000 * 20 percent) 
did not use arbitration agreements and the overall exposure for these 
800 providers was 40 cases total, for a rate of 5 percent (40/800) for 
five years. In turn, this implies that the 200 providers (1,000 * 20 
percent) that currently use arbitration agreements would be expected to 
face, collectively, 10 class settlements in five years (200 * 5 
percent), or 2 class settlements per year (10/5).\589\ The Bureau 
performs similar calculations for the monetary exposure in terms of 
payments to class members and plaintiff's attorney's fees.
---------------------------------------------------------------------------

    \589\ These calculations were done by NAICS codes and adjusted 
for the composition of the debt portfolios at debt collectors. 
According to the comments made by SERs and other anecdotal evidence, 
debt collectors currently do not differentiate between debt incurred 
on contracts with and without arbitration agreements when deciding 
whether to collect on such debt. Many debts in their portfolios do 
not involve arbitration agreements and their ability to invoke 
agreements where they are present in the original credit contracts 
varies depending on the circumstances. See SBREFA Panel Report, 
supra note 332 at Appendix A. Thus, as discussed above, arguably all 
debt collectors face the risk of class litigation already. However, 
as discussed above, they are likely to experience an increase in 
risk proportional to the share of debt that they are collecting on 
that currently enjoys arbitration agreement protection. For purposes 
of this calculation, the Bureau assumed that 53 percent of debt 
collectors' current portfolios are subject to arbitration agreements 
based on the Study's estimate that 53 percent of the credit card 
loans outstanding are subject to arbitration agreements. Study, 
supra note 2, section 2 at 7. Thus, the Bureau assumed that the 
proportion of debt collectors' general portfolios that would be 
affected by the proposal has a prevalence of arbitration agreements 
on par with credit card debt. The prevalence is likely to be 
different from 53 percent as there are other sources of debt, for 
example, payday and medical debt. As with other estimates of 
prevalence, if 53 percent is an underestimate, then debt collectors 
would incur more costs (and consumers would experience more 
benefits).
---------------------------------------------------------------------------

    In the Study, the Bureau reports both the amount defendants agreed 
to provide as cash relief (gross cash relief) and the amount that 
public court filings established a defendant actually paid or was 
unconditionally obligated to pay to class members because of either 
submitted claims, an automatic distribution requirement, or a pro rata 
distribution with a fixed total amount (payments).\590\ The Bureau 
documented about $2 billion in gross cash relief and about $1.09 
billion in payments.\591\ The actual (as opposed to documented by the 
end date of the Study) payments to consumers from the 419 Federal class 
settlements in the Study are somewhere between these two numbers. The 
Bureau uses the documented payments amount ($1.09 billion in total) as 
an input in calculating payments to class members in the derivations 
below. However, accounting for the different scope of the proposed rule 
results in the aggregate payment amount changing from $1.09 billion to 
$1.07 billion.\592\ In contrast, using gross cash relief would roughly 
double the calculated amount of payments to class members (thus it 
would double both this cost to providers and the benefit to consumers, 
but not

[[Page 32907]]

any other costs to providers such as legal fees).
---------------------------------------------------------------------------

    \590\ See Study, supra note 2, section 8 at 3-5 and 23-29.
    \591\ The Bureau notes that the number of class cases litigated, 
and the corresponding numbers for both gross cash relief and 
payments vary year-to-year. See Study, supra note 2, section 8 at 
12, 16, 24, and 27.
    \592\ The data presented below with respect to a given market is 
after adding and dropping the aforementioned cases from the 419 used 
in the Study. The total amount of payments, or other aggregate 
statistics, did not change materially due to adding and dropping 
these cases.
---------------------------------------------------------------------------

    The Study documents relief provided to consumers and attorney's 
fees paid to attorneys for the consumers,\593\ but the Study does not 
contain data on the defense costs incurred by the providers because 
these data were not available to the Bureau. The Bureau therefore 
estimated defendant's attorney fees based on plaintiff's attorney's 
fees with appropriate adjustments.\594\ Specifically, the Bureau 
believed it was important to account for the fact that while 
plaintiff's attorneys are compensated in class actions largely on a 
contingent basis (and thus not only lose the time value of money but, 
moreover, face the risk of losing the case and earning nothing), the 
defendant's attorneys and the defendant's staff are often compensated 
on an hourly or salary basis, and face considerably lower risk. Courts 
review attorney's fees in class action settlements for reasonableness. 
One way courts do this is to first calculate a ``lodestar'' amount by 
multiplying the number of hours the attorneys devoted to the case by a 
reasonable hourly rate, and then adjust that amount by a lodestar 
multiplier designed to compensate the plaintiff's attorneys for the 
risk they took in bringing the case with no guarantee of payment.\595\ 
To the extent that lodestar multipliers incorporate a risk inapplicable 
to defense costs, the Bureau believes that the proper comparison for 
the defendant's cost is the unadjusted plaintiff's attorney's fees.
---------------------------------------------------------------------------

    \593\ These fees include other litigation costs such as expert 
report costs as well as amounts paid for settlement administrator 
costs. See Study, supra note 2, Appendix B at 137.
    \594\ Including other defense costs, such as discovery, and 
including the provider's staff and management time (as both staff 
and management will spend at least some time with their attorneys in 
defending the case).
    \595\ For this factor, the Bureau averaged lodestar multipliers 
from a subset of cases from the Study where the Bureau documented a 
lodestar multiplier. Plaintiff's attorney compensation in a class 
settlement is frequently computed using the time spent on the case, 
the per-hour rate of the attorneys, all adjusted by the ``lodestar 
multiplier''. The multiplier reflects various considerations, for 
example, the fact that when plaintiff attorneys do not settle a 
case, they will frequently not be compensated. See, e.g., Theodore 
Eisenberg & Geoffrey P. Miller, Attorney Fees in Class Action 
Settlements: An Empirical Study, 1 J. of Emp. Leg. Stud. 27 (2004); 
Brian Fitzpatrick, An Empirical Study of Class Action Settlements 
and Their Fee Awards, 7 J. of Emp. Leg. Stud. 811 (2010).
---------------------------------------------------------------------------

    By reviewing the cases used in Section 8 of the Study, the Bureau 
documented lodestar multipliers in about 10 percent of the settlements. 
The average multiplier across those cases was 1.71, and thus the Bureau 
uses this number for calculations below.\596\ Thus, the Bureau assumes 
that in all cases the plaintiff's attorney's fees awarded were 171 
percent of the base amount, including in cases where the Bureau did not 
find a lodestar multiplier, which also include the cases where 
attorneys were compensated based on a percentage of the settlement 
amount.
---------------------------------------------------------------------------

    \596\ Despite the small sample, this number is consistent with 
the finding by Professor Fitzpatrick of a 1.65 average. See 
Fitzpatrick, supra note 595, at 834.
---------------------------------------------------------------------------

    The Bureau also notes that the estimates provided below are 
exclusively for the cost of additional Federal class litigation filings 
and settlements. The Bureau does not attempt to monetize the costs of 
additional state class litigation filings and settlements because 
limitations on the systems to search and retrieve state court cases 
precluded the Bureau from developing sufficient data on the size or 
costs of state court class action settlements. Based on the Study's 
analysis of cases filed, the Bureau believes that there is roughly the 
same number of class settlements in state courts as there is in Federal 
courts across affected markets; \597\ however, the Bureau generally 
believes that the amounts at stake are not nearly as large in state 
courts.\598\ The Bureau notes that while the total number of putative 
class cases filed might be similar in Federal and state courts, the 
relative frequency of state and Federal class actions may vary in 
different markets.\599\ For example, there might be considerably more 
putative state class actions filed against auto lenders or smaller 
payday operators than putative Federal class cases. On the other hand, 
there might be considerably more putative Federal class actions filed 
against large national banks than putative state class actions.
---------------------------------------------------------------------------

    \597\ The Study found 470 putative Federal class actions filed 
between 2010 through 2012 versus 92 putative state class actions. 
However, the state class actions were only for jurisdictions 
representing 18.1 percent of the U.S. population (92/.181 = 508). 
See Study, supra note 2, section 6 at 16-17. Note that the scope of 
Section 6 included six markets, not all the markets that would be 
affected.
    \598\ Especially due to the Class Action Fairness Act of 2005, 
supra note 54, which in many cases allows defendants to remove class 
actions to Federal court when $5 million or more are at stake and 
other jurisdictional requirements are met.
    \599\ See Study, supra note 2, section 6 at 19 tbl. 4.
---------------------------------------------------------------------------

    In some markets, such as the payday loan market, there were Federal 
class settlements related to debt collection practices, which this Part 
classifies as relating to the debt collection market.
Covered Persons' Costs Due to Additional Class Litigation
    The Bureau estimates that the proposed rule would create class 
action exposure for about 53,000 providers (those who fall within the 
coverage of the proposed rule and currently have an arbitration 
agreement).\600\ Based on the calculation described above, the Bureau's 
model estimates that this class action exposure would result--on an 
annual basis--in about 103 additional class settlements in Federal 
court. In those cases, the Bureau estimates that an additional $342 
million would be paid out to consumers, an additional $66 million would 
be paid out to plaintiff's attorneys, and an additional $39 million 
would be spent by providers on their own attorney's fees and internal 
staff and management time.\601\
---------------------------------------------------------------------------

    \600\ See IRFA Analysis below for the data used to arrive at 
this estimate.
    \601\ These numbers do not include any estimates from costs or 
benefits from increased investment in compliance with the law. As 
discussed above, the Bureau is not estimating those numbers. The 
Bureau has also performed a sensitivity analysis by using market 
shares of providers with arbitration agreements in the checking 
account and credit card markets instead of prevalence that is 
unadjusted by market share. The Bureau used the numbers reported in 
Section 2 of the Study for this sensitivity analysis. This other 
specification changes the results to about 109 additional Federal 
class settlements, an additional $475 million paid out to consumers, 
an additional $114 million paid out to plaintiff's attorney's fees, 
and an additional $67 million for defendants' attorney's fees and 
internal staff and management time per year.
---------------------------------------------------------------------------

    These numbers should be compared to the number of accounts across 
the affected markets. While the total number of all accounts across all 
markets is unavailable, there are, for example, hundreds of millions of 
accounts in the credit card market alone. Thus, averaged across all 
markets, the monetized estimates provided above amount to less than one 
dollar per account per year. However, this exposure could be higher for 
particular markets.
    The Bureau believes that these providers would enter into a similar 
number of class settlements in state court; however, with markedly 
lower amounts paid out to consumers and attorneys on both sides. Many 
cases also feature in-kind relief.\602\ However, as in the Study, the 
Bureau is unable to quantify this cost in a way that would be 
comparable with payments to class

[[Page 32908]]

members. Similarly, injunctive relief could result in substantial 
forgone profit (and a corresponding substantial benefit to the 
consumers), but cannot be easily quantified.\603\
---------------------------------------------------------------------------

    \602\ See Study, supra note 2, section 8 at 4. As in the Study, 
the Bureau uses the term ``in-kind relief'' to refer to class 
settlements in which consumers were provided with free or discounted 
access to a service. Id., section 8 at 4 n.6. While the Study 
quantified $644 million of in-kind relief, that number is included 
in relief, but not in payments in the Study, and the Bureau 
continues to follow this approach here, both for the calculation of 
costs to providers and benefits to consumers.
    \603\ The Study quantified behavioral relief (defined as a part 
of injunctive relief) in the Study. The Bureau uses ``behavioral 
relief'' to refer to class settlements that contained a commitment 
by the defendant to alter its behavior prospectively, for example, 
by promising to change business practices in the future or 
implementing new compliance programs. The Bureau did not include a 
simple agreement to comply with the law, without more, as behavioral 
relief. Study, supra note 2, appendix B at 135. If the Bureau were 
to count such cases, there would likely be significantly more cases 
with behavioral relief. As the Bureau notes in the Study, behavioral 
relief is seldom quantified in case records, and thus the Bureau 
does not quantify it. Study, supra note 2, section 8 at 5 n.10.
---------------------------------------------------------------------------

    The Bureau performed a similar analysis to estimate the number of 
cases that would be filed as putative class actions, but would not 
result in a class settlement. Based on the data used in the Study, the 
Bureau believes that roughly 17 percent of cases that are filed as 
class litigations end up settling on a classwide basis.\604\ For 
purposes of this estimate the Bureau again assumed that these putative 
class actions were all brought against providers without an arbitration 
agreement. This is a conservative assumption; it may be that the very 
reason that some of these putative class actions were resolved on an 
individual basis is precisely because of an arbitration agreement. 
Nonetheless, on this assumption and extrapolating from the estimated 
103 additional Federal cases that would be settled on a classwide basis 
each year, the Bureau estimates that there would be 501 additional 
Federal court cases filed as class actions that would end up not 
settling on a classwide basis, assuming no change in filing behavior by 
plaintiff's attorneys.\605\ Some of the Federal cases analyzed in the 
Study filed as class actions were filed against providers that had an 
arbitration agreement that applied to the case. Thus, the Bureau 
believes that such providers already face some exposure, which implies 
that both the 103 settled class cases and the 501 cases filed as class 
actions are likely overestimates of Federal court settlements.
---------------------------------------------------------------------------

    \604\ The Bureau reported a lower number (12.3 percent) in the 
Study based on final settlements approved before March 1, 2014, 
though as noted in the Study, nearly 30 additional cases had a final 
settlement or proposed class settlement entered as of August 31, 
2014. Study, supra note 2, section 6 at 7 and 36.
    \605\ The Bureau estimated 102.7 (rounded to 103) additional 
Federal class settlements. Thus, the calculation for additional 
Federal cases that would be settled on a classwide basis is 
(102.7/.17)*(1-.17).
---------------------------------------------------------------------------

    In order to estimate the costs associated with these incremental 
Federal putative class actions, the Bureau notes that the Study showed 
that an average case filed as a putative class action in Federal court 
takes roughly 2.5 times longer to resolve if it is settled as a class 
case than if it is resolved in any other way.\606\ The Bureau discusses 
two potential estimates below and presents the more conservative one in 
the table below.
---------------------------------------------------------------------------

    \606\ See Study, supra note 2, section 6 at 46 tbl. 7.
---------------------------------------------------------------------------

    For the purposes of the first defense cost estimate, the Bureau 
assumed that putative class action cases that are not settled on a 
class basis (for whatever reason) cost 40 percent (1 divided by 2.5) 
less to litigate. Therefore, the Bureau estimated that these additional 
501 Federal class cases that do not settle on a class basis would 
result in $76 million per year in defense costs to providers. The 
Bureau did not include in this estimate recovery amounts in these 
putative class cases that did not result in a class settlement, as the 
Bureau believes those are negligible amounts (for example, a few 
thousand dollars per case that had an individual settlement). Based on 
similar numbers of Federal and State cases, it is likely that there 
would also be an additional 501 State cases filed that do not settle on 
class basis, whose cost the Bureau does not estimate due to the lack of 
nationally representative data; however, these cases would likely be 
significantly cheaper for providers.\607\
---------------------------------------------------------------------------

    \607\ For the sensitivity analysis using market share prevalence 
data for checking account and credit card markets, the results are 
additional 530 Federal class cases that do not settle on class basis 
result in $130 million in costs to providers.
---------------------------------------------------------------------------

    The Bureau believes that the calculation above might be an 
overestimate of time spent on such cases because both defendant's and 
plaintiff's attorneys frequently come to the conclusion, relatively 
early in the case, that the case will not result in a class settlement. 
Once such a conclusion is reached, the billable hours incurred by 
either side (in particular the defense) are likely significantly lower 
than for a case that is headed towards a class settlement, even if the 
final outcome of the two cases might be achieved in comparable calendar 
time. Similarly, many cases are resolved before discovery or motions on 
the pleadings; such cases are cheaper to litigate. In other words, at 
some point early in many putative class actions, the case becomes 
effectively an individual case (in terms of how the parties and their 
counsel treat the stakes of it), and from that point on, its cost 
should be comparable to the cost of an individual case (as opposed to a 
case settled on a classwide basis). The calculation above assumes that 
this point of transition to an individual case is the last day of the 
case.
    In contrast, the opposite assumption is that from the first day of 
the case the parties (in particular, the defense) know that the case is 
not going to be settled on a classwide basis. Using this assumption, 
the 501 cases cost as much to defend as 501 individual cases. Using 
$15,000 per individual case as a defense cost estimate, the cost of 
these 501 cases would be approximately $8 million per year.\608\ Thus, 
the Bureau believes that the correct estimate is somewhere between $8 
and $76 million per year. For the purposes of clearer presentation, the 
Bureau conservatively presents the $76 million number in the table 
below.
---------------------------------------------------------------------------

    \608\ While the $15,000 figure is hard to estimate, this 
estimate is consistent with data received from one of the SERs 
during the SBREFA process. See SBREFA Panel Report, supra note 332 
at 18.
---------------------------------------------------------------------------

    The Bureau notes that for several markets the estimates of 
additional Federal class action settlements are low.\609\ These low 
estimates could reflect some combination of the following four 
possibilities. First, as noted above, in some markets class actions are 
more commonly filed in state courts. Second, it is possible that in 
some markets, where there is less uncertainty, additional investment in 
compliance might result in no class actions filed.\610\ Third, in some 
markets, by their nature, there will be few claims that can proceed as 
class actions, regardless of arbitration agreements, because there are 
not common issues that are predominant or because the market is highly 
dispersed. Fourth, in some markets the current prevalence of 
arbitration agreements is so high (over 80 percent) that any estimates 
are especially imprecise.
---------------------------------------------------------------------------

    \609\ As further discussed in Part IX below, a number of other 
markets are covered, but not sufficiently affected to the point that 
the Bureau would estimate the number of affected persons. The Bureau 
likewise does not generally include rows in the Federal class 
settlement estimate table for those markets.
    \610\ Although as the Bureau's estimates suggest, this is 
unlikely to be the case in many markets.

---------------------------------------------------------------------------

[[Page 32909]]

[GRAPHIC] [TIFF OMITTED] TP24MY16.000

    The Bureau notes that providers might attempt to manage the risks 
of increased class litigation exposure by opting for more comprehensive 
insurance coverage or a higher reimbursement limit. However, the

[[Page 32910]]

Bureau is not able to model the impacts of insurance in providers' 
response to the proposed rule. During the Small Business Review Panel, 
the SERs reported that it often is not clear to them which type of 
class litigation exposure a policy covers nor was it clear that 
providers typically ask about this sort of coverage. The SERs explained 
that their coverage is often determined on a more specialized case-by-
case basis that limits at least small providers' ability to plan ahead. 
Larger firms may have more sophisticated policies and more systematic 
understanding of their coverage, however, or they may self-insure. 
Finally, the insurance providers might require at least some of the 
changes to compliance and products discussed above as a prerequisite 
for coverage or for a discounted premium.
Covered Persons' Costs Due to the Administrative Change Expense
    Providers that currently have arbitration agreements (or who 
purchase contracts with arbitration agreements that do not include the 
Bureau's language) would also incur administrative expenses to make the 
one-time change to the arbitration agreement itself (or a notice to 
consumers concerning the purchased contract). Providers are likely to 
incur a range of costs related to these administrative requirements.
    The Bureau believes that providers that currently have arbitration 
agreements would manage and incur these costs in one of three ways. 
First, the Bureau believes that some providers rely exclusively on 
third-party contract forms providers with which they already have a 
relationship, and for these providers the cost of making the required 
changes to their contracts is negligible (e.g., downloading a compliant 
contract from the third party's Web site, with the form likely being 
either inexpensive or free to download).
    Second, there might be providers that perform an annual review of 
the contracts they use with consumers. As a part of that review 
(provided it comes before the proposed rule becomes effective), they 
would either revise their arbitration agreements or delete them, 
whether or not most of these contracts are supplied by third-party 
providers. For these providers, it is also unlikely that the proposed 
rule would cause considerable incremental expense of changing or taking 
out the arbitration agreement insofar as they already engage in a 
regular review, as long as this review occurs before the rule becomes 
effective.
    Third, there are likely to be some providers that use contracts 
that they have highly customized to their own needs (relative to the 
first two categories above) and that might not engage in annual 
reviews. These would require a more comprehensive review in order to 
either change or remove the arbitration agreement.
    The Bureau believes that smaller providers are likely to fall into 
the first category. The Bureau believes that the largest providers 
would fall into either the second or the third category. On average 
across all categories, the Bureau believes that the average provider's 
expense for the administrative change to be about $400. This consists 
of approximately one hour of time from a staff attorney or a compliance 
person and an hour of supporting staff time. Given the Bureau's 
estimate of approximately 48,000 providers that use arbitration 
agreements,\611\ the proposal's required contractual change would 
result in a one-time cost of $19 million, or about $4 million per year 
total for all providers if amortized over five years.\612\ 
Alternatively, providers might choose to drop arbitration agreements 
altogether, potentially resulting in lower administrative costs.
---------------------------------------------------------------------------

    \611\ See the Regulatory Flexibility Analysis below at Part IX. 
The Bureau estimates that 4,500 debt collectors would be subject to 
the rule but would not incur this cost because they do not act as 
the original provider of consumer financial products and services, 
and thus are unlikely to have contracts directly with the consumers 
with whom they interact.
    \612\ Some providers have multiple contracts: For example, some 
of the credit card issuers have filed dozens of contracts with the 
Bureau, see http://www.consumerfinance.gov/credit-cards/agreements/. 
Presumably, the marginal cost of changing each additional contract 
would be minimal, as long as each of the contracts used the same 
dispute resolution clause.
---------------------------------------------------------------------------

    In addition to the one-time change described directly above, some 
providers could be affected on an ongoing or sporadic basis in the 
future as they acquire existing contracts as the result of regular or 
occasional activity, such as a merger. Under proposed Sec.  
1040.4(a)(2), that would require providers who become a party to an 
existing contract with a pre-dispute arbitration agreement that does 
not already contain the language mandated by proposed Sec.  
1040.4(a)(2) to amend the agreement to include that provision, or send 
the consumer a notice indicating that the acquirer would not invoke 
that pre-dispute arbitration agreement in a class action.\613\ Various 
markets might incur different costs due to this proposed requirement.
---------------------------------------------------------------------------

    \613\ The Bureau believes that medical debt buyers would be the 
most affected by this provision.
---------------------------------------------------------------------------

    For example, buyers of medical debt could incur additional costs 
due to additional due diligence they would undertake to determine which 
acquired debts arise from consumer credit transactions (that would be 
subject to the proposed rule), or alternatively by the additional 
exposure created from sending consumer notices on debts that did not 
arise from credit transactions (i.e., potential over-compliance). The 
Bureau does not believe that the cost of sending such a notice would be 
burdensome to the buyers of medical debt. In particular, the Bureau 
believes that medical debt buyers typically send out a notice to the 
consumer upon acquisition of debt due to requirements of 15 U.S.C. 
1692(g), when applicable. The Bureau believes that these debt buyers 
could attach the additional notice that would be required by the 
proposed rule to this required FDCPA notice with a minimal increase in 
costs.
    Indirect auto lenders might face a somewhat different impact. While 
a loan purchased from an auto dealer would be from a credit 
transaction, the dealer's contract might contain an arbitration 
agreement that does not include the language specified by the Bureau 
because the dealer would not be a provider under the rule. However, the 
Bureau believes that because dealers would be aware that their partner 
indirect auto lenders would be subject to the proposed rule, it is 
likely that dealers would voluntarily change their contracts to 
streamline the process for indirect auto lenders.
Costs to Covered Persons From the Proposed Requirements Regarding 
Submission of Arbitral Records
    There would also be a minor cost related to the proposed rule's 
requirements regarding sending records to the Bureau related to 
providers' arbitrations. In the Study, the Bureau documented 
significantly fewer than 1,000 individual arbitrations per year.\614\ 
Given that the proposed rule's requirements would involve sending 
records related to a particular arbitration to the Bureau, it is 
unlikely that the transmittal requirement would impose a cost of more 
than $100 per arbitration--a conservative estimate for the time 
required to copy or scan the documents, locate the address where to 
send the documents, and any postage costs. To the extent covered 
persons would be required to redact specific identifiers (such as name, 
physical and email

[[Page 32911]]

address, phone number, account number, and social security number), 
this cost might increase, conservatively, by a few hundred dollars on 
average due to the time to train the staff on the specific identifiers 
and the time to redact the documents, for each arbitration.\615\ Thus, 
the total cost of the proposed arbitration submission requirements is 
unlikely to reach $1 million per year given the current frequency of 
individual arbitrations. Moreover, these costs could be lower to the 
extent that providers decide not to use arbitration agreements in 
response to the rule.
---------------------------------------------------------------------------

    \614\ See generally Study, supra note 2, section 5. Relatedly, 
JAMS (the second largest provider of consumer arbitrations) reported 
about 114 consumer financial products or services arbitrations in 
2015.
    \615\ One of the SERs on the SBREFA Panel projected 2 to 6 hours 
of staff time. See SBREFA Panel Report, supra note 332 at 25.
---------------------------------------------------------------------------

Potential Pass-Through of Costs to Consumers
    The Bureau believes that most providers would pass through at least 
portions of some of the costs described above to consumers. This pass-
through can take multiple forms, such as higher prices to consumers or 
reduced quality of the products or services they provide to consumers. 
The rate at which firms pass through changes in their marginal costs 
onto prices (or interest rates) charged to consumers is called the 
pass-through rate.\616\
---------------------------------------------------------------------------

    \616\ In some markets the provider does not have a direct 
relationship with the consumer, and thus the pass-through if any 
will be indirect. In other markets, providers are already charging a 
price at the usury limit, and thus would not be able to pass through 
any cost onto price.
---------------------------------------------------------------------------

    A pass-through rate of 100 percent means that an increase in 
marginal costs would not be absorbed by the providers, but rather would 
be fully passed through to the consumers.\617\ Conversely, a pass-
through rate of 0 percent would mean that consumers would not see a 
price increase due to the proposal. As noted above, the monetized 
estimates of additional Federal class settlements above amount to less 
than one dollar per account per year when averaged across markets 
(however, it is possible that the number is higher for some markets). 
Thus, even 100 percent pass-through of the monetized costs of 
additional Federal class settlements in every market would result in an 
increase in prices of under one dollar per account per year when 
averaged across all markets.
---------------------------------------------------------------------------

    \617\ Even where providers pass on 100 percent of their costs, 
they may lose volume and thus experience lower profits. With regard 
to the proposal, however, in markets where arbitration agreements 
are extremely widespread, this would depend on the extent to which 
the market's aggregate demand curve is elastic. In other words, the 
entities' profits would decrease in proportion to the fraction of 
consumers who would stop buying the consumer financial products or 
services if most or all firms were to increase their prices at the 
same time. The Bureau is unaware of reliable estimates of this 
elasticity for the covered markets, with the exception of the credit 
card market, where such a loss would unlikely be significant given 
the likely modest per-consumer magnitude of the marginal cost 
increase. See David Gross & Nicholas Souleles, Do Liquidity 
Constraints and Interest Rates Matter for Consumer Behavior? 
Evidence from Credit Card Data, 149 Q. J. of Econ. 117 (2002). To 
the extent that credit cards and mortgages are indicative of other 
markets for consumer financial products and services, this effect is 
unlikely to be significant. See, e.g., Andreas Fuster & Basit Zafar, 
The Sensitivity of Housing Demand to Financing Conditions: Evidence 
from a Survey (Fed. Reserve Board of N.Y.C., Staff Rept. No. 702, 
2015), available at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2535912.
---------------------------------------------------------------------------

    Determining the extent of pass-through involves evaluating a trade-
off between volume of business and margin (the difference between price 
and marginal cost) on each customer served. Any amount of pass-through 
increases price, and thus lowers volume. A pass-through rate below 100 
percent means that a firm's margin per customer is lower than it was 
before the provider had to incur the new cost. Economic theory suggests 
that, without accounting for strategic effects of competition, the 
pass-through rate ends up somewhere in between the two extremes of: (1) 
No pass-through (and thus completely preserving the volume at the 
expense of lowering margin) and (2) full pass-through (completely 
preserving the margin at the expense of lowering volume).\618\ For a 
case of a monopolist with a linear demand function (a price increase of 
a dollar results in the same change in quantity demanded regardless of 
the original price level) and constant marginal cost (each additional 
unit of output costs the same to produce as the previous unit), the 
theory predicts a pass-through rate of 50 percent. The rate would be 
higher or lower depending on how demand elasticity and economies of 
scale change with higher prices and lower outputs.\619\ To the extent 
that a provider's fixed costs change, economic theory indicates that 
the profit-maximizing response is not to pass that change onto prices.
---------------------------------------------------------------------------

    \618\ It is theoretically possible to have a pass-through rate 
of over 100 percent, even without accounting for strategic effects 
of competition. These strategic effects tend to drive up the pass-
through rate even higher. See, e.g., Jeremy Bulow & Paul Pfleiderer, 
A Note on the Effect of Cost Changes on Prices, 91 J. of Polit. 
Econ. 182(1983),); Rajeev Tyagi, A Characterization of Retailer 
Response to Manufacturer Trade Deals, 36 J. of Mktg. Res. 510 
(1999); E. Glen Weyl & Michal Fabinger, Pass-Through as an Economic 
Tool: Principles of Incidence under Imperfect Competition, 121 J. of 
Pol. Econ. 528 (2013); Alexei Alexandrov & Sergei Koulayev, Using 
the Economics of the Pass-Through in Proving Antitrust Injury in 
Robinson-Patman Cases, 60 Antitrust Bull. 345 (2015).
    \619\ In other words, these rates depend on curvatures 
(concavity/convexity) of cost and demand functions.
---------------------------------------------------------------------------

    Economic theory does not provide useful guidance about what the 
magnitude of the pass-through of marginal cost is likely to be with 
regard to the proposed rule. The Bureau believes that providers might 
treat the administrative costs as fixed. Whether the costs due to 
additional compliance are marginal depends on the exact form of this 
spending, but most examples discussed above would likely qualify as 
largely fixed. The Bureau believes that providers might treat a large 
fraction of the costs of additional class litigation as marginal: 
Payments to class members, attorney's fees (both defendant's and 
plaintiff's), and the cost of putative class cases that do not settle 
on a class basis. The extent to which these marginal costs are likely 
to be passed through to consumers cannot be reliably predicted, 
especially given the multiple markets affected. Empirical studies are 
mostly unavailable for the markets covered. Empirical studies for other 
products, mainly consumer package goods and commodities, do not produce 
a single estimate.\620\
---------------------------------------------------------------------------

    \620\ See, e.g., RBB Economics, Cost Pass-Through: Theory, 
Measurement, and Potential Policy Implications, A Report Prepared 
for the Office of Fair Trading, (Feb. 2014), available at https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/320912/Cost_Pass-Through_Report.pdf.
---------------------------------------------------------------------------

    The available pass-through estimates for the consumer financial 
products or services are largely for credit cards, where older 
literature found pass-through rates of close to 0 percent.\621\ More 
recently, researchers have analyzed the effects of regulation that 
effectively imposed price ceilings on late payment and overlimit fees 
on credit cards and interchange fees on debit cards. These researchers, 
by-and-large, found evidence consistent with low to non-existent pass-
through rates in these markets.\622\ However, these

[[Page 32912]]

findings do not necessarily imply low pass-through in other markets 
that would be affected by the proposed rule, as providers in different 
markets are likely to face cost and demand curves of different 
curvatures.
---------------------------------------------------------------------------

    \621\ See Lawrence Ausubel, The Failure of Competition in the 
Credit Card Market, 81 a.m. Econ. Rev. 50 (1991); but see Todd 
Zywicki, The Economics of Credit Cards, 3 Chap. L. Rev. 79 (2000); 
Daniel Grodzicki, Competition and Customer Acquisition in the U.S. 
Credit Card Market (Working Paper, 2015), available at: https://editorialexpress.com/cgi-bin/conference/download.cgi?db_name=IIOC2015&paper_id=308.
    \622\ See Sumit Agarwal, Souphala Chomsisengphet, Neale Mahoney 
& Johannes Stroebel, Regulating Consumer Financial Products: 
Evidence from Credit Cards, 130 Q. J. of Econ. 1 (2015); Benjamin 
Kay, Mark Manuszak & Cindy Vojtech, Bank Profitability and Debit 
Card Interchange Regulation: Bank Responses to the Durbin Amendment 
(Fed. Reserve Board, Working Paper No. 2014-77, 2014), available at 
http://www.federalreserve.gov/econresdata/feds/2014/files/201477pap.pdf. But see Todd Zywicki, Geoffrey Manne & Julian Morris, 
Price Controls on Payment Card Interchange Fees: The U.S. 
Experience, (Geo. Mason L. & Econ., Research Paper No. 14-18, 2014), 
available at http://papers.ssrn.com/sol3/Papers.cfm?abstract_id=2446080.
---------------------------------------------------------------------------

    More directly related to the proposal, the Study analyzed the 
effect on prices of several large credit card issuers agreeing to drop 
their arbitration agreements for a period of time as a part of a class 
settlement.\623\ The Bureau did not find a statistically significant 
effect on the prices that these issuers charged subsequent to the 
contract changes, relative to other large issuers that did not have to 
drop their arbitration agreements. To the extent that this finding 
implies low or non-existent price increases, it could be due to several 
reasons other than a low general industry pass-through rate. For 
example, issuers may have priced as if the expected litigation exposure 
was a fixed cost or as if most of the cost was expected to be due to 
investment in more compliance (and would be treated as a fixed 
cost).\624\ The result also might not be representative for other 
issuers.
---------------------------------------------------------------------------

    \623\ See generally Study, supra note 2, section 10.
    \624\ See Study, supra note 2, section 10 (for other caveats to 
this analysis). See also Alexei Alexandrov, Making Firms Liable for 
Consumers' Mistaken Beliefs: Theoretical Model and Empirical 
Applications to the U.S. Mortgage and Credit Card Markets, Soc. Sci. 
Res. Network (Sept. 22, 2015).
---------------------------------------------------------------------------

C. Potential Benefits and Costs to Consumers

Potential Benefits to Consumers
    Consumers would benefit from the proposed class rule to the extent 
that providers would have a larger incentive to comply with the law; 
from the class payments in any class settlement that occurs due to a 
provider not being able to invoke an arbitration agreement in a class 
proceeding; and, from any new compliance with the law they experience 
as a result of injunctive relief in a settlement or as a result of 
changes in practices that the provider adopts in the wake of the 
settlement to avoid future litigation.\625\
---------------------------------------------------------------------------

    \625\ See Part VI for a related discussion.
---------------------------------------------------------------------------

    Consumer benefits due to providers' larger incentive to comply with 
the law are directly related to the aforementioned investments by 
providers to reduce class litigation exposure. Specifically, consumers 
would benefit from the forgone harm resulting from fewer violations of 
law. A full catalog of how all laws applicable to affected products 
benefit consumers when they are followed is far beyond the scope of 
this analysis. However, a few examples of types of benefits are 
offered. These benefits could take a form that is easier to monetize--
for example, a credit card issuer voluntarily discontinuing (or not 
initiating) a charge to consumers for a service that generates $1 of 
benefit to consumers for every $10 paid by consumers; a depository 
ceasing to charge overdraft fees with respect to transactions for which 
the consumer has sufficient funds on deposit at the time the 
transaction settles to cover the transaction; or, a lender ceasing to 
charge higher rates to minority than non-minority borrowers. Or this 
could take a form that is harder to monetize--for example, a debt 
collector investing more in insuring that the correct consumers are 
called and in complying with various provisions limiting certain types 
of contacts and calls under the FDCPA and TCPA; or, a creditor taking 
more time to assure the accuracy of the information furnished to a 
credit reporting agency or to investigate disputes of that information.
    Just as the Bureau is unable to quantify and monetize the 
investment that providers would undertake to lower their exposure to 
class litigation, the Bureau is unable to quantify and monetize the 
extent of the consumer benefit that would result from this investment, 
or particular subcategories of investment such as improving 
disclosures, improving compliance management systems, expanding staff 
training, or other specific activities. The Bureau requests comment on 
any representative data sources that could assist the Bureau in both of 
these quantifications.
    Consumers would also benefit from class payments that they receive 
from settlements of additional class actions. According to the 
calculation above, this benefit would be on the order of $342 million 
per year for Federal class settlements, and an unquantified amount in 
State court settlements.\626\
---------------------------------------------------------------------------

    \626\ As noted above, the calculation depends on many 
assumptions, and thus there are many reasons for why this number 
might be considerably higher or considerably lower.
---------------------------------------------------------------------------

    Moreover, as noted above as well, the Bureau believes that there 
would also be significant benefits to consumers when settlements 
include in-kind and injunctive relief.\627\ This relief can affect 
consumers beyond those receiving monetary remediation, including for 
example future customers of the provider or customers who fall outside 
of the class action but will stand to benefit from the injunctive 
relief. The Bureau is not aware of a consistent method of quantifying 
the total amounts of additional in-kind and injunctive relief from the 
approximately 103 additional Federal class settlements per year and a 
similar number of additional State class settlements.\628\ The Bureau 
requests comment on whether the extent of this benefit, and the 
associated cost to providers, could be monetized, and if so how.
---------------------------------------------------------------------------

    \627\ In a market with transaction costs (not subject to the 
Coase Theorem), the value of behavioral relief to consumers could be 
either roughly equal, higher or lower that the value to firms.
    \628\ One easier quantification to make is in the class 
settlement analysis in Section 8 of the Study where 13 percent of 
the settlements featured behavioral relief and 6 percent featured 
in-kind relief. Accordingly, out of the additional 103 cases, a 
reasonable quantification is that 13 percent will feature behavioral 
relief and 6 percent will feature in-kind relief. As noted above, 
while the Study quantified $644 million of in-kind relief, that 
number is included in relief, but not in payments in the Study, and 
the Bureau continues to follow this approach here, both for the 
calculation of costs to providers and benefits to consumers. 
Similarly, as noted above, the Study did not include promises to 
obey the law going forward as specific enough to count toward 
behavioral relief, suggesting that injunctive relief overall is 
likely higher.
---------------------------------------------------------------------------

Potential Costs to Consumers
    The cost to consumers is mostly due to the aforementioned pass-
through by providers, to the extent it occurs, as discussed above. The 
Bureau does not repeat this general discussion here.
    A second possible impact could occur if some providers decide to 
remove arbitration agreements entirely from their contracts, although 
there is no empirical basis to determine the proportion of providers 
that would do so. Assuming that some providers would remove these 
agreements, some consumers who can currently resort to arbitration for 
filing claims against providers would no longer be able to do so if the 
provider is unwilling to engage in post-dispute arbitration. The Bureau 
is unable to determine empirically whether individual arbitration is 
more beneficial to consumers than individual litigation, and if so the 
magnitude of the additional consumer benefit of arbitration.\629\ 
However, given that the

[[Page 32913]]

Study found only several hundred individual arbitrations per year 
involving consumer financial products or services, the Bureau believes 
that the magnitude of consumer benefit, if any, of individual 
arbitration over individual litigation would need to be implausibly 
large for some, or even all, providers that eliminated their 
arbitration agreements to make a noticeable difference to consumers in 
the aggregate.
---------------------------------------------------------------------------

    \629\ See Study, supra note 2, section 6 at 2. Existing 
empirical evidence compiled by scholars prior to the Study mainly 
concerns employment, franchisee, and security arbitrations (note 
that FINRA rules require an option of class action in any 
arbitration agreement). The Bureau does not believe that these data 
are necessarily applicable to consumer financial products and 
services. Even that evidence is also largely inconclusive. See, 
e.g., Theodore Eisenberg & Elizabeth Hill, Arbitration and 
Litigation of Employment Claims: An Empirical Comparison, 58 Disp. 
Res. J. 44 (2004) (finding no statistical differences in a variety 
of outcomes between individual arbitration and individual 
litigation). See also Peter Rutledge, Whither Arbitration?, 6 Geo. 
J. of L. & Pub. Pol'y 549 at 557-9, (2008) (discussing several 
studies that compared outcomes in individual arbitration and 
individual litigation, typically showing comparable outcomes in the 
two fora). The Bureau notes that these and other similar comparative 
studies should be interpreted carefully for reasons stated in the 
Study. See Study, supra note 2, section 6 at 2-5.
---------------------------------------------------------------------------

    In short, if a consumer initiates a formal dispute relating to a 
consumer financial product or service, it is possible that the consumer 
would fare somewhat better in individual arbitration than in individual 
litigation.\630\ However, in practice, this comparison is not material 
for the analysis of consumer benefits and costs since consumers do not 
initiate formal individual disputes involving consumer financial 
products or services in notable numbers in any forum: The Bureau 
documented hundreds of individual arbitrations versus millions of 
consumers receiving relief through class actions.\631\
---------------------------------------------------------------------------

    \630\ Similarly, it is possible that the consumer would fare 
somewhat worse in individual arbitration than in individual 
litigation.
    \631\ If anything, the Study shows considerably more individual 
litigation (in Federal and in small claims courts) than individual 
arbitration. See generally, Study, supra note 2, sections 5 and 6.
---------------------------------------------------------------------------

    Moreover, the stakeholder feedback that the Bureau has received so 
far suggests that if any provider dropped arbitration agreements 
entirely, the decision could be a result of the provider not finding it 
cost-effective to support a dual-track system of litigation (on a class 
or putative class basis) and individual arbitrations. However, the 
Study shows that providers often do not invoke arbitration agreements 
in individual lawsuits,\632\ and thus providers are already operating 
in such a dual-track system. Thus, the Bureau lacks sufficient 
information to believe that most, or even any, providers would indeed 
drop arbitration agreements altogether rather than adopting the 
Bureau's language if the rule is finalized as proposed. The Bureau 
requests comment on both providers' incentives to drop arbitration 
agreements altogether and on quantification of consumer benefit or cost 
of individual arbitration over and above individual litigation.
---------------------------------------------------------------------------

    \632\ Study, supra note 2, section 1 at 15.
---------------------------------------------------------------------------

    As discussed above, at least some providers might decide that a 
particular feature of a product makes the provider more susceptible to 
class litigation, and therefore the provider would decide to remove 
that feature from the product. A provider might make this decision even 
if that feature is actually beneficial to consumers and does not result 
in legal harm to consumers. In this case, consumers would incur a cost 
due to the provider's over-deterrence with respect to this particular 
decision. The Bureau is not aware of any data showing this theoretical 
phenomenon (over-deterrence) to be prevalent among providers who 
currently do not have an arbitration agreement or likely among 
providers who would be required to forgo using their arbitration 
agreement to block class actions. The Bureau requests comment on the 
extent of this phenomenon in the context of the proposed rule, and it 
specifically requests data and suggestions about how to quantify both 
the prevalence of this phenomenon and the magnitude of consumer harm if 
the phenomenon exists.

D. Impact on Depository Institutions With No More Than $10 Billion in 
Assets

    The prevalence of arbitration agreements for large depository 
institutions is significantly higher than that for smaller depository 
institutions.\633\ Moreover, while more than 90 percent of depository 
institutions have no more than $10 billion in assets, about one in five 
of the class settlements with depository institutions in the Study 
involved depository institutions under this threshold (approximately 
one class settlement per year). The magnitude of these settlements, 
measured by payments to class members, was also considerably smaller 
than settlements with institutions above the threshold: The aggregated 
documented payments to class members from all cases that involve 
depository institutions with less than $10 billion in assets was under 
$2 million over the five years analyzed in the Study.
---------------------------------------------------------------------------

    \633\ See generally Study, supra note 2, sections 2.
---------------------------------------------------------------------------

    Thus, using the same method discussed above to estimate additional 
class settlements (and putative class cases) among depository 
institutions with no more than $10 billion in assets suggests that the 
proposed rule would have practically no effect that could be monetized. 
Specifically, the calculation predicts approximately one additional 
Federal class settlement and about three putative Federal class cases 
over five years involving depositories below the $10 billion threshold 
if the proposed rule is finalized.
    However, there might be other ways in which impacts on smaller 
depository institutions, and smaller providers in general, would differ 
from impacts on larger providers. The Bureau describes some of these in 
this Section 1022(b)(2) Analysis.
    One possibility might be that the managers of smaller providers 
(depository institutions or otherwise) are sufficiently risk averse, or 
generally sensitive to payouts, such that putative class actions have 
an in terrorem effect. To the extent this occurs, small providers may 
settle any such additional lawsuits for more than the expected value of 
an award if the case were likely to be certified as a class case and go 
to trial. However, the Study found that it is most common for class 
action settlements to be reached before a court has certified a case as 
a class case. Moreover, as noted above, the amount of any such 
settlement should be lower for smaller providers given the smaller 
magnitude of the case and the lower number of consumers affected. In 
addition, as noted above, the Bureau estimates the number of additional 
class lawsuits in general against small depository institutions to be 
extremely low. In particular, the Bureau believes that out of the 312 
cases (over five years) that are used for the estimates of the impact 
on the number of Federal class settlements, about one Federal class 
settlement per year involved smaller institutions (either depository or 
non-depositories) paying over $1,000,000 to class members.
    There is a significant amount of academic finance literature 
suggesting that management should not be risk averse, unless the case 
involves a possibility of a firm going bankrupt in case of a loss.\634\ 
However, management of smaller providers, regardless of whether they 
are depository institutions, might be more risk averse because their 
shareholders or owners might be less diversified.
---------------------------------------------------------------------------

    \634\ See, e.g., Clifford Smith & Ren[eacute] Stulz, The 
Determinants of Firms' Hedging Policies, 20 J. Fin. & Quantitative 
Analysis 391 (1985).
---------------------------------------------------------------------------

    The bargaining theory literature generally suggests that the party 
with deeper pockets and relatively less at stake will be the party that 
gets the most out of the settlement.\635\ It follows that smaller 
defendants might fare worse in

[[Page 32914]]

terms of the settlements relative to their larger peers, all else being 
equal. However, from anecdotal evidence, the Bureau believes that, if 
the smaller defendants are sued at all, they are likely to be sued by 
smaller law firms. This could equalize bargaining power (as a smaller 
law firm might not be able to afford to be too aggressive even in a 
single proceeding) or tilt bargaining power more to a smaller 
defendant's side relative to their larger peers defending against 
larger law firms.
---------------------------------------------------------------------------

    \635\ More generally, economic theory suggests that the side 
that is more patient is going to get a better deal, all else being 
equal. For the canonical economic model of bargaining, see Ariel 
Rubinstein, Perfect Equilibrium in a Bargaining Model, 50 
Econometrica 97 (1982).
---------------------------------------------------------------------------

    Finally, given the considerably lower frequency of class litigation 
for smaller providers, it is possible that it is not worth the cost for 
smaller providers to invest in lowering class litigation exposure. This 
might also explain the relatively lower frequency of arbitration 
agreement use by smaller depositories.

E. Impact on Rural Areas

    Rural areas might be differently impacted to the extent that rural 
areas tend to be served by smaller providers, as discussed above with 
regard to depository institutions with less than $10 billion in assets 
and below with regard to providers of all types that are below certain 
thresholds for small businesses. In addition, markets in rural areas 
might also be less competitive. Economic theory suggests that less 
competitive markets would have lower pass-through with all else being 
equal; therefore, if there were any price increase due to the proposed 
rule, it would be lower in rural areas.\636\
---------------------------------------------------------------------------

    \636\ See Weyl and Fabinger, supra note 618 and Alexandrov and 
Koulayev, supra note 618.
---------------------------------------------------------------------------

F. Impact on Access to Consumer Financial Products and Services

    Given hundreds of millions of accounts across affected providers 
and the numerical estimates of costs above, the expected additional 
marginal costs due to additional Federal class settlements to providers 
are likely to be negligible in most markets. Each of the product 
markets affected has hundreds of competitors or more. Thus, the Bureau 
does not believe that this proposed rule would result in a noticeable 
impact on access to consumer financial products or services.
    The Bureau does not believe that access to consumer financial 
products or services would be diminished due to effects on providers' 
continuing viability or, as discussed below in Part IX, due to effects 
on providers' access to credit to facilitate the operation of their 
businesses. It is possible that consumers might experience temporary 
access concerns if their particular provider was sued in a class 
action. These concerns might become permanent if such litigation 
significantly depleted the provider's financial resources, potentially 
resulting in the provider exiting the market.
    Of course, the incentive for a class counsel to pursue a case to 
the point where it would cause a defendant's bankruptcy is low because 
this would leave little, or no, resources from which to fund a remedy 
for consumers in a class settlement or any fees for the class counsel 
and could make the process longer. In addition, the potential consumers 
of this provider presumably have the option of seeking this consumer 
financial product or service from a different company that is not 
facing a class action, and thus a bankruptcy scenario is substantially 
more of an issue for the particular provider affected than for the 
provider's consumers. Moreover, especially given the low prevalence of 
cases against smaller providers outlined above and the amounts of 
documented payments to class members, the Bureau does not believe that 
out of the Federal class settlements analyzed in the Study, many 
settlements threatened the continued existence of the defendant and the 
resulting access to credit.

IX. Regulatory Flexibility Analysis

    The Regulatory Flexibility Act (RFA) generally requires an agency 
to conduct an initial regulatory flexibility analysis (IRFA) and a 
final regulatory flexibility analysis (FRFA) of any rule subject to 
notice-and-comment rulemaking requirements.\637\ These analyses must 
``describe the impact of the proposed rule on small entities.'' \638\ 
An IRFA or FRFA is not required if the agency certifies that the 
proposed rule will not have a significant economic impact on a 
substantial number of small entities.\639\ The Bureau also is subject 
to certain additional procedures under the RFA involving the convening 
of a panel to consult with small entity representatives prior to 
proposing a rule for which an IRFA is required.\640\
---------------------------------------------------------------------------

    \637\ 5 U.S.C. 601, et seq.
    \638\ 5 U.S.C. 603(a). For purposes of assessing the impacts of 
the proposed rule on small entities, ``small entities'' is defined 
in the RFA to include small businesses, small not-for-profit 
organizations, and small government jurisdictions. 5 U.S.C. 601(6). 
A ``small business'' is determined by application of Small Business 
Administration regulations and reference to the North American 
Industry Classification System (NAICS) classifications and size 
standards. 5 U.S.C. 601(3). A ``small organization'' is any ``not-
for-profit enterprise which is independently owned and operated and 
is not dominant in its field.'' 5 U.S.C. 601(4). A ``small 
governmental jurisdiction'' is the government of a city, county, 
town, township, village, school district, or special district with a 
population of less than 50,000. 5 U.S.C. 601(5).
    \639\ 5 U.S.C. 605(b).
    \640\ 5 U.S.C. 609.
---------------------------------------------------------------------------

    The Bureau is not certifying that the proposed rule would not have 
a significant economic impact on a substantial number of small entities 
within the meaning of the RFA. Accordingly, the Bureau convened and 
chaired a Small Business Review Panel under the Small Business 
Regulatory Enforcement Fairness Act (SBREFA) to consider the impact of 
the proposed rule on small entities that would be subject to that rule 
and to obtain feedback from representatives of such small entities. The 
Small Business Review Panel for this proposed rule is discussed in the 
SBREFA Panel Report.
    Among other things, this IRFA estimates the number of small 
entities that will be subject to the proposed rule and describes the 
impact of the proposed rule on those entities. Throughout this IRFA, 
the Bureau draws on the Section 1022(b)(2) Analysis above.
    Despite not certifying that the proposed rule would not have a 
significant economic impact on a substantial number of small entities 
at this time, the Bureau believes that the arguments and calculations 
outlined both in the Section 1022(b)(2) Analysis, as well as the 
arguments and calculations that follow, strongly suggest that the 
proposed rule would indeed not have a significant economic impact on a 
substantial number of small entities in any of the covered markets. The 
Bureau is requesting comment on the assumptions and methodology used, 
and on potential certification if the proposed rule is finalized.
    In preparing this proposed rule and this IRFA, the Bureau has 
carefully considered the feedback from the SERs participating in the 
SBREFA process and the findings and recommendations in the SBREFA Panel 
Report. The Section-by-Section analysis of the proposed rule, above in 
Part VII, and this IRFA discuss this feedback and the specific findings 
and recommendations of the Small Business Review Panel, as applicable. 
The SBREFA process provided the Small Business Review Panel and the 
Bureau with an opportunity to identify and explore opportunities to 
minimize the burden of the proposed rule on small entities while 
achieving the proposed rule's purposes. As in other Bureau's 
rulemakings, it is important to note, however, that the Small Business 
Review Panel prepared the SBREFA Panel Report at a preliminary stage of 
the proposal's development and that the

[[Page 32915]]

SBREFA Panel Report--in particular, the Small Business Review Panel's 
findings and recommendations--should be considered in that light. The 
proposed rule and this IRFA reflect further consideration, analysis, 
and data collection by the Bureau.
    Under RFA section 603(a), an IRFA ``shall describe the impact of 
the proposed rule on small entities.'' \641\ Section 603(b) of the RFA 
sets forth the required elements of this IRFA. Section 603(b)(1) 
requires this IRFA to contain a description of the reasons why action 
by the agency is being considered.\642\ Section 603(b)(2) requires a 
succinct statement of the objectives of, and the legal basis for, the 
proposed rule.\643\ This IRFA further must contain a description of 
and, where feasible, an estimate of the number of small entities to 
which the proposed rule will apply.\644\ Section 603(b)(4) requires a 
description of the projected reporting, recordkeeping, and other 
compliance requirements of the proposed rule, including an estimate of 
the classes of small entities that will be subject to the requirement 
and the types of professional skills necessary for the preparation of 
the report or record.\645\ In addition, the Bureau must identify, to 
the extent practicable, all relevant Federal rules which may duplicate, 
overlap, or conflict with the proposed rule.\646\ Furthermore, the 
Bureau must describe any significant alternatives to the proposed rule 
which accomplish the stated objectives of applicable statutes and which 
minimize any significant economic impact of the proposed rule on small 
entities.\647\ Finally, as amended by the Dodd-Frank Act, RFA section 
603(d) requires that this IRFA include a description of any projected 
increase in the cost of credit for small entities, a description of any 
significant alternatives to the proposed rule which accomplish the 
stated objectives of applicable statutes and which minimize any 
increase in the cost of credit for small entities (if such an increase 
in the cost of credit is projected), and a description of the advice 
and recommendations of representatives of small entities relating to 
the cost of credit issues.\648\
---------------------------------------------------------------------------

    \641\ 5 U.S.C. 603(a).
    \642\ 5 U.S.C. 603(b)(1).
    \643\ 5 U.S.C. 603(b)(2).
    \644\ 5 U.S.C. 603(b)(3).
    \645\ 5 U.S.C. 603(b)(4).
    \646\ 5 U.S.C. 603(b)(5).
    \647\ 5 U.S.C. 603(b)(6).
    \648\ 5 U.S.C. 603(d)(1); Dodd-Frank section 1100G(d)(1).
---------------------------------------------------------------------------

1. Description of the Reasons Why Agency Action Is Being Considered and 
Succinct Statement of the Objectives of, and Legal Basis for, the 
Proposed Rule

    As the Bureau outlined in the SBREFA Panel Report and discussed 
above, the Bureau is considering a rulemaking because it is concerned 
that consumers do not have sufficient opportunity to obtain remedies 
when they are legally harmed by providers of consumer financial 
products and services, because arbitration agreements effectively block 
consumers from participating in class proceedings. The Bureau is also 
concerned that by blocking class actions, arbitration agreements reduce 
deterrent effects and compliance incentives in connection with the 
underlying laws. Finally, the Bureau is concerned about the potential 
for systemic harm if arbitration agreements were to be administered in 
biased or unfair ways. Accordingly, the Bureau is considering proposals 
that would: (1) Prohibit the application of certain arbitration 
agreements regarding consumer financial products or services as to 
class litigation; and (2) require submission of arbitral claims, 
awards, and two other categories of documents to the Bureau. This 
proposed rulemaking is pursuant to the Bureau's authority under 
sections 1022(b) and (c) and 1028 of the Dodd-Frank Act. The latter 
section directs the Bureau to study pre-dispute arbitration agreements 
in connection with the offering or providing of consumer financial 
products or services and authorizes the Bureau to regulate their use if 
the Bureau finds that certain conditions are met.\649\
---------------------------------------------------------------------------

    \649\ 12 U.S.C. 5518(b).
---------------------------------------------------------------------------

2. Description and, Where Feasible, Provision of an Estimate of the 
Number of Small Entities to Which the Proposed Rule Will Apply

    As noted in the SBREFA Panel Report, the Panel identified 22 
categories of small entities that may be subject to the proposed rule. 
These were later narrowed (see discussion and table below with 
estimates of the number of entities in each market). The NAICS industry 
and SBA small entity thresholds for these 22 categories are the 
following:

                                      Table 2--SBA Small Entity Thresholds
----------------------------------------------------------------------------------------------------------------
                    NAICS description                        NAICS code         SBA small business threshold
----------------------------------------------------------------------------------------------------------------
All Other Nondepository Credit Intermediation............          522298  $38.5m in revenue.
All Other Professional, Scientific, and Technical                  541990  $15m in revenue.
 Services.
Collection Agencies......................................          561440  $15m in revenue.
Commercial Banking.......................................          522110  $550m in assets.
Commodity Contracts Dealing..............................          523130  $38.5m in revenue.
Consumer Lending.........................................          522291  $38.5m in revenue.
Credit Bureaus...........................................          561450  $15m in revenue.
Credit Card Issuing......................................          522210  $550m in assets.
Direct Life Insurance Carriers...........................          524113  $38.5m in revenue.
Direct Property and Casualty Insurance Carriers..........          524126  1500 employees.
Financial Transactions Processing, Reserve, and                    522320  $38.5m in revenue.
 Clearinghouse Activities.
Mortgage and Nonmortgage Loan Brokers....................          522310  $7.5m in revenue.
Other Activities Related to Credit Intermediation........          522390  $20.5m in revenue.
Other Depository Credit Intermediation...................          522190  $550m in assets.
Passenger Car Leasing....................................          532112  $38.5m in revenue.
Real Estate Credit.......................................          522292  $38.5m in revenue.
Sales Financing..........................................          522220  $38.5m in revenue.
Truck, Utility Trailer, and RV (Recreational Vehicle)              532120  $38.5m in revenue.
 Rental and Leasing.
Used Car Dealers.........................................          441120  $25m in revenue.
Utilities (including Electric Power Generation,                       221  between $15-$27.5m in revenue or 250-
 Transmission, and Distribution of Electric Power,                          1000 employees.
 Natural Gas, Water/Sewage, and other systems).
Wired Telecommunications Carriers........................          517110  1500 employees.

[[Page 32916]]

 
Wireless Telecommunications Carriers (except Satellite)..          517210  1500 employees.
----------------------------------------------------------------------------------------------------------------

    For purposes of assessing the impacts of the proposals under 
consideration on small entities, ``small entities'' are defined in the 
RFA to include small businesses, small nonprofit organizations, and 
small government jurisdictions that would be subject to the proposals 
under consideration. A ``small business'' is defined by the SBA Office 
of Size Standards for all industries through the NAICS.
    To arrive at the number of entities affected, the Bureau began by 
creating a list of markets that would be covered if the proposals under 
consideration were to be adopted. The Bureau assigned at least one, but 
often several, NAICS codes to each market. For example, while payday 
and other installment loans are provided by storefront payday stores 
(NAICS 522390), they are also provided by other small businesses, such 
as credit unions (NAICS 522120). The Bureau estimated the number of 
small firms in each market-NAICS combination (for example, storefront 
payday lenders in NAICS 522390 would be such a market-NAICS 
combination), and then the Bureau added together all the markets within 
a NAICS code if there is more than one market within a NAICS code, 
accounting for the potential overlaps between the markets (for example, 
probably all banks that provide payday-like loans also provide checking 
accounts, and the Bureau does not double-count them, to the extent 
possible given the data).
    The Bureau first attempted to estimate the number of firms in each 
market-NAICS combination by using administrative data (for example, 
Call Reports that credit unions have to file with the NCUA). When 
administrative data was not available, the Bureau attempted to estimate 
the numbers using public sources, including the Bureau's previous 
rulemakings and impact analyses. When neither administrative nor other 
public data was available, the Bureau used the Census's NAICS numbers. 
The Bureau estimated the number of small businesses according to the 
SBA's size standards for NAICS codes (when such data was 
available).\650\ When the data was insufficient to precisely estimate 
the number of businesses under the SBA threshold, the Bureau based its 
estimate for the number of small businesses on the estimate that 
approximately 95 percent of firms in finance and insurance are 
small.\651\
---------------------------------------------------------------------------

    \650\ The Bureau also used data from the Census Bureau, 
including the Census Bureau's Statistics of U.S. Businesses.
    \651\ See Small Business Administration Office of Size 
Standards, SBA's Size Standards Analysis: An Overview on Methodology 
and Comprehensive Size Standards Review, Presentation of Sharma R. 
Khem at 4 (2011), available athttp://www.gtscoalition.com/wp-content/uploads/2011/07/Size-Stds-Presentation_Dr.-Sharma-SBA.pdf.
---------------------------------------------------------------------------

    NAICS numbers were taken from the 2012 NAICS Manual, the most 
recent version available from the Census Bureau. The data provided 
employment, average size, and an estimate of the number of firms for 
each industry, which are disaggregated by a six-digit ID. Other 
industry counts were taken from a variety of sources, including other 
Bureau rulemakings, internal Bureau data, public data and statistics, 
including published reports and trade association materials, and in 
some cases from aggregation Web sites. For a select number of 
industries, usually NAICS codes that encompass both covered and not 
covered markets, the Bureau estimated the covered market in this NAICS 
code using data from Web sites that aggregate information from multiple 
online sources. The reason the Bureau relied on this estimate instead 
of the NAICS estimate is that NAICS estimates are sometimes too broad. 
For example, the NAICS code associated with virtual wallets includes 
dozens of other small industries, and would overestimate the actual 
number of firms affected by an order of magnitude or more.
    Although the Bureau attempted to account for overlaps wherever 
possible, a firm could be counted several times if it participates in 
different industries and was counted separately in each data source. 
While this analysis removes firms that were counted twice using the 
NAICS numbers, some double counting may remain due to overlap in non-
NAICS estimates. For the NAICS codes that encompass several markets, 
the Bureau summed the numbers for each of the market-NAICS combinations 
to produce the table of affected firms.
    In addition to estimating the number of providers in the affected 
markets, the Bureau also estimated the prevalence of arbitration 
agreements in these markets. The Bureau first attempted to estimate the 
prevalence of arbitration agreements in each market using public 
sources. However, this attempt was unsuccessful.\652\ For the markets 
covered in Section 2 of the Study that provided data on prevalence of 
arbitration agreements, the Bureau uses the numbers from the Study. The 
Bureau contacted trade associations to obtain supplemental data for the 
markets that were not covered in Section 2 of the Study.\653\
---------------------------------------------------------------------------

    \652\ The Bureau attempted to develop a methodology for sampling 
contracts on the Internet. The methodology involved attempting to 
sample the contracts of 20 businesses from randomly-selected states 
and different levels of Web search relevance (to alleviate selection 
biases). However, providers generally do not provide their contracts 
or terms and conditions online. Even when some contracts are 
available online in a specific market, providers that provided such 
information are usually large, national corporations that operated 
in multiple states. The lack of provider-specific revenue and 
employment information also makes it hard to determine which of the 
sampled businesses are small according to the SBA threshold. After 
attempting this methodology for several markets, the Bureau decided 
to proceed by contacting trade associations instead. The Bureau 
attempted the sampling method for the following markets: Currency 
Exchange, Other Money Transmitters/Remittances, Telephone (Landline) 
Services, Cable Television. The Bureau also started work on a few 
other markets before determining that the results are unlikely to be 
sufficiently representative for the purposes of this analysis.
    \653\ The Bureau obtained the necessary PRA approval from OMB 
for the survey. The Bureau contacted national trade associations 
with a history of representation of providers in the relevant 
markets. The questions the Bureau posed related to the prevalence of 
arbitration agreements among providers in this market generally, as 
opposed to among the members of the trade association. The Bureau 
uses the prevalence numbers from the Study for checking/deposit 
accounts, credit cards, payday loans, prepaid cards, private student 
loans, and wired and wireless telecommunication providers. All other 
prevalence estimates used in this section and in the Section 
1022(b)(2) Analysis are based on this survey of trade associations. 
In each such market (represented by a separate row in the table 
below), except credit monitoring and providers of credit reports, we 
relied on numbers from one trade association for that market. For 
credit monitoring and providers of credit reports, we received 
supplemental information from a trade association that we did not 
survey that lead us to adjust the estimate by averaging the two 
estimates. For the markets covered by the Study's prevalence 
analysis, the Bureau adjusted the numbers to fit into the four 
choices provided in the survey: 0-20 percent, 20-50 percent, 50-80 
percent, and 80-100 percent. The prevalence column in the tables in 
this section and in the Section 1022(b)(2) Analysis provide the 
midpoint estimate (for example, 10 percent if the answer was 0-20 
percent).
---------------------------------------------------------------------------

    The table below sets forth potentially affected markets (and the 
associated NAICS codes) in which it appears reasonably likely that more 
than a few small entities use arbitration agreements. Some affected 
markets (and

[[Page 32917]]

associated NAICS codes) are not listed because the number of small 
entities in the market using arbitration agreements is likely to be 
insignificant. For example, the Bureau did not list convenience stores 
(NAICS 445120). While consumers can cash a check at some grocery or 
convenience stores, the Bureau does not believe that consumers 
generally sign contracts that contain arbitration agreements with 
grocery or convenience stores when cashing checks; indeed, this is even 
less likely for check guarantee (NAICS 522390) and collection (NAICS 
561440). For the same reason, currency exchange providers (NAICS 
523130) are not listed on the table. The Bureau also did not list 
department stores (NAICS 4521) because the Bureau does not believe 
small department stores are typically involved in issuing their own 
credit cards, rather than partnering with an issuing bank that issues 
cards in the name of the department store.
    Other notable exceptions were Other Depository Credit 
Intermediation (NAICS 522190) and attorneys who collect debt (NAICS 
541110). The Bureau believes that for these codes virtually all 
providers that are engaged in these activities are already reporting 
under other NAICS codes (for example, Commercial Banking, NAICS 52211, 
or collection agencies, NAICS 561440).
    In addition, the proposed rule would apply to mortgage referral 
providers for whom referrals are their primary business. For example, 
the Bureau estimates that there are 7,007 entities classified as 
mortgage and nonmortgage brokers (NAICS 522310), 6,657 of which are 
small.\654\ However, the Bureau believes that arbitration agreements 
are not prevalent in the consumer mortgage market. With respect to 
brokering of credit more broadly, the Bureau also believes that some 
credit lead generators may be primarily engaged in the business of 
brokering and would be affected by the proposed rule. The Bureau lacks 
data on the number of such businesses and the extent to which they are 
primarily engaged in brokering. The Bureau therefore requests this data 
and data on the use of contracts and on the prevalence of arbitration 
agreements by these providers.
---------------------------------------------------------------------------

    \654\ NAICS 522292 is similarly-excluded from estimates.
---------------------------------------------------------------------------

    Merchants are not listed in the table because merchants generally 
would not be covered by the proposal, except in limited circumstances. 
For example, the Bureau believes that most types of financing consumers 
use to buy nonfinancial goods or services from merchants is provided by 
third parties other than the merchant or, if the merchant grants a 
right of deferred payment, this is typically done without charge and 
for a relatively short period of time. For example, a provider of 
monthly services may bill in arrears, allowing the consumer to pay 30 
days after services are rendered each month. Thus the Bureau believes 
that merchants rarely offer their own financing with a finance charge, 
or in an amount that significantly exceeds the market value of the 
goods or services sold.\655\ In those rare circumstances (for example, 
acting as a TILA creditor due to lending with a finance charge), then 
the merchants would be covered by the proposal in those transactions 
(unless, in the case of offering credit with a finance charge, the 
merchant is a small entity and meets the other requirements of Dodd-
Frank section 1027(a)(2)(D)). The Bureau lacks data on how frequently 
merchants engage in such transactions, whether in the education, 
health, or home improvement sectors, among others, and on how often 
pre-dispute arbitration agreements may apply to such transactions. The 
Bureau requests comment and data on the frequency of these 
transactions, by industry.
---------------------------------------------------------------------------

    \655\ However, the Bureau includes buy-here-pay-here automobile 
dealers in the table below.
---------------------------------------------------------------------------

    Similarly, the Bureau does not list utility providers (NAICS 221) 
because when these providers allow consumers to defer payment for these 
providers' services without imposing a finance charge, this type of 
credit is not subject to the proposed rule. In some cases, utility 
providers may engage in billing the consumer for charges imposed by a 
third-party supplier hired by the consumer. However, government 
utilities providing these services to consumers who are located in 
their territorial jurisdiction would be exempt and, with respect to 
private utility providers providing these services, the Bureau believes 
that these private utility providers' agreements with consumers, 
including their dispute resolution mechanisms, are generally regulated 
at a State or local level. The Bureau is not aware that those dispute 
resolution mechanisms provide for mandatory arbitration.\656\
---------------------------------------------------------------------------

    \656\ The Bureau notes, for example, that in some situations, 
such as some consumer disputes heard by state utility regulators, 
consumers may be required to submit disputes to governmental 
administrative bodies prior to going to court. If courts review the 
determinations of those administrative bodies as agency 
administrative action, rather than an arbitral award, then the 
Bureau does not believe that processes such as these would be 
considered ``arbitration'' under proposed Sec.  1040.2(d).
---------------------------------------------------------------------------

    Further, the proposal would apply to extensions of credit by 
providers of whole life insurance policies (NAICS 524113) to the extent 
that these companies are ECOA creditors and that activity is not the 
``business of insurance'' under the Dodd-Frank section 1002(15)(C)(i) 
and 1002(3) and arbitration agreements are used for such policy loans. 
However, it is unlikely that a significant number of such providers 
would be affected because a number of state laws restrict the use of 
arbitration agreements in insurance products and, in any event, it is 
possible that the loan feature of the whole life policy could be part 
of the ``business of insurance'' depending on the facts and applicable 
law.\657\
---------------------------------------------------------------------------

    \657\ See, e.g., Kan. Stat. Ann. sec. 5-401 (2015). These State 
laws involve interplay between the FAA and the McCarran-Ferguson 
Act, 15 U.S.C. 6701 et seq.
---------------------------------------------------------------------------

    The Bureau also does not believe that a significant number of new 
car dealers offer or provide consumer financial products or services 
that render these dealers subject to the Bureau's regulatory 
jurisdiction. As a result, new car dealers (NAICS 44111) and passenger 
car leasing companies (NAICS 532112) are not included in the table 
below; rather, the table covers dealer portfolio leasing and lending 
with the used car dealer category (NAICS 441120) and indirect auto 
lenders with the sales financing category (NAICS 522220).
    In addition, the Bureau does not believe that it is common for 
commodities merchants subject to CFTC jurisdiction to extend credit to 
consumers as defined by Regulation B.\658\
---------------------------------------------------------------------------

    \658\ See U.S. Dept. of Treasury, Blueprint for a Modernized 
Financial Regulatory Structure, at 116 (2008), available at https://www.treasury.gov/press-center/press-releases/Documents/Blueprint.pdf 
(``In general, margin is a very different concept in the futures and 
securities worlds. In the securities context, margin means a minimum 
amount of equity that must be put down to purchase securities on 
credit, while in the futures context margin means a risk-based 
performance bond system which acts much like a security deposit.'').
---------------------------------------------------------------------------

    The Bureau does not account for various types of entities that are 
indirectly affected (and thus would likely not need to change their 
contracts) and for which the Bureau did not find any Federal class 
settlements in the Study (and thus would not be significantly affected 
by additional class litigation exposure). These entities include, for 
example, billing service providers for providers of merchant credit 
(third-party servicers NAICS 522390).
    Similarly, the Bureau is unaware of the number of software 
developers

[[Page 32918]]

(NAICS codes 511210 and 541511) that provide covered consumer financial 
products or services with arbitration agreements directly to consumers 
(such as payment processing products) that do not report in the NAICS 
codes listed either above or in the table below. The Bureau believes 
that the number of such software developers is low; however, the Bureau 
requests comment on this issue.
[GRAPHIC] [TIFF OMITTED] TP24MY16.001

3. Projected Reporting, Recordkeeping, and Other Compliance 
Requirements of the Proposed Rule, Including an Estimate of the Classes 
of Small Entities Which Will Be Subject to the Requirement and the Type 
of Professional Skills Necessary for the Preparation of the Report 
Reporting Requirements

    The providers that use arbitration agreements would have to change 
their contracts to state that the arbitration agreements cannot be used 
to block class litigation. The Bureau believes that, given that the 
Bureau is specifying the language that must be used, this can be 
accomplished in minimal time by compliance personnel, who do not have 
to possess any specialized skills, and in particular who do not require 
a law degree.\659\ Moreover, the Bureau believes that to the extent 
small covered entities use contracts from form providers, that task 
might be done by the providers themselves, requiring a simple check by 
the small provider's compliance staff to ensure that this has indeed 
been done. See the last column in the table above for the Bureau's 
estimate of the number of small providers that use arbitration 
agreements.
---------------------------------------------------------------------------

    \659\ The Bureau is aware that many small providers do not 
employ dedicated compliance staff, and uses the term broadly to 
denote any personnel who engage in compliance activities.
---------------------------------------------------------------------------

    Additionally, as discussed above, debt buyers and other providers 
who become parties to existing contracts with pre-dispute arbitration 
agreements that do not contain the required language would be subject 
to the ongoing requirements of proposed Sec.  1040.4(a)(2), which would 
require them to issue contract amendments or notices when they

[[Page 32919]]

become party to a pre-existing contract that does not include the 
proposed mandated language. As discussed above, the Bureau believes 
that this cost and the skills required to satisfy this requirement 
would also be minimal since many of these providers typically send out 
notices for FDCPA purposes to consumers whose contracts these providers 
just acquired.
    The proposed rule also includes a reporting requirement when 
covered entities exercise their arbitration agreements in individual 
lawsuits and in several other circumstances. Given the small number of 
individual arbitrations in the Study, the Bureau believes that there 
would be at most a few hundred small covered entities affected by this 
requirement each year, and most likely considerably fewer since most 
defendants that participated in arbitrations analyzed by the Study were 
large repeat players.\660\ Each instance of reporting consists of 
sending the Bureau already existing documents, potentially redacting 
specified categories of personally identifiable information pursuant to 
proposed rule. As discussed above, the Bureau believes that fulfilling 
the requirement would not require any specialized skills and would 
require minimal time.
---------------------------------------------------------------------------

    \660\ See Study, supra note 2, section 5 at 59.
---------------------------------------------------------------------------

    The Bureau requests comment on whether there are any additional 
costs or skills required to comply with reporting, recordkeeping, and 
other compliance requirements of the proposed rule that the Bureau had 
not mentioned here. As noted in its Section 1022(b)(2) Analysis above, 
the Bureau believes that the vast majority of the proposed rule's 
impact is due to additional exposure to class litigation and to any 
voluntary investment (spending) in reducing that exposure that 
providers might undertake. The Bureau believes that neither of these 
categories is a reporting, recordkeeping, or other compliance 
requirement; however, the Bureau discusses them below.
    The costs and types of additional investment to reduce additional 
exposure to class litigation and the components of the cost of 
additional class litigation itself are described above in the Section 
1022(b)(2) Analysis. As noted above, it is difficult to quantify how 
much all covered providers, including small entities, would invest in 
additional compliance; that applies to all covered providers.
    With respect to additional class litigation exposure, using the 
same calculation as in the Section 1022(b)(2) Analysis, limited to 
providers below the SBA threshold for their markets,\661\ the Bureau 
estimates that the proposed rule would result in about 25 additional 
Federal class settlements, and in those cases, an additional $3 million 
paid out to consumers, an additional $2 million paid out in plaintiff's 
attorney's fees, and an additional $1 million for defendant's 
attorney's fees and internal staff and management time per year. The 
Bureau also estimates 121 additional Federal cases filed as class 
litigation that would end up not settling on class basis, resulting in 
an additional $2 million in fees per year. These aggregate $8 million 
per year for Federal class litigation should be juxtaposed with an 
estimated 51,000 providers below the SBA thresholds that use 
arbitration agreements, resulting in well under a 1 percent chance per 
year of those entities being subject to a putative Federal class 
litigation, a much lower chance of any of those cases resulting in a 
class settlement, and an expected cost of about $200 per year from 
Federal class cases per entity.
---------------------------------------------------------------------------

    \661\ The Bureau attempted to classify defendants of the class 
settlements from the Study on whether they meet the SBA threshold 
for a small business in the defendant's market. Some of the markets 
were relatively easy to classify; for example, the Bureau has the 
data on depository institutions' assets and that is the only data 
necessary to determine whether depository institutions are SBA 
small. Other markets were considerably more difficult, in particular 
debt collectors. The Bureau used trade publications and internal 
expertise to the extent possible to classify debt collectors into 
large and small; however, it is likely that the Bureau made mistakes 
in this classification in at least several cases. The mistakes were 
likely made in both directions: Some debt collectors that were SBA 
small at the time of the settlement were classified as large, and 
other debt collectors that were not SBA small at the time of the 
settlement were classified as small.
---------------------------------------------------------------------------

    While the expected cost per provider that the Bureau can monetize 
is about $200 per year from Federal class cases, these costs would not 
be evenly distributed across small providers. In particular, the 
estimates above suggest that about 25 providers per year would be 
involved in an additional Federal class settlement--a considerably 
higher expense than $200 per year, as noted in the Section 1022(b)(2) 
Analysis above. In addition, the additional Federal cases filed as 
class litigation that would end up not settling on class basis (121 per 
year according to the estimates above) are also likely to result in a 
considerably higher expense that $200. However, the vast majority of 
the 51,000 providers would not experience any of these effects.
    As discussed above, these entities would also face increased 
exposure to state class litigation. While the Study's Section 6 reports 
similar numbers for State and Federal cases, it is likely that the 
State to Federal class litigation ratio is higher for small covered 
entities to the extent that they are more likely to serve consumers 
only in one State. However, as discussed above, the Bureau believes 
that State class litigation is also likely to generate lower costs than 
Federal litigation. The Bureau believes that these calculations 
strongly suggest that the proposed rule would not have a significant 
economic impact on a substantial number of small entities within the 
meaning of the RFA; however, the Bureau requests comment on that 
preliminary conclusion.
    The Bureau notes that the estimates are higher for small debt 
collectors than for other categories: Small debt collectors account for 
22 of the 25 Federal settlements estimated above for small providers 
overall, and $5 million (out of $8 million for small providers) in 
costs combined. With about 4,400 debt collectors below the SBA 
thresholds, the estimates suggest a roughly 2 percent chance per year 
of being subject to an additional putative Federal class litigation, a 
lower than 1 percent chance of that resulting in a Federal class 
settlement, and an expected cost of about $1,100 per year from these 
additional settlements. The same State class litigation assumptions 
outlined above apply to smaller debt collectors.
    As evident from the data and from feedback received during the 
SBREFA process, providers that are debt collectors might be the most 
affected relative to providers in other markets, despite the fact that 
debt collectors do not enter into arbitration agreements directly and 
already frequently collect on debt without an arbitration agreement in 
the original contract. However, for the reasons described above, the 
Bureau believes it is unlikely that class settlement amounts would in 
fact drive companies out of business. Indeed, as discussed above, debt 
collectors already face class litigation exposure in connection with a 
significant proportion of debt they collect. Much of that debt comes 
from creditors that do not have arbitration agreements, and even where 
the credit contract includes an arbitration agreement, collectors are 
not always able to invoke the agreements successfully.

4. Identification, to the Extent Practicable, of All Relevant Federal 
Rules Which May Duplicate, Overlap, or Conflict With the Proposed Rule

    Several other Federal laws and regulations address the use of 
arbitration agreements. For example, arbitration agreements that apply 
to

[[Page 32920]]

class litigation have been prohibited in securities contracts between 
broker dealers and their customers since 1992.\662\ The Military 
Lending Act and its implementing regulations, which were recently 
expanded by the Department of Defense to reach most forms of credit 
accessed by servicemembers and their families, prohibit arbitration 
agreements in consumer credit contracts with certain covered 
servicemembers or their dependents.\663\
---------------------------------------------------------------------------

    \662\ Financial Industry Regulatory Authority (FINRA) Rule 
2268(f).
    \663\ 10 U.S.C. 987, as implemented by 32 CFR 232.8(c).
---------------------------------------------------------------------------

    In addition to providing the Bureau the authority to regulate the 
use of arbitration agreements in consumer financial contracts, the 
Dodd-Frank Act prohibited all arbitration agreements in consumer 
mortgages\664\ and authorized the Securities and Exchange Commission to 
regulate arbitration agreements in contracts between consumers and 
securities broker-dealers or investment advisers.\665\ The Department 
of Health and Human Services also recently proposed regulations that 
would regulate the use of arbitration agreements in long-term care 
contracts with consumers.\666\ Finally, the Department of Education 
released a proposal that, among other things, ``would protect students 
from the use of mandatory arbitration provisions in enrollment 
agreements'' for postsecondary schools.\667\
---------------------------------------------------------------------------

    \664\ Dodd-Frank section 1414(a). That prohibition was 
implemented in Regulation Z by the Bureau's Loan Originator 
Compensation Rule. 12 CFR 1026.36(h).
    \665\ Dodd-Frank section 921.
    \666\ Reform of Requirements for Long-Term Care Facilities, 80 
FR 42168, 42264-65 (July 16, 2015) (proposing to require that 
arbitration agreements be explained in understandable language, 
acknowledged by the resident, provide for a convenient venue and a 
neutral arbiter, entered into on a voluntary basis, not be made a 
condition of admission, and not restrict or discourage communication 
with government authorities).
    \667\ Press Release, U.S. Department of Education, U.S. 
Department of Education Takes Further Steps to Protect Students from 
Predatory Higher Education Institutions (Mar. 11, 2016), https://www.ed.gov/news/press-releases/us-department-education-takes-further-steps-protect-students-predatory-higher-education-institutions.
---------------------------------------------------------------------------

5. Description of Any Significant Alternatives to the Proposed Rule 
Which Accomplish the Stated Objectives of Applicable Statutes and 
Minimize Any Significant Economic Impact of the Proposed Rule on Small 
Entities

    The Bureau describes several potential alternatives below. The 
Bureau believes that none of these are significant alternatives insofar 
as they would not accomplish the goal of the proposed rulemaking with 
substantially less regulatory burden. Unless otherwise noted, the 
Bureau discusses these alternatives both for SBA small providers and 
for larger providers as well. The Bureau requests comment on these and 
other potential alternatives and on their further quantification.
Potential Alternatives Involving Disclosure, Consumer Education, Opt-
In, or Opt-Out Requirements
    In principle, effective disclosures coupled with consumer education 
could make consumers more cognizant in selecting a financial product or 
service, of the existence and consequences of an arbitration provision 
in the standard form contract and, ex post, could make consumers who 
have a dispute with the provider cognizant of the option of pursuing 
the dispute in arbitration. But the market failure this proposal seeks 
to address arises from the fact that consumers often lack awareness 
that they have a legal claim and, moreover, that even when they are 
aware of such claims, many are negative-value claims so that it is not 
practical for them to be pursued in any formal forum on an individual 
basis. Accordingly, individual enforcement mechanisms provide 
insufficient incentives to comply with the law. Thus, while a 
hypothetical perfect disclosure might give consumers an informed choice 
of whether to patronize a provider with an arbitration agreement, 
providers with arbitration agreements would still have a lower 
incentive to comply with the law under a disclosure intervention 
approach. The Bureau notes that in addition to not meeting the goals of 
this proposed rulemaking, all of the potential alternatives in this 
subsection would also impose costs on providers.\668\
---------------------------------------------------------------------------

    \668\ See Omri Ben-Shahar & Carl Schneider, The Failure of 
Mandated Disclosure, 159 U. Pa. L. Rev. 647 (2011) on disclosures.
---------------------------------------------------------------------------

    Furthermore, there is reason to doubt that disclosures would be 
very effective in raising consumer awareness in any event. The Study 
indicates that the current consumer understanding of arbitration 
agreement is low,\669\ and the Bureau believes that even with the most 
effective disclosures and education it is unlikely that many consumers 
would, at the outset of a customer relationship, anticipate that the 
provider will act unlawfully and assess the value of these dispute-
resolution rights in a hypothetical future scenario.\670\ Therefore, 
the Bureau believes that it would be difficult, if not impossible, for 
a disclosure to cause even a significant percentage of consumers to 
factor the presence of an arbitration agreement into their shopping 
behavior,\671\ let alone to address the market failure discussed above.
---------------------------------------------------------------------------

    \669\ Despite contract language and placement that is not 
dramatically different from that of other contract provisions.
    \670\ See Study, supra note 2, section 3 at 16-23.
    \671\ Economic theory suggests that even that might not be 
sufficient. See, e.g., R. Ted Cruz & Jeffrey Hinck, Not My Brother's 
Keeper: The Inability of an Informed Minority to Correct for 
Imperfect Information, 47 Hastings L.J. 635 (1995) and Mark 
Armstrong, Search and Ripoff Externalities, 47 Rev. Indus. Org. 273 
(2015).
---------------------------------------------------------------------------

    Similar concerns arise with regard to opt-in and opt-out regimes. 
An opt-out regime would require providers to give consumers an option 
to opt out of the arbitration agreement when the consumer signs the 
contract or for some additional period. An opt-in regime would presume 
that a consumer is not bound by the arbitration agreement, unless a 
consumer affirmatively indicates otherwise. Many providers currently 
offer arbitration agreements that allow consumers to opt out at the 
point of contract formation or for a limited period afterward.\672\ In 
contrast, the Bureau is unaware of a significant number of providers 
offering opt-in agreements.
---------------------------------------------------------------------------

    \672\ See Study, supra note 2, section 2 at 31.
---------------------------------------------------------------------------

    Much as with disclosures, the Bureau believes that opt-in and opt-
out arrangements would not meet the objectives of the proposed rule 
because neither would alleviate the market failure that the proposed 
rule is designed to address. Further, and again similar to disclosures, 
the fact that opt-out agreements are already used by a number of 
providers in markets for consumer financial services today but that 
very few consumers are aware whether they have arbitration agreements 
in their contracts suggest that such regimes are subject to many of the 
same awareness and effectiveness issues discussed above with regard to 
disclosures. Finally, economic theory suggests that even with regard to 
a more consumer-friendly ``opt-in'' system, an individual consumer 
would not have a sufficient incentive, from the market perspective, to 
refuse an opt-in offer.\673\
---------------------------------------------------------------------------

    \673\ An opt-in offer would involve a consumer entering an 
arbitration agreement only if the consumer were given the choice to 
enter the agreement (unconditional on the provision of the consumer 
financial product or service), followed by the consumer explicitly 
agreeing to the arbitration agreement. For example, this could be 
accomplished by having a checkbox in the contract by the arbitration 
agreement.
---------------------------------------------------------------------------

    Consider an individual consumer's decision to opt-in. First, 
suppose that this consumer expects other consumers to opt-in. In this 
case, this individual consumer does not benefit from refusing an opt-in 
offer: The option of class

[[Page 32921]]

litigation is not valuable if there are not enough consumers that could 
be in the potential class. Instead, suppose that this consumer expects 
other consumers to refuse the opt-in. In this case, the provider has a 
sufficient incentive to comply, and this individual consumer still does 
not benefit from refusing an opt-in offer.\674\ In short, regardless of 
whether other consumers opt-in or refuse to opt-in, this individual 
consumer's choice does not matter for the provider's compliance 
incentives, so this individual consumer will not take even the minimal 
effort (or forgo even a minimal incentive) to refuse an opt-in offer: 
Consumers free-ride on other consumers.\675\ Other consumers will think 
similarly, and thus an insufficient number of consumers will refuse an 
opt-in offer. Similar incentives are at play with an opt-out 
requirement. In general, a similar problem arises in provision of 
public goods and in other collective action settings.\676\
---------------------------------------------------------------------------

    \674\ Assuming the consumer is indifferent between individual 
arbitration and individual litigation.
    \675\ It is likely that there is some inertia in consumer's 
choice of whether to opt-in: If not prompted by the provider, the 
consumer is unlikely to opt-in by him or herself. However, even 
suggestions by providers' employees, let alone monetary incentives, 
while signing the contract could reverse this inertia.
    \676\ See, e.g., Paul Samuelson, The Pure Theory of Public 
Expenditure, 36 Rev. of Econ. & Stat. 387 (1954); Mancur Olson, The 
Logic of Collective Action (Harv. Univ. Press 1965); Elinor Ostrom, 
How Types of Goods and Property Rights Jointly Affect Collective 
Action, 15 J. of Theo. Pol. 239 (2003). See also Eric Rasmusen, J. 
Mark Ramseyer & John Wiley, Jr., Naked Exclusion, 81 Am. Econ. Rev. 
1137; Ilya Segal & Michael Whinston, Naked Exclusion: Comment, 90 
Am. Econ. Rev. 296 (2000) (treatment of a similar problem in 
industrial organization); Keith Hylton, The Economics of Class 
Actions and Class Action Waivers (Forthcoming, Sup. Ct. Econ. Rev., 
2015), available at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2277562; David Rosenberg & Kathryn Spier, 
Incentives to Invest in Litigation and the Superiority of the Class 
Action, 6 J. of Legal Analysis 305 (2014); Eric Posner, Kathryn 
Spier & Adrian Vermeule, Divide and Conquer, 2 J. of Legal Analysis 
417 (2010). The case of this rulemaking is somewhat more complicated 
than the standard underprovision of public goods, since there are 
strategic providers that react to the public good underprovision.
---------------------------------------------------------------------------

    The Study shows that, currently, consumers are unlikely to even 
attempt such a calculation. Most, if not virtually all, consumers do 
not realize the significance of an arbitration agreement that can block 
class litigation, most consumers do not have an option to opt out of 
the agreement (though in some markets such as payday loans and private 
student loans opt-outs appear to be the norm), and in many markets the 
vast majority of providers use arbitration agreements.\677\ However, 
the presence of the collective action problem discussed directly above 
shows that resolving these current issues, such as lack of consumer 
awareness, would still not get to the core of the public good/
collective action market failure.
---------------------------------------------------------------------------

    \677\ See generally Study, supra note 2, sections 2 and 3. 
Consumers failing to realize the importance of arbitration 
agreements might be due to several reasons. This could either be due 
to behavioral or cognitive biases, rational inattention due to the 
issue not being sufficiently important to invest in learning, or it 
could be rational consumers with correct expectations not investing 
into learning the issue due to the collective action problem.
---------------------------------------------------------------------------

Total Ban of Pre-Dispute Arbitration Agreements
    Under this potential alternative, arbitration would only occur if 
parties agree to it after a dispute arises. The primary difference 
between this option and the proposed rule is that individual disputes 
would not be subject to mandatory pre-dispute arbitration agreements. 
The Study could not determine empirically whether individual 
arbitration is more beneficial to consumers than individual 
litigation.\678\ Compared with the proposed rule, this potential 
alternative would result in approximately the same cost to providers 
(either large or small), since providers rarely, if ever, face any 
individual arbitration currently. In addition, if providers were not 
allowed to maintain individual pre-dispute arbitration programs for 
consumers, then there is a risk that individual dispute resolution 
costs could increase; however, given the low number of such disputes, 
this cost increase would not be noticeable.
---------------------------------------------------------------------------

    \678\ See Part VI.A.
---------------------------------------------------------------------------

    This potential alternative alleviates the market failure discussed 
in the Section 1022(b)(2) Analysis above and gives the providers same 
incentives to comply with the law as the proposed rule. However, this 
potential alternative could be more costly if individual arbitration 
proceedings are less expensive than individual litigation and parties 
do not voluntarily agree to post-dispute individual arbitration.
    The Bureau believes that the current level of individual 
arbitrations, summed over all affected consumer financial products or 
services providers, is hundreds of arbitrations per year.\679\ The 
Study does not identify a quantifiable comparison of the relative 
benefits and costs of individual arbitration relative to individual 
litigation. However, given the number of such arbitrations relative to 
the magnitude of quantifiable impacts of class litigation in the 
Section 1022(b)(2) Analysis (ignoring those impacts that are not 
quantifiable), the per-case differences between individual arbitration 
and litigation would have to be implausibly large to result in even a 
noticeable difference between benefits and costs, either to consumers 
or to providers, of this potential alternative relative to the proposed 
rule. The Bureau does not possess any evidence that shows that the per-
case differences are indeed that large. Thus, the Bureau does not 
believe a total ban to be preferable with regard to regulatory burden.
---------------------------------------------------------------------------

    \679\ See Study, supra note 2, section 5 at 20.
---------------------------------------------------------------------------

Various Specific Exceptions to the Proposed Rule
    During the SBREFA process, some of the SERs stated that some of the 
statutes (for example, TCPA) are particularly problematic and onerous 
if arbitration agreements cannot be used to block class litigation. The 
Bureau understands the SERs' argument that cases putatively seeking 
very large amounts of damages have a potential to amplify SERs' costs.
    The Bureau's analysis of this argument is discussed in greater 
detail above in Part VI. From an economic theory perspective, the 
potential for these cases to be filed seeking very large damages also 
amplifies the incentive to comply with the law (for example, TCPA), and 
thus amplifies the benefits to consumers, even if providers pass on 
some of the costs to consumers in terms of higher prices. Thus, unless 
there is considerable evidence that compliance with or the remedial 
scheme established by a particular statute is against the public good 
the Bureau believes this issue, for the reasons discussed in Part VI, 
may be more appropriately addressed by Congress, state legislatures, 
and the courts.\680\
---------------------------------------------------------------------------

    \680\ The Bureau has also heard from stakeholders that other 
statutes with statutory damages should be exempted from the 
proposal. For example, some argue that allowing consumers to bring 
class actions pursuant to the Credit Repair Organizations Act (CROA) 
against providers that offer credit monitoring products could 
threaten the availability of those products due to the challenge of 
complying with CROA (to the extent it applies to those products).
---------------------------------------------------------------------------

Small Entity Exemption
    As outlined above in the Section-by-Section analysis to proposed 
Sec.  1040.4(a), the Bureau requests comment on a small entity 
exemption, including which thresholds could be used for such an 
exemption for each market covered. The Bureau's estimates, based on 
current litigation levels, suggest that small providers would not be 
particularly affected by this proposed rule. However, a handful of 
small providers would likely face a Federal class action settlement due 
to this rule (and slightly higher numbers for providers who are

[[Page 32922]]

debt collectors), and all small providers that have arbitration 
agreements would incur a cost of changing these agreements.\681\ Thus, 
a small entity exemption would barely change the aggregate monetized 
costs and benefits, both to consumers and to providers.
---------------------------------------------------------------------------

    \681\ The Bureau notes again that the vast majority of the 
estimated additional Federal class action settlements in this 
Section 1022(b)(2) Analysis would be class action settlements with 
debt collectors. A small entity exemption would be unlikely to 
change that, as even small debt collectors would likely be 
collecting on debt of larger credit card issuers whose arbitration 
agreements, if existent, could not be used to invoke in class 
litigation. See proposed Sec.  1040.4(a)(1).
---------------------------------------------------------------------------

    The Bureau is concerned, however, that an exemption would eliminate 
the additional incentives to comply with the law provided by the 
exposure to class litigation. This is a particular concern for markets 
such as payday loans, where the vast majority of the market currently 
uses arbitration agreements, and thus it is harder to estimate the 
impact of the proposed rule and this potential alternative. Moreover, 
the Bureau is concerned that smaller providers without arbitration 
agreements might not be representative of small providers with 
arbitration agreements: In other words, that the providers that 
currently might not be complying with the law to the full extent might 
self-select into inserting arbitration agreements in their contracts.
    At the same time, the Bureau acknowledges that, as discussed above, 
based on the evidence from providers that do not currently have 
arbitration agreements, the low monetized impact of class litigation 
estimated for small providers might suggest that the proposed rule 
would create weaker incentives to comply than for larger providers, 
since a given small provider is highly unlikely to face a class action. 
Moreover, as noted by the SERs during the SBREFA process, many small 
providers believe that they are already complying with the law to the 
fullest extent, notwithstanding the presence of arbitration agreements 
in their contracts. As discussed above, the Bureau is seeking comment 
on all issues relating to a small entity exemption.
Public Options
    Various stakeholders suggested alternatives related to public 
enforcement. Aside from an alternative that the Bureau does not have 
the power to accomplish--sizably increasing enforcement at all 
regulators of the providers affected by the proposed rule--most of 
these suggestions would mostly duplicate what the providers can do 
already. For example, providers that discover a compliance issue before 
a class action is filed can already (and sometimes do) submit a 
description of the compliance issue to their regulator and attempt to 
work out a solution (that may or may not involve fines and payments to 
consumers). If consumers are compensated during the process, then there 
is less potential recovery for any following private litigation. 
Moreover, as the Study demonstrates, such private litigation following 
the same matter decided by public enforcement is rare.\682\ Given that 
the suggested mechanisms could be used by providers today if they felt 
sufficient incentive to reduce compliance and litigation risk, the 
Bureau does not believe that these options could be relied upon to 
achieve the policy goals of the proposed rule.
---------------------------------------------------------------------------

    \682\ See Study, supra note 2, section 9 at 13-16.
---------------------------------------------------------------------------

Request for Comment
    The Bureau requests comment on these and any other alternative 
policy options that may accomplish the goals of the proposed rulemaking 
with substantially less regulatory burden, including a detailed 
description of the option and any evidence that would indicate that the 
option could achieve such goals.

6. Discussion of Impact on Cost of Credit for Small Entities

    Although SERs expressed concern that the proposed rule could affect 
costs that they bear when they seek out business credit to facilitate 
their operations, the Bureau believes based on its estimates derived 
from current litigation levels as discussed above that the vast 
majority of small providers' cost of credit would not be impacted by 
the proposed rule. However, given a higher likelihood that a smaller 
debt collector would be subject to incremental class litigation at any 
given time, it is possible that a fraction of small debt collectors 
might experience an adverse impact on their cost of credit if they were 
subject to ongoing class litigation at a time when they were seeking 
credit. However, the Study indicated that the majority of cases filed 
as class actions are resolved within a few months, such that any such 
adverse impact is likely to be only temporary.

7. Description of Any Significant Alternatives to the Proposed Rule 
Which Accomplish the Stated Objectives of Applicable Statutes and Which 
Minimize Any Increase in the Cost of Credit for Small Entities

    As stated above, the Bureau does not believe that the vast majority 
of the small providers' cost of credit will be impacted. The Bureau 
also is not aware of any significant alternatives that would minimize 
the impact on small debt collectors' cost of credit while accomplishing 
the objectives of the proposed rule. The Bureau notes that any 
alternatives would be particularly complicated with regard to 
application to smaller debt collectors, as they typically use the 
contract of another firm, for example a credit card issuer.

8. Description of the Advice and Recommendations of Representatives of 
Small Entities relating to Issues Described in 6 and 7 Above

    As noted in the SBREFA Panel Report, the small entity 
representatives (SERs) expressed concerns about how the proposals under 
consideration would affect their borrowing costs. One SER believed his 
business would lose its line of credit if it could not use arbitration 
agreements to block class actions. Another SER stated that the class 
proposal under consideration would increase her business's borrowing 
costs, and also that drawing on its credit to pay litigation costs 
related to a class action would ``raise warning signs'' for her 
business's lender. Another SER stated that mere exposure to class 
action liability would cause his business's lender to ``raise an 
eyebrow.'' One debt collector SER stated that his company's bank had 
closed its line of credit in recent years due to concerns over the 
industry but that the company was able to obtain a line of credit at 
another bank relatively quickly. None of these SERs reported that they 
actually had spoken with their lender or that, when they sought credit 
in the past, their lender inquired as to whether they used arbitration 
agreements in their consumer contracts.
    In general, SERs in the business of extending credit stated that 
the proposal under consideration regarding class actions might cause 
them to increase the cost of credit they offer to their consumers. One 
of these SERs stated that the proposal may increase his business's 
expenses overall--such as insurance premiums, compliance investment, 
and exposure to class actions for which his business is uninsured--and, 
due to that SER's thin margins, such increases may require his business 
to increase the cost of consumer credit. However, another SER--a short-
term, small-dollar lender--stated that he would be unable to increase 
the cost of his business's consumer loans due to limitations imposed by 
state law. Another SER, a buy-here-pay-here auto dealer, stated that, 
in addition to potentially raising the cost of credit, his business 
could

[[Page 32923]]

recoup costs by increasing its debt collection and collateral recovery 
efforts.
    Three SERs predicted that, if the class proposal under 
consideration goes into effect, some small entities would reduce their 
product offerings. One of these SERs speculated that products designed 
for underserved groups may be especially vulnerable because cases 
involving such products are more attractive to plaintiff's attorneys.

X. Paperwork Reduction Act

    Under the Paperwork Reduction Act of 1995 (PRA), Federal agencies 
are generally required to seek the Office of Management and Budget's 
(OMB) approval for information collection requirements prior to 
implementation. Under the PRA, the Bureau may not conduct or sponsor--
and, notwithstanding any other provision of law, a person is not 
required to respond to--an information collection unless the 
information collection displays a valid control number assigned by 
OMB.\683\
---------------------------------------------------------------------------

    \683\ 44 U.S.C. 3507(a).
---------------------------------------------------------------------------

    As part of its continuing effort to reduce paperwork and respondent 
burden, the Bureau conducts a preclearance consultation program to 
provide the general public and Federal agencies with an opportunity to 
comment on new information collection requirements in accordance with 
the PRA.\684\ This helps ensure that the public understands the 
Bureau's requirements or instructions; respondents can provide the 
requested data in the desired format; reporting burden (time and 
financial resources) is minimized; collection instruments are clearly 
understood; and the Department can properly assess the impact of 
collection requirements on respondents.
---------------------------------------------------------------------------

    \684\ 44 U.S.C. 3506(c)(2)(A).
---------------------------------------------------------------------------

    The Bureau believes that this proposed rule would impose the 
following two new information collection requirements (recordkeeping, 
reporting, or disclosure requirements) on covered entities or members 
of the public that would constitute collections of information 
requiring OMB approval under the PRA. Both information collections 
would apply to agreements entered into after the compliance date of the 
rule.\685\
---------------------------------------------------------------------------

    \685\ See proposed Sec.  1040.5(a).
---------------------------------------------------------------------------

    The first information collection requirement relates to proposed 
disclosure requirements. The proposal would require providers that 
enter into arbitration agreements with consumers to ensure that these 
arbitration agreements contain a specified provision, with two limited 
exceptions as described below.\686\ The specified provision would 
effectively state that no person can use the agreement to stop the 
consumer from being part of a class action case in court.\687\ The 
Bureau proposed this language and, if the rule is adopted as proposed, 
providers would be required to use it unless an enumerated exception 
applies. The Bureau is also proposing to permit providers to use an 
alternative provision in connection with arbitration agreements in 
contracts for multiple products or services, some of which are not 
covered by the proposed rule.\688\
---------------------------------------------------------------------------

    \686\ See proposed Sec.  1040.4(a)(2). In addition to the one-
time change described directly above, some providers could be 
affected on an ongoing basis or sporadic basis in the future as they 
acquire existing contracts as the result of regular or occasional 
activity, under proposed Sec.  1040.4(a)(2). As noted above in the 
Section 1022(b)(2) Analysis, the Bureau believes that this 
requirement does not impose a material burden, and thus the Bureau 
does not further discuss it in this Section 1022(b)(2) Analysis.
    \687\ See proposed Sec.  1040.4(a)(2)(i).
    \688\ See proposed Sec.  1040.4(a)(2)(ii).
---------------------------------------------------------------------------

    The proposed rule contains two exceptions to this first information 
collection requirement. Under the first exception, if a provider enters 
into an arbitration agreement that existed previously (and was entered 
into by another person after the compliance date),\689\ and the 
agreement does not already contain the provision required by proposed 
Sec.  1040.4(a)(2)(i) (or the alternative provision permitted by 
proposed Sec.  1040.4(a)(2)(ii)), the provider must either ensure that 
the agreement is amended to contain a specified provision or send any 
consumer to whom the agreement applies a written notice containing 
specified language. The provider is required to ensure the agreement is 
amended or provide the written notice within 60 days of entering into 
the agreement.\690\ Under the second exception, the requirement to 
ensure that an arbitration agreement entered into after the compliance 
date contains the provision required by proposed Sec.  1040.4(a)(2)(i) 
(or the alternative provision permitted by proposed Sec.  
1040.4(a)(2)(ii)) would not apply to an arbitration agreement for a 
general-purpose reloadable prepaid card if certain conditions are 
satisfied with respect to when the card was packaged and purchased in 
relation to the compliance date. For a prepaid card provider that has 
the ability to contact the consumer in writing, the provider must also, 
within 30 days of obtaining the consumer's contact information, notify 
the consumer in writing that the arbitration agreement complies with 
the requirements of proposed Sec.  1040.4(a)(2) by providing an amended 
arbitration agreement to the consumer.\691\
---------------------------------------------------------------------------

    \689\ See proposed comment 4(a)(2)-2 for an example of when this 
could occur.
    \690\ See proposed Sec.  1040.4(a)(2)(iii).
    \691\ See proposed Sec.  1040.5(b).
---------------------------------------------------------------------------

    The second information collection requirement relates to proposed 
reporting requirements. The proposal would require providers to submit 
specified arbitral records to the Bureau relating to any arbitration 
agreement entered into after the compliance date.\692\ The proposal 
would require the submission of two general categories of documents to 
the Bureau. The first category would require providers to submit 
certain records in connection with any claim filed in arbitration by or 
against the provider concerning a covered consumer financial product or 
service. In particular, providers would be required to submit the 
following four types of documents in connection with any claim filed in 
arbitration: (1) The initial claim and any counterclaim; (2) the 
arbitration agreement filed with the arbitrator or arbitration 
administrator; (3) the judgment or award, if any, issued by the 
arbitrator or arbitration administrator; and (4) if an arbitrator or 
arbitration administrator refuses to administer or dismisses a claim 
due to the provider's failure to pay required filing or administrative 
fees, any communication the provider receives from the arbitrator or an 
arbitration administrator related to such a refusal.\693\ The second 
category would require providers to submit any communications the 
provider receives from an arbitrator or arbitration administrator 
related to a determination that an arbitration agreement covered by the 
proposed rule does not comply with the administrator's fairness 
principles, rules, or similar requirements.\694\
---------------------------------------------------------------------------

    \692\ See proposed Sec.  1040.4(b).
    \693\ See proposed Sec.  1040.4(b)(1)(i).
    \694\ See proposed Sec.  1040.4(b)(1)(ii).
---------------------------------------------------------------------------

    The proposal would require providers to submit any record described 
above to the Bureau within 60 days of filing by the provider or, in the 
case of records filed by other persons (such as arbitrators, 
arbitration administrators, or consumers), receipt by the 
provider.\695\ The proposal would further require that, before 
submitting these records to the Bureau, a provider must redact any of 
nine specific types of information to the extent such information 
appears in any of these documents.\696\
---------------------------------------------------------------------------

    \695\ See proposed Sec.  1040.4(b)(2).
    \696\ See proposed Sec.  1040.4(b)(3).
---------------------------------------------------------------------------

    The estimated burden on Bureau respondents from the proposed 
adoption of part 1040 are summarized below. A complete description of 
the

[[Page 32924]]

information collection requirements, including the burden estimate 
methods, is provided in the information collection request (ICR) that 
the Bureau has submitted to OMB under the requirements of the PRA.
[GRAPHIC] [TIFF OMITTED] TP24MY16.002

[GRAPHIC] [TIFF OMITTED] TP24MY16.003

    Please send your comments to the Office of Information and 
Regulatory Affairs, OMB, Attention: Desk Officer for the Bureau of 
Consumer Financial Protection. Send these comments by email to 
[email protected] or by fax to (202) 395-6974. If you wish to 
share your comments with the Bureau, please send a copy of these 
comments to the docket for this proposed rule at www.regulations.gov. 
The ICR submitted to OMB requesting approval under the PRA for the 
information collection requirements contained herein is available at 
www.regulations.gov as well as OMB's public-facing docket at 
www.reginfo.gov.
    Title of Collection: Arbitration Agreements, Disclosure and 
Reporting Requirements.
    OMB Control Number: 3170-XXXX.
    Type of Review: New collection (Request for a new OMB control 
number).
    Affected Public: Private Sector.
    Comments are invited on: (1) Whether the collection of information 
is necessary for the proper performance of the functions of the Bureau, 
including whether the information will have practical utility; (2) the 
accuracy of the Bureau's estimate of the burden of the collection of 
information, including the validity of the methods and the assumptions 
used; (3) ways to enhance the quality, utility, and clarity of the 
information to be collected; and (4) ways to minimize the burden of the 
collection of information on respondents, including through the use of 
automated collection techniques or other forms of information 
technology. Comments submitted in response to this notice will be 
summarized and/or included in the request for OMB approval. All 
comments will become a matter of public record.
    If applicable, in any notice of final rule the Bureau would display 
the control number assigned by OMB to any information collection 
requirements proposed herein and adopted in any final rule. If the OMB 
control number has not been assigned prior to publication of any final 
rule in the Federal Register, the Bureau would publish a separate 
notice in the Federal Register prior to the effective date of any final 
rule.

List of Subjects in 12 Part 1040

    Banks, banking, Business and industry, Claims, Consumer protection, 
Contracts, Credit, Credit unions, Finance, National banks, Reporting 
and recordkeeping requirements, Savings associations.

Authority and Issuance

    For the reasons set forth above, the Bureau proposes to add part 
1040 to chapter X in title 12 of the Code of Federal Regulations, as 
set forth below:

PART 1040--ARBITRATION AGREEMENTS

Sec.
1040.1 Authority, purpose, and enforcement.
1040.2 Definitions.
1040.3 Coverage.
1040.4 Limitations on the use of pre-dispute arbitration agreements.
1040.5 Compliance date and temporary exception.
Supplement I to Part 1040--Official Interpretations.

    Authority: 12 U.S.C. 5512(b) and (c) and 5518(b).


Sec.  1040.1  Authority, purpose, and enforcement.

    (a) Authority. The regulation in this part is issued by the Bureau 
of Consumer Financial Protection (Bureau) pursuant to sections 
1022(b)(1) and (c) and 1028(b) of the Dodd-Frank Act (12 U.S.C. 5512(b) 
and (c) and 5518(b)).
    (b) Purpose. The purpose of this part is the furtherance of the 
public interest and the protection of consumers regarding the use of 
agreements for consumer financial products and services providing for 
arbitration of any future dispute.


Sec.  1040.2  Definitions.

    (a) Class action means a lawsuit in which one or more parties seek 
class treatment pursuant to Federal Rule of Civil Procedure 23 or any 
State process analogous to Federal Rule of Civil Procedure 23.
    (b) Consumer means an individual or an agent, trustee, or 
representative acting on behalf of an individual.
    (c) Provider means:
    (1) A person as defined by 12 U.S.C. 5481(19) that engages in 
offering or providing any of the consumer financial products or 
services covered by Sec.  1040.3(a) to the extent that the person is 
not excluded under Sec.  1040.3(b); or

[[Page 32925]]

    (2) An affiliate of a provider as defined in paragraph (c)(1) of 
this section when that affiliate is acting as a service provider to the 
provider as defined in paragraph (c)(1) of this section with which the 
service provider is affiliated consistent with 12 U.S.C. 5481(6)(B).
    (d) Pre-dispute arbitration agreement means an agreement between a 
provider and a consumer providing for arbitration of any future dispute 
between the parties.


Sec.  1040.3  Coverage.

    (a) Covered consumer financial products and services. This part 
generally applies to pre-dispute arbitration agreements for the 
following products or services when they are consumer financial 
products or services as defined by 12 U.S.C. 5481(5):
    (1)(i) Providing an ``extension of credit'' that is ``consumer 
credit'' as defined in Regulation B, 12 CFR 1002.2;
    (ii) Acting as a ``creditor'' as defined by 12 CFR 1002.2(l) by 
regularly participating in a credit decision consistent with its 
meaning in 12 CFR 1002.2(l) concerning ``consumer credit'' as defined 
by 12 CFR 1002.2(h);
    (iii) Acting, as a person's primary business activity, as a 
``creditor'' as defined by 12 CFR 1002.2(l) by referring applicants or 
prospective applicants to creditors, or selecting or offering to select 
creditors to whom requests for credit may be made consistent with its 
meaning in 12 CFR 1002.2(l);
    (iv) Acquiring, purchasing, or selling an extension of consumer 
credit covered by paragraph (a)(1)(i) of this section; or
    (v) Servicing an extension of consumer credit covered by paragraph 
(a)(1)(i) of this section; or
    (2) Extending automobile leases as defined by 12 CFR 1090.108 or 
brokering such leases;
    (3) Providing services to assist with debt management or debt 
settlement, modify the terms of any extension of consumer credit 
covered by paragraph (a)(1)(i) of this section, or avoid foreclosure;
    (4) Providing directly to a consumer a consumer report as defined 
by the Fair Credit Reporting Act, 15 U.S.C. 1681a(d), a credit score, 
or other information specific to a consumer from such a consumer 
report, except when such consumer report is provided by a user covered 
by 15 U.S.C. 1681m solely in connection with an adverse action as 
defined in 15 U.S.C. 1681a(k) with respect to a product or service not 
covered by any of paragraphs (a)(1) through (3) or (a)(5) through (10) 
of this section;
    (5) Providing accounts subject to the Truth in Savings Act, 12 
U.S.C. 4301 et seq., as implemented by 12 CFR part 707, and Regulation 
DD, 12 CFR part 1030;
    (6) Providing accounts or remittance transfers subject to the 
Electronic Fund Transfer Act, 15 U.S.C. 1693 et seq., as implemented by 
Regulation E, 12 CFR part 1005;
    (7) Transmitting or exchanging funds as defined by 15 U.S.C. 
5481(29) except when integral to another product or service that is not 
covered by this section;
    (8) Accepting financial or banking data or providing a product or 
service to accept such data directly from a consumer for the purpose of 
initiating a payment by a consumer via any payment instrument as 
defined by 15 U.S.C. 5481(18) or initiating a credit card or charge 
card transaction for the consumer, except when the person accepting the 
data or providing the product or service to accept the data also is 
selling or marketing the nonfinancial good or service for which the 
payment or credit card or charge card transaction is being made;
    (9) Check cashing, check collection, or check guaranty services; or
    (10) Collecting debt arising from any of the consumer financial 
products or services described in paragraphs (a)(1) through (9) of this 
section by:
    (i) A person offering or providing the product or service giving 
rise to the debt being collected, an affiliate of such person, or, a 
person acting on behalf of such person or affiliate;
    (ii) A person purchasing or acquiring an extension of consumer 
credit covered by paragraph (a)(1)(i) of this section, an affiliate of 
such person, or, a person acting on behalf of such person or affiliate; 
or
    (iii) A debt collector as defined by 15 U.S.C. 1692a(6).
    (b) Excluded persons. This part does not apply to the following 
persons to the extent they are offering or providing any of the 
following products and services:
    (1) Broker dealers to the extent that they are providing products 
or services described in paragraph (a) of this section that are subject 
to rules promulgated or authorized by the U.S. Securities and Exchange 
Commission prohibiting the use of pre-dispute arbitration agreements in 
class action litigation and providing for making arbitral awards 
public;
    (2)(i) The federal government and any affiliate of the Federal 
government providing any product or service described in paragraph (a) 
of this section directly to a consumer; or
    (ii) A State, local, or tribal government, and any affiliate of a 
State, local, or tribal government, to the extent it is providing any 
product or service described in paragraph (a) of this section directly 
to a consumer who resides in the government's territorial jurisdiction;
    (3) Any person when providing a product or service described in 
paragraph (a) of this section that the person and any of its affiliates 
collectively provide to no more than 25 consumers in the current 
calendar year and to no more than 25 consumers in the preceding 
calendar year;
    (4) Merchants, retailers, or other sellers of nonfinancial goods or 
services to the extent they:
    (i) Provide an extension of consumer credit covered by paragraph 
(a)(1)(i) of this section that is of the type described in 12 U.S.C. 
5517(a)(2)(A)(i) and they would be subject to the Bureau's authority 
only under 12 U.S.C. 5517(a)(2)(B)(i) but not 12 U.S.C. 
5517(a)(2)(B)(ii) or (iii); or
    (ii) Purchase or acquire an extension of consumer credit excluded 
by paragraph (b)(4)(i) of this section; or
    (5) Any person to the extent the limitations in 12 U.S.C. 5517 or 
5519 apply to the person or a product or service described in paragraph 
(a) of this section that is offered or provided by the person.


Sec.  1040.4  Limitations on the use of pre-dispute arbitration 
agreements.

    (a) Use of pre-dispute arbitration agreements in class actions--(1) 
General rule. A provider shall not seek to rely in any way on a pre-
dispute arbitration agreement entered into after the date set forth in 
Sec.  1040.5(a) with respect to any aspect of a class action that is 
related to any of the consumer financial products or services covered 
by Sec.  1040.3 including to seek a stay or dismissal of particular 
claims or the entire action, unless and until the presiding court has 
ruled that the case may not proceed as a class action and, if that 
ruling may be subject to appellate review on an interlocutory basis, 
the time to seek such review has elapsed or the review has been 
resolved.
    (2) Provision required in covered pre-dispute arbitration 
agreements. Upon entering into a pre-dispute arbitration agreement for 
a product or service covered by Sec.  1040.3 after the date set forth 
in Sec.  1040.5(a):
    (i) Except as provided in paragraph (a)(2)(ii) or (iii) of this 
section or in Sec.  1040.5(a), a provider shall ensure that the 
agreement contains the following provision:


[[Page 32926]]


    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.

    (ii) When the pre-dispute arbitration agreement is for multiple 
products or services, only some of which are covered by Sec.  1040.3, 
the provider may include the following alternative provision in place 
of the one otherwise required by paragraph 4(a)(2)(i) of this section:

    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 that Rule.

    (iii) When the pre-dispute arbitration agreement existed previously 
between other parties and does not contain either the provision 
required by paragraph (a)(2)(i) of this section or the alternative 
permitted by paragraph (a)(2)(ii) of this section, the provider shall 
either ensure the agreement is amended to contain the provision 
specified in paragraph (a)(2)(iii)(A) of this section or provide any 
consumer to whom the agreement applies with the written notice 
specified in paragraph (a)(2)(iii)(B) of this section. The provider 
shall ensure the agreement is amended or provide the notice to 
consumers within 60 days of entering into the pre-dispute arbitration 
agreement.
    (A) Agreement provision. A pre-dispute arbitration agreement 
amended pursuant to paragraph (a)(2)(iii) of this section shall contain 
the following provision:

    We agree that neither we nor anyone else who later becomes a 
party to this pre-dispute arbitration agreement will use it 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.

    (B) Notice. A notice provided pursuant to paragraph (a)(2)(iii) of 
this section shall state the following:

    We agree not to use any pre-dispute arbitration 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.

    (b) Submission of arbitral records. For any pre-dispute arbitration 
agreement entered into after the date set forth in Sec.  1040.5(a), a 
provider shall comply with the requirements set forth in paragraphs 
(b)(1) through (3) of this section.
    (1) Records to be submitted. A provider shall submit a copy of the 
following records to the Bureau, in the form and manner specified by 
the Bureau:
    (i) In connection with any claim filed in arbitration by or against 
the provider concerning any of the consumer financial products or 
services covered by Sec.  1040.3;
    (A) The initial claim and any counterclaim;
    (B) The pre-dispute arbitration agreement filed with the arbitrator 
or arbitration administrator;
    (C) The judgment or award, if any, issued by the arbitrator or 
arbitration administrator; and
    (D) If an arbitrator or arbitration administrator refuses to 
administer or dismisses a claim due to the provider's failure to pay 
required filing or administrative fees, any communication the provider 
receives from the arbitrator or an arbitration administrator related to 
such a refusal; and
    (ii) Any communication the provider receives from an arbitrator or 
an arbitration administrator related to a determination that a pre-
dispute arbitration agreement for a consumer financial product or 
service covered by Sec.  1040.3 does not comply with the 
administrator's fairness principles, rules, or similar requirements, if 
such a determination occurs.
    (2) Deadline for submission. A provider shall submit any record 
required pursuant to paragraph (b)(1) of this section within 60 days of 
filing by the provider of any such record with the arbitrator or 
arbitration administrator and within 60 days of receipt by the provider 
of any such record filed or sent by someone other than the provider, 
such as the arbitration administrator or the consumer.
    (3) Redaction. Prior to submission of any records pursuant to 
paragraph (b)(1) of this section, a provider shall redact the following 
information:
    (i) Names of individuals, except for the name of the provider or 
the arbitrator where either is an individual;
    (ii) Addresses of individuals, excluding city, State, and zip code;
    (iii) Email addresses of individuals;
    (iv) Telephone numbers of individuals;
    (v) Photographs of individuals;
    (vi) Account numbers;
    (vii) Social Security and tax identification numbers;
    (viii) Driver's license and other government identification 
numbers; and
    (ix) Passport numbers.


Sec.  1040.5  Compliance date and temporary exception.

    (a) Compliance date. Compliance with this part is required for any 
pre-dispute arbitration agreement entered into after [DATE 211 DAYS 
AFTER DATE OF PUBLICATION OF THE FINAL RULE].
    (b) Exception for pre-packaged general-purpose reloadable prepaid 
card agreements. Section 1040.4(a)(2) shall not apply to a provider 
that enters into a pre-dispute arbitration agreement for a general-
purpose reloadable prepaid card if the requirements set forth in either 
paragraph (b)(1) or (2) of this section are satisfied.
    (1) For a provider that does not have the ability to contact the 
consumer in writing:
    (i) The consumer acquires a general-purpose reloadable prepaid card 
in person at a retail store;
    (ii) The pre-dispute arbitration agreement was inside of packaging 
material when the general-purpose reloadable prepaid card was acquired; 
and
    (iii) The pre-dispute arbitration agreement was packaged prior to 
[DATE 211 DAYS AFTER DATE OF PUBLICATION OF THE FINAL RULE].
    (2) For a provider that has the ability to contact the consumer in 
writing:
    (i) The provider meets the requirements set forth in paragraphs 
(b)(1)(i) through (iii) of this section; and
    (ii) Within 30 days of obtaining the consumer's contact 
information, the provider notifies the consumer in writing that the 
pre-dispute arbitration agreement complies with the requirements of 
Sec.  1040.4(a)(2) by providing an amended pre-dispute arbitration 
agreement to the consumer.

Supplement I to Part 1040--Official Interpretations

Section 1040.2--Definitions

2(c) Provider
    1. Providers of multiple products or services. A provider as 
defined in Sec.  1040.2(c) that also engages in offering or providing 
products or services not covered by Sec.  1040.3 must comply with this 
part only for the products or services that it offers or provides that 
are covered by Sec.  1040.3. For example, a merchant that transmits 
funds for its customers would be covered pursuant to Sec.  1040.3(a)(6) 
with respect to the transmittal of funds. That same merchant generally 
would not be covered with respect to the sale of durable goods to 
consumers, except as provided in 12 U.S.C. 5517(a)(2)(B)(ii) or (iii).

[[Page 32927]]

2(d) Pre-Dispute Arbitration Agreement
    1. Form of pre-dispute arbitration agreements. A pre-dispute 
arbitration agreement for a consumer financial product or service 
includes any agreement between a provider and a consumer providing for 
arbitration of any future disputes between the parties, regardless of 
its form or structure. Examples include a standalone pre-dispute 
arbitration agreement that applies to a product or service, as well as 
a pre-dispute arbitration agreement that is included within, annexed 
to, incorporated into, or otherwise made a part of a larger agreement 
that governs the terms of the provision of a product or service.

Section 1040.3--Coverage

3(a) Covered Products or Services
    1. Consumer financial products or services pursuant to 12 U.S.C. 
5481(5). Section 1040.3(a) provides that the products or services 
listed in therein are covered by part 1040 when they are consumer 
financial products or services as defined by 12 U.S.C. 5481(5). 
Products or services generally meet this definition in either of two 
ways: they are offered or provided for use by consumers primarily for 
personal, family, or household purposes, or they are delivered, 
offered, or provided in connection with such products or services. 
Examples of the second type of consumer product or service include debt 
collection, when the underlying loan that is the subject of collection 
is a consumer financial product or service.
Paragraph (a)(1)(i)
    1. Coverage of extensions of consumer credit by creditors. A 
transaction is only an extension of consumer credit, as defined by 
Regulation B, if the credit is extended by a ``creditor.'' Persons who 
do not regularly participate in credit decisions in the ordinary course 
of business, for example, are not creditors as defined by Regulation B. 
12 CFR 1002.2(l).
Paragraph (a)(1)(iii)
    1. Offering or providing referral or creditor selection services. 
Section 1040.3(a)(1)(iii) includes in the coverage of part 1040 
providing referrals or providing or offering creditor selection 
consistent with the meaning in 12 CFR 1002.2(l) by a creditor as its 
primary business. A person whose primary business is the sale of non-
financial goods or services that also provides or offers the services 
described in Sec.  1040.3(a)(1)(iii) would not be covered under Sec.  
1040.4(a)(1)(iii) because the referrals are not its primary business.
Paragraph (a)(1)(v)
    1. Servicing of credit. Section 1040.3(a)(1)(v) includes in the 
coverage of part 1040 servicing of extensions of consumer credit. 
Servicing of extensions of consumer credit includes, but is not limited 
to, student loan servicing as defined in 12 CFR 1090.106 and mortgage 
loan servicing as defined in 12 CFR 1024.2(b).
Paragraph (a)(3)
    1. Debt relief products and services. Section 1040.3(a)(3) includes 
in the coverage of Part 1040 services that offer to renegotiate, 
settle, or modify the terms of a consumer's debt. Providers of these 
services would be covered by Sec.  1040.3(a)(3) regardless of the 
source of the debt, including but not limited to when seeking to 
relieve consumers of a debt that does not arise from a consumer credit 
transaction as described by Sec.  1040.3(a)(1)(i) or from a consumer 
financial product or service more generally.
Paragraph (a)(8)
    1. Credit card and charge card transactions. Section 1040.3(a)(8) 
includes in the coverage of part 1040 certain payment processing 
activities involving the initiation of credit card or charge card 
transactions. The terms ``credit card ``and ``charge card'' are defined 
in Regulation Z, 12 CFR 1026.2(a)(15). For purposes of Sec.  
1040.3(a)(8), those definitions in Regulation Z apply.
Paragraph (a)(10)
    1. Collection of debt by the same person arising from covered and 
non-covered products and services. Section 1040.3(a)(10)(i) includes in 
the coverage of part 1040 the collection of debt by a provider that 
arises from its providing any of the products and services described in 
paragraphs (a)(1) through (9) of Sec.  1040.3, including for example an 
extension of consumer credit described in Sec.  1040.3(a)(1). If the 
person collecting such debt also collects other debt that does not 
arise from any of the products and services described in paragraphs 
(a)(1) through (9) of Sec.  1040.3, the collection of that other debt 
is not included in the coverage of Sec.  1040.3(a)(10)(i). For example, 
if a creditor extended consumer credit to consumers and business credit 
to other persons, Sec.  1040.3(a)(10)(i) would include in the coverage 
of part 1040 the collection of the consumer credit but not the 
collection of the business credit. Similarly, if a debt buyer purchases 
a portfolio of credit card debt that includes both consumer and 
business debt, Sec.  1040.3(a)(10)(ii) would include in the coverage of 
Part 1040 only the collection of the consumer credit card debt.
    2. Collection of debt by affiliates. Paragraphs (a)(10)(i) and (ii) 
of Sec.  1040.3 cover certain collection activities not only by 
providers themselves, but also by their affiliates. The term 
``affiliate'' is defined in 12 U.S.C. 5481(1) as any person that 
controls, or is controlled by, or is under common control with another 
person.
3(b) Excluded Persons
Paragraph (b)(1)
    1. Exclusion for broker dealers to the extent they are subject to 
certain rules promulgated by the Financial Industry Regulatory 
Authority. Section 1040.3(b)(1) excludes from the coverage of part 1040 
broker dealers to the extent they are subject to rules promulgated or 
authorized by the U.S. Securities and Exchange Commission (SEC) 
prohibiting the use of pre-dispute arbitration agreements in class 
action litigation and providing that arbitral awards be made public. 
Rules authorized by the SEC as referenced in Sec.  1040.3(b)(1) include 
those promulgated by the Financial Industry Regulatory Authority 
(FINRA) and authorized by the SEC, such as FINRA Rule 2268: 
Requirements When Using Predispute Arbitration Agreements for Customer 
Accounts, FINRA Rule 12204: Class Action Claims, and FINRA Rule 12904: 
Awards.
Paragraph (b)(2)
    1. Exclusion only for governments and their affiliates. Section 
1040.3(b)(2) excludes from the coverage of part 1040 governments and 
their affiliates under certain circumstances. The term ``affiliate'' is 
defined in 12 U.S.C. 5481(1) as any person that controls, or is 
controlled by, or is under common control with another person. One of 
the requirements for this exclusion in Sec.  1040.3(b)(2) to apply to a 
government or government affiliate is that the government or government 
affiliate itself be providing the covered product or service directly 
to consumers. As a result, the exclusion does not extend to an entity 
that may provide services on behalf of a government or government 
affiliate, when the entity is not itself a government or government 
affiliate.
    2. Examples of consumer financial products or services provided 
directly by a government or government affiliate to consumers who 
reside in the territorial jurisdiction of the government. Section 
1040.3(b)(2)(ii) excludes from the coverage of part 1040 State, local, 
or tribal governments and their affiliates when directly providing a 
consumer

[[Page 32928]]

financial product or service to consumers who reside in the 
government's territorial jurisdiction.
    i. Such products or services provided to a consumer who resides in 
the territorial jurisdiction of the government may include, but are not 
limited to, the following:
    A. A bank that is an affiliate of a State government providing a 
student loan or deposit account directly to a resident of the State; or
    B. A utility that is an affiliate of a State or municipal 
government providing credit or payment processing services directly to 
a consumer who resides in the State or municipality to allow a consumer 
to purchase energy from an energy supplier that is not an affiliate of 
the same State or municipal government.
    ii. Such products or services provided to a consumer who does not 
reside in the territorial jurisdiction of the government may include, 
but are not limited to, the following:
    A. A bank that is an affiliate of a State government providing a 
student loan to a student who resides in another State; or
    B. A tribal government affiliate providing a short-term loan to a 
consumer who does not reside in the tribal government's territorial 
jurisdiction and completes the transaction via the Internet.
Paragraph (b)(3)
    1. Including consumers to whom affiliates offer or provide a 
product or service toward the numerical threshold for exemption of a 
person under Sec.  1040.4(b)(3). Section 1040.3(b)(3) provides an 
exclusion to persons offering or providing a service covered by Sec.  
1040.3(a) if no more than 25 consumers are offered the product or 
service in the current and prior calendar years by the person and its 
affiliates. For purposes of this test, the number of consumers to whom 
affiliates of a person offer or provide a product or service is 
combined with the number of consumers to whom the person itself offers 
or provides that product or service. The term ``affiliate'' is defined 
in 12 U.S.C. 5481(1) as any person that controls, or is controlled by, 
or is under common control with another person.

Section 1040.4 Limitations on the Use of Pre-Dispute Arbitration 
Agreements

    1. Enters into a pre-dispute arbitration agreement. Section 1040.4 
applies to providers that enter into pre-dispute arbitration agreements 
after the date set forth in Sec.  1040.5(a).
    i. Examples of when a provider enters into a pre-dispute 
arbitration agreement for purposes of Sec.  1040.4 include but are not 
limited to when the provider:
    A. Provides to a consumer a new product or service that is subject 
to a pre-dispute arbitration agreement, and the provider is a party to 
the pre-dispute arbitration agreement;
    B. Acquires or purchases a product covered by Sec.  1040.3(a) that 
is subject to a pre-dispute arbitration agreement and becomes a party 
to that pre-dispute arbitration agreement, even if the person selling 
the product is excluded from coverage under Sec.  1040.3(b); or
    C. Adds a pre-dispute arbitration agreement to an existing product 
or service.
    ii. Examples of when a provider does not enter into a pre-dispute 
arbitration agreement for purposes of Sec.  1040.4 include but are not 
limited to when the provider:
    A. Modifies, amends, or implements the terms of a product or 
service that is subject to a pre-dispute arbitration agreement that was 
entered into before the date set forth in Sec.  1040.5(a); or
    B. Acquires or purchases a product that is subject to a pre-dispute 
arbitration agreement but does not become a party to the pre-dispute 
arbitration agreement.
    2. Application of Sec.  1040.4 to providers that do not enter into 
pre-dispute arbitration agreements.
    i. Pursuant to Sec.  1040.4(a)(1), a provider cannot rely on any 
pre-dispute arbitration agreement entered into by another person after 
the effective date with respect to any aspect of a class action 
concerning a product or service covered by Sec.  1040.3 and pursuant to 
Sec.  1040.4(b) may be required to submit certain specified records 
related to claims filed in arbitration pursuant to such pre-dispute 
arbitration agreements. See comment 4(a)(2)-1, however, which clarifies 
that Sec.  1040.4(a)(2) does not apply to providers that do not enter 
into pre-dispute arbitration agreements.
    ii. For example, when a debt collector collecting on consumer 
credit covered by Sec.  1040.3(a)(1)(i) has not entered into a pre-
dispute arbitration agreement, Sec.  1040.4(a)(1) nevertheless 
prohibits the debt collector from relying on a pre-dispute arbitration 
agreement entered into by the creditor with respect to any aspect of a 
class action filed against the debt collector concerning its debt 
collection products or services covered by Sec.  1040.3. Similarly, 
Sec.  1040.4(a)(1) would also prohibit the debt collector from relying 
with respect to any aspect of such a class action on a pre-dispute 
arbitration agreement entered into by a merchant creditor who was 
excluded from coverage by Sec.  1040.3(b)(5).
4(a) Use of Pre-Dispute Arbitration Agreements in Class Actions
4(a)(1) General Rule
    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 Sec.  1040.5(a) with respect to any aspect 
of a class action concerning any of the consumer financial products or 
services covered by Sec.  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
    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.
    2. Class actions concerning multiple products or services. In a 
class action concerning multiple products or services only some of 
which are covered by Sec.  1040.3, the prohibition in Sec.  
1040.4(a)(1) applies only to claims that concern the consumer financial 
products or services covered by Sec.  1040.3.
4(a)(2) Required Provision
    1. Application of Sec.  1040.4(a)(2) to providers that do not enter 
into pre-dispute arbitration agreements. Section 1040.4(a)(2) sets 
forth requirements only for providers that enter into pre-dispute 
arbitration agreements for a covered product or service. Accordingly, 
the requirements of Sec.  1040.4(a)(2) do not apply to a provider that 
does not enter into a pre-dispute arbitration agreement with a 
consumer.

[[Page 32929]]

    2. Entering into a pre-dispute arbitration agreement that had 
existed previously between other parties. Section 1040.4(a)(2)(iii) 
requires a provider that enters into a pre-dispute arbitration 
agreement that had existed previously as between other parties and does 
not contain the provision required by Sec.  1040.4(a)(2)(i) or (ii), 
either to ensure the agreement is amended to contain the required 
provision or to provide a written notice to any consumer to whom the 
agreement applies. This could occur, when, for example, Bank A is 
acquiring Bank B after the compliance date specified in Sec.  
1040.5(a), and Bank B had entered into pre-dispute arbitration 
agreements before the compliance date specified in Sec.  1040.5(a). If, 
as part of the acquisition, Bank A enters into the pre-dispute 
arbitration agreements of Bank B, Bank A would be required either to 
ensure the account agreements were amended to contain the provision 
required by Sec.  1040.4(a)(2)(i), the alternative permitted by Sec.  
1040.4(a)(2)(ii), or to provide the notice specified in Sec.  
1040.4(a)(2)(iii). See comment 4-1 for examples of when a provider 
enters into a pre-dispute arbitration agreement.
    3. 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 Sec.  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.
4(b) Submission of Arbitral Records
    1. Submission by entities other than providers. Section 1040.4(b) 
requires providers to submit specified arbitral records to the Bureau. 
Providers are not required to submit the records themselves if they 
arrange for another person, such as an arbitration administrator or an 
agent of the provider, to submit the records on the providers' behalf. 
The obligation to comply with Sec.  1040.4(b) nevertheless remains on 
the provider and thus the provider must ensure that the person submits 
the records in accordance with Sec.  1040.4(b).
4(b)(1) Records To Be Submitted
Paragraph 4(b)(1)(ii)
    1. Determinations that a pre-dispute arbitration agreement does not 
comply with an arbitration administrator's fairness principles. Section 
1040.4(b)(1)(ii) requires submission to the Bureau of any communication 
the provider receives related to any arbitration administrator's 
determination that the provider's pre-dispute arbitration agreement 
entered into after the date set forth in Sec.  1040.5(a) does not 
comply with the administrator's fairness principles or rules. The 
submission of such records is required both when the determination 
occurs in connection with the filing of a claim in arbitration as well 
as when it occurs if no claim has been filed. Further, when the 
determination occurs with respect to a pre-dispute arbitration 
agreement that the provider does not enter into with a consumer, 
submission of any communication related to that determination is not 
required. For example, if the provider submits a prototype pre-dispute 
arbitration agreement for review by the arbitration administrator and 
never includes it in any consumer agreements, the pre-dispute 
arbitration agreement would not be entered into and thus submission to 
the Bureau of communication related to a determination made by the 
administrator concerning the pre-dispute arbitration agreement would 
not be required.
    2. Examples of fairness principles, rules, or similar requirements. 
Section 1040.4(b)(1)(ii) requires submission to the Bureau of records 
related to any administrator's determination that a provider's pre-
dispute arbitration agreement violates the administrator's fairness 
principles, rules, or similar requirements. What constitutes an 
administrator's fairness principles, rules, or similar requirements 
should be interpreted broadly. Examples of such principles or rules 
include, but are not limited to:
    i. The American Arbitration Association's Consumer Due Process 
Protocol; or
    ii. JAMS Policy on Consumer Arbitrations Pursuant to Pre-Dispute 
Clauses Minimum Standards of Procedural Fairness.
4(b)(3) Redaction
    1. Redaction by entities other than providers. Section 1040.4(b)(3) 
requires providers to redact records before submitting them to the 
Bureau. Providers are not required to perform the redactions themselves 
and may arrange for another person, such as an arbitration 
administrator, or an agent of the provider, to redact the records. The 
obligation to comply with Sec.  1040.4(b) nevertheless remains on the 
provider and thus the provider must ensure that the person redacts the 
records in accordance with Sec.  1040.4(b).

Section 1040.5 Compliance Date and Temporary Exception

5(b) Exception for Pre-Packaged General-Purpose Reloadable Prepaid Card 
Agreements
Paragraph 5(b)(2)
    1. Examples. Section 1040.5(b)(2)(ii) requires a provider that has 
the ability to contact the consumer in writing to provide an amended 
pre-dispute arbitration agreement to the consumer in writing within 30 
days after the issuer has the ability to contact the consumer. A 
provider is able to contact the consumer when, for example, the 
provider has the consumer's mailing address or email address.

    Dated: May 3, 2016.
Richard Cordray,
Director, Bureau of Consumer Financial Protection.

    Note: The following appendixes will not appear in the Code of 
Federal Regulations.

Appendix A to Section 1022(b)(2) Analysis--Cases Analyzed

    As stated in the Bureau's analysis of the costs, benefits, and 
impacts of the proposed class rule under Dodd-Frank section 
1022(b)(2), the Bureau's estimate of additional federal class 
litigation costs, benefits, and impacts seeks to use the federal 
class settlements identified in the Bureau's Study to project the 
number and size of incremental class action settlements expected to 
result if the proposal were finalized, as well as other additional 
costs associated with incremental class litigation. To make that 
projection the Bureau has sought to confine its analysis to class 
settlements of class action cases of a type from which providers of 
consumer financial services are today able to insulate themselves by 
using an arbitration agreement but would not be able to do so under 
the proposed rule. For that reason, in making its projections the 
Bureau excluded two types of federal class settlements that were 
analyzed in Section 8 of the Study: (1) Class action settlements 
involving providers or financial products or services which fall 
outside the scope of the proposal so that providers would still be 
able to insulate themselves from such cases under the proposal; \1\ 
and (2) class action settlements involving claims of a type that 
could not have been affected by the presence of an arbitration 
agreement because there was no

[[Page 32930]]

contract or privity of contract between the provider and the members 
of the class, or because of legal constraints on use of arbitration 
agreements.\2\ Examples of the first type include class settlements 
involving real estate settlement services, insurance firms providing 
ancillary (add-on) products which take the form of insurance, claims 
against credit reporting agencies where the claims did not relate to 
the provision of a consumer report or related information, and class 
settlements by merchants of claims concerning ATM ``sticker'' notice 
requirements previously required by EFTA.\3\ Examples of the second 
type include class settlements by financial institutions of claims 
by non-customers concerning ATM ``sticker'' notice requirements 
previously required by EFTA, and class settlements of claims 
involving check cashing by merchants. In total 117 of the 419 
federal class settlements analyzed in Section 8 of the Study were 
not used for purposes of these projections. The largest group 
excluded--over half of the total--were EFTA ATM class settlements. 
The 117 federal class settlements in the above categories are 
identified in Appendix B to the proposed rule.
---------------------------------------------------------------------------

    \1\ Persons offering or providing similar products or services 
might be covered by the proposed rule in some circumstances; the 
Bureau's estimates are not a legal determination of coverage.
    \2\ In addition, two debt collection cases were inadvertently 
included in the set of cases analyzed in Section 8 twice. The Bureau 
therefore removed the two duplicates from the set of cases analyzed 
in the Section 1022(b)(2) Analysis.
    \3\ In addition, a class settlements of a dispute concerning a 
merchant's disclosures on a prepaid funeral plan was analyzed in 
Section 8 of the Study, but was not used as a basis for the Bureau's 
estimate of impacts. As a result the Bureau did not find any 
merchant TILA creditor (based on allegations of consumer credit with 
a finance charge) federal class settlements. Such settlements, 
however, may exist in state courts.
---------------------------------------------------------------------------

    In addition, to avoid potential underestimates of the costs of 
the proposal in the Bureau's Section 1022(b)(2) Analysis, the Bureau 
included for purposes of its calculations 10 federal class 
settlements that were identified as part of the Study but were not 
include in the results reported in the Study. Seven of these cases 
involve allegations of ``cramming'' of third-party charges on 
consumer telecommunications bills. One case involved long-term auto 
leasing.\4\ The other two cases appeared to be companion class 
settlements to a payday loan debt collection class settlement that 
was included in Section 8 of the Study.\5\
---------------------------------------------------------------------------

    \4\ The case materials reviewed by the Bureau do not 
definitively establish whether the automobile leases at issue would 
be covered under proposed Sec.  1040.3(a)(2).
    \5\ These settlements resolved alleged FDCPA violations asserted 
by the same consumer, in the same court, by the same law firm, in 
the same month, against a group of defendants involved in an 
apparently related set of activities in the payday lending market.
---------------------------------------------------------------------------

    After accounting for all of the foregoing adjustments, the list 
below identifies the resulting set of 312 federal class settlements 
used in the Section 1022(b)(2) Analysis to project the estimated 
impact of the proposed rule on federal class litigation against 
providers, with 10 added cases noted with a ``*.'' (Cases 
consolidated in the checking account overdraft reordering 
multidistrict litigation are listed under their original docket 
numbers, but are consolidated under Docket 1:09-MD-2036-JLK in the 
U.S. District Court, Southern District of Florida; these settlements 
are noted with ``**.'')

    Adams v. LVNV Funding L.L.C., 1:09-CV-06469 (N.D. Ill.);
    Ajiere v. Tressler, Soderstrom, Maloney & Priess, L.L.P., 1:09-
CV-06125 (N.D. Ill.);
    Anama v. AFNI, Inc., 1:07-CV-04251 (N.D. Ill.);
    Anderson v. Nationwide Credit, Inc., 2:10-CV-03825 (E.D.N.Y.);
    Anokhin v. Continental Service Group, Inc., 1:10-CV-02890 
(E.D.N.Y.);
    Aramburu v. Healthcare Financial Services, Inc., 1:02-CV-06535 
(E.D.N.Y.);
    Arlozynski v. Rubin & Debski, P.A., 8:09-CV-02321 (M.D. Fla.);
    Arroyo v. Professional Recovery Services, Inc., 1:09-CV-00750 
(E.D. Cal.);
    Arthur v. SLM Corp., 2:10-CV-00198 (W.D. Wash.);
    Asch v. Teller Levit & Silvertrust, P.C., 1:00-CV-03290 (N.D. 
Ill.);
    Aspan v. Hudson & Keyse, L.L.C., 1:08-CV-02826 (N.D. Ill.);
    Baron v. Direct Capital Corp., 2:09-CV-00669 (W.D. Wash.);
    Barrera v. Resurgence Financial, L.L.C., 1:08-CV-03519 (N.D. 
Ill.);
    Bennett v. Weltman Weinberg & Reis Co., 1:07-CV-01818 (N.D. 
Ohio);
    Bertram Robison v. WFS Financial Inc., 8:06-CV-01072 (C.D. 
Cal.);
    Bibb v. Friedman & Wexler L.L.C., 2:07-CV-02173 (C.D. Ill.);
    Bicking v. Law Offices of Rubenstein & Cogan, 3:11-CV-00078 
(E.D. Va.);
    Blair v. Phillips & Cohen Associates, Ltd., 1:09-CV-05271 (N.D. 
Ill.);
    Blake v. Smith Thompson Shaw & Manausa P.A., 4:08-CV-00358 (N.D. 
Fla.);
    Blarek v. Encore Receivable Management Inc., 2:06-CV-00420 (E.D. 
Wis.);
    Blodgett v. Regent Asset Management Solutions, Inc., 0:09-CV-
03210 (D. Minn.);
    Blue v. Unifund CCR Partners, 1:09-CV-01777 (N.D. Ill.);
    Boettger v. Sula, 1:12-CV-00002 (S.D. Iowa);
    Bogner v. Masari Investments, L.L.C., 2:08-CV-01511 (D. Ariz.);
    Bradshaw v. Hilco Receivables, L.L.C., 1:10-CV-00113 (D. Md.);
    Brown v. Syndicated Office Systems, Inc., 9:10-CV-80465 (S.D. 
Fla);
    Buchman v. Bray & Lunsford, P.A., 8:07-CV-01752 (M.D. Fla.);
    Burton v. Northstar Location Services, L.L.C., 1:08-CV-05751 
(N.D. Ill.);
    Cady v. Codilis & Associates, P.C., 1:08-CV-01901 (N.D. Ill.);
    Cain v. Consumer Porfolio Services, Inc., 1:10-CV-02697 (N.D. 
Ill.);
    Cain v. J.P.T. Automotive, Inc., 2:05-CV-03805 (E.D.N.Y.);
    Calloway v. Cash America Net of California, L.L.C., 5:09-CV-
04858 (N.D. Cal.);
    Carlsen v. Freedom Debt Relief L.L.C., 2:09-CV-00055 (E.D. 
Wash.);
    Carpenter v. Persolve, L.L.C., 3:07-CV-00633 (S.D. Ill.);
    Case v. Bank of Oklahoma, N.A. (In re Checking Account Overdraft 
Litig.)**, 5:10-00901-L (W.D. Okla.);
    Castellano v. Global Credit & Collection Corp., 2:10-CV-05898 
(E.D.N.Y.);
    Caston-Palmer v. NCO Portfolio Management, Inc., 1:08-CV-02818 
(N.D. Ill.);
    Catala v. Resurgent Capital Services L.P., 3:08-CV-02401 (S.D. 
Cal.);
    Cervantes v. Pacific Bell L.L.C.*, 3:05-CV-01469 (S.D. Cal.);
    Cheney v. Tek-Collect Inc., 1:09-CV-08052 (N.D. Ill.);
    Chulsky v. Hudson Law Offices, P.C., 3:10-CV-03058 (D.N.J.);
    Clendenin v. Carecredit, L.L.C., 1:08-CV-06559 (N.D. Ill.);
    Cole v. Portfolio Recovery Associates, L.L.C., 4:08-CV-00036 (D. 
Mont.);
    Cole v. Wells Fargo Bank N.A., 2:07-CV-00916 (W.D. Wash.);
    Colello v. Franklin Collection Service, Inc., 1:10-CV-06229 
(N.D. Ill.);
    Corsick v. West Asset Management, Inc., 5:09-CV-03053 (N.D. 
Cal.);
    Cosgrove v. Citizens Automobile Finance, Inc., 5:09-CV-01095 
(E.D. Pa.);
    Cotton v. Asset Acceptance, L.L.C., 1:07-CV-05005 (N.D. Ill.);
    Cotton v. National Action Financial Services, Inc., 1:10-CV-
04709 (N.D. Ill.);
    Cox v. Unifund CCR Partners, 1:08-CV-01005 (N.D. Ill.);
    Craddock v. Hayt, Hayt & Landau, L.L.C., 3:09-CV-00595 (D.N.J.);
    Craft v. North Seattle Community College Foundation, 3:07-CV-
00132 (M.D. Ga.);
    Cruz-Martinez v. Hellmuth & Johnson, P.L.L.C., 0:08-CV-04289 (D. 
Minn.);
    Cyrus Ahmad Ebrahimi v. West Asset Management Inc., 8:09-CV-
01109 (C.D. Cal.);
    Dalton v. Cardworks Services, L.L.C., 1:09-CV-00563 (S.D. Ala);
    Davis v. Riddle & Associates, P.C., 2:07-CV-00284 (E.D. Pa.);
    Day v. Persels & Associates, L.L.C., 8:10-CV-02463 (M.D. Fla.);
    Dee v. Bank of The West (In re Checking Account Overdraft 
Litig.)**, 4:10-CV-02736 (N.D. Cal.);
    D'Elia v. First Capital, L.L.C., 1:07-CV-06042 (N.D. Ill.);
    Diangelo v. Unifund CCR Partners, 1:08-CV-03205 (N.D. Ill.);
    Dobson v. Asset Acceptance L.L.C., 1:07-CV-06203 (N.D. Ill.);
    Donahue v. Weltman, Weinberg & Reis Co., L.P.A., 1:10-CV-04619 
(N.D. Ill.);
    Douma v. Law Offices of Mitchell N. Kay P.C., 1:09-CV-09957 
(S.D.N.Y);
    Drinkman, Robert v. Encore Receivable Management, Inc., 3:07-CV-
00363 (W.D. Wis.);
    Ducharme v. John C. Heath Attorney at Law P.L.L.C., 3:10-CV-
02763 (N.D. Cal.);
    Duffy v. Oliphant Financial L.L.C., 2:07-CV-03657 (E.D.N.Y.);
    Duhadway v. Credigy Receivables Inc., 1:08-CV-00852 (N.D. Ill.);
    Durham v. Continental, 3:07-CV-01763 (S.D. Cal.);
    Eason v. AFNI, Inc., 8:08-CV-00128 (D. Md.);
    Eatmon v. Palisades Collection, L.L.C., 2:08-CV-00306 (E.D. 
Tex.);
    Eddie Wayne Hutchison v. Progressive Management Systems, Inc., 
2:07-CV-07464 (C.D. Cal.);
    Elizabeth Lavalle v. Chex Systems, Inc., 8:08-CV-01383 (C.D. 
Cal.);
    Elsey v. Pierce & Associates, P.C., 1:08-CV-02538 (N.D. Ill.);

[[Page 32931]]

    Esslinger v. HSBC Bank USA Inc., 2:10-CV-03213 (E.D. Pa.);
    Fahme v. I.C. System, Inc., 1:08-CV-01487 (E.D.N.Y.);
    Faloney v. Wachovia Bank, N.A., 2:07-CV-01455 (E.D. Pa.);
    Fike v. The Bureaus, Inc., 1:09-CV-02558 (N.D. Ill.);
    Flores v. OneWest Bank, F.S.B., d/b/a IndyMac Federal Bank, 
1:09-CV-04042 (N.D. Ill.);
    Ford v. Verisign Inc.*, 3:05-CV-00819 (S.D. Cal.);
    Foster v. Velocity Investments, L.L.C., 1:07-CV-00824 (N.D. 
Ill.);
    Foster v. D.B.S. Collection Agency, 2:01-CV-00514 (S.D. Ohio);
    Foti v. NCO Financial Systems, Inc., 1:04-CV-00707 (S.D.N.Y);
    Fragoso v. HBLC, Inc., 1:07-CV-05482 (N.D. Ill.);
    Frances Anne Ramsey v. Prime Healthcare Services Inc., 8:08-CV-
00820 (C.D. Cal.);
    Francisco Marenco v. Visa Inc., 2:10-CV-08022 (C.D. Cal.);
    Friedrichs v. BMW Financial Services L.L.C., 4:08-CV-04486-PJH 
(C.D. Cal.);
    Froumy v. Stark & Stark, 3:09-CV-04890 (D.N.J.);
    Gaalswyk-Knetzke v. The Receivable Management Services Corp., 
8:08-CV-00493 (M.D. Fla.);
    Gail v. Law Offices of Weltman Weinberg & Reis Co. L.P.A, 2:05-
CV-00721 (E.D. Wis.);
    Gailin R. Brown v. Dean J. Jungers, 8:08-CV-00451 (D. Neb.);
    Galbraith v. Resurgent Capital Services, 2:05-CV-02133 (E.D. 
Cal.);
    Garland v. Cohen & Krassner, 1:08-CV-04626 (E.D.N.Y.);
    Garland v. Greenberg, 1:09-CV-02643 (E.D.N.Y.);
    Garnett v. Lasalle Bank Corp., 1:08-CV-01872 (N.D. Ill.);
    Garo v. Global Credit & Collection Corp., 2:09-CV-02506 (D. 
Ariz.);
    Gaudalupe v. Miller Law Offices, P.L.L.C., 1:06-CV-03044 
(E.D.N.Y.);
    Gillespie v. Equifax Inc., 1:05-CV-00138 (N.D. Ill.);
    Goodie v. Weinstock, Friedman & Friedman, P.C., 1:10-CV-01870 
(D. Md.);
    Grannan v. Alliant Law Group, P.C., 5:10-CV-02803 (N.D. Cal.);
    Gravina v. Client Services, Inc., 2:08-CV-03634 (E.D.N.Y.);
    Gray v. Mobile Messenger*, 0:08-CV-61089 (S.D. Fla);
    Griffin v. Capital One Bank, 8:08-CV-00132 (M.D. Fla.);
    Guidos v. Northstar Education Finance, Inc., 0:08-CV-04837 (D. 
Minn.);
    Gunther v. Capital One, N.A., 2:09-CV-02966 (E.D.N.Y.);
    Gutierrez v. LVNV Funding, L.L.C., 3:08-CV-00225 (W.D. Tex.);
    Haidee Estrella v. Freedom Financial Network L.L.C., 3:09-CV-
03156 (N.D. Cal.);
    Halbert v. Biehl & Biehl, Inc., 1:09-CV-06221 (N.D. Ill.);
    Halbert v. Creditors Interchange Receivable Management, L.L.C., 
1:09-CV-06207 (N.D. Ill.);
    Hale v. AFNI, Inc., 1:08-CV-03918 (N.D. Ill.);
    Hall v. Bronson & Migliaccio, L.L.P., 1:07-CV-00255 (S.D. Ohio);
    Hall v. Capital One Auto Finance, Inc., 1:08-CV-01181 (N.D. 
Ohio);
    Harris v. D. Scott Carruthers & Associates, 8:09-CV-00154 (D. 
Neb.);
    Hartt v. Flagship Credit Corp., 2:10-CV-00822 (E.D. Pa.);
    Hauk v. LVNV Funding, L.L.C., 1:09-CV-03238 (D. Md.);
    Hearsh v. OSI Collection Services, Inc., 1:07-CV-00097 (N.D. 
Ill.);
    Henry Mcmullen v. Jennings & Valancy, P.A. v. Jennings & 
Valancy, P.A., 0:10-CV-60050 (S.D. Fla);
    Herkert v. Midland Funding NNC-2 Corp., 1:08-CV-00760 (N.D. 
Ill.);
    Holman v. Student Loan Xpress, Inc., 8:08-CV-00305 (M.D. Fla.);
    Horton v. IQ Telecom, Inc., 1:07-CV-02478 (N.D. Ill.);
    Housenkamp v. Weltman, Weinberg & Reis, Co. of Michigan, 1:09-
CV-10613 (E.D. Mich.);
    Howell v. Capital Management Services L.P., 1:10-CV-00184 (N.D. 
Ind.);
    Huffman v. Zwicker & Associates, P.C., 1:07-CV-01369 (E.D. 
Cal.);
    Hughes v. Harvest Credit Management VII, L.L.C., 1:08-CV-03685 
(N.D. Ill.);
    Hunt v. Check Recovery Systems, Inc., 4:05-CV-04993 (N.D. Cal.);
    Hurwitz v. Ameriquest Recovery Services, L.L.C., 1:06-CV-01440 
(E.D.N.Y.);
    In re: Chase Bank USA, N.A. ``Check Loan'' Contract Litigation, 
3:09-MD-02032 (N.D. Cal.);
    In re: Currency Conversion Fee Antitrust Litigation, 1:01-MD-
01409 (S.D.N.Y);
    In re: Lifelock, Inc., Marketing & Sales Practices Litigation, 
2:08-MD-01977 (D. Ariz.);
    Jackson v. Metscheck, Inc., 1:11-CV-02735 (N.D. Ga.);
    Jancik v. Cavalry Portfolio Services L.L.C., 0:06-CV-03104 (D. 
Minn.);
    Janice J. Abat v. JPMorgan Chase & Co., 8:07-CV-01476 (C.D. 
Cal.);
    Jenkins v. Hyundai Motor Finance Co., 2:04-CV-00720 (S.D. Ohio);
    Johnson v. Kleinsmith & Associates P.C., 3:09-CV-00003 (D.N.D.);
    Johnson v. Law Offices of Brachfeld & Associates, 8:09-CV-00336 
(D. Neb.);
    Johnson v. Midland Funding, 1:09-CV-02391 (D. Md.);
    Jones v. Client Services, Inc., 2:10-CV-00343 (E.D. Pa.);
    Jones v. Hoffman Swartz*, 1:10-CV-07632 (N.D. Ill.);
    Jones v. National Credit Adjusters, L.L.C., 1:10-CV-08027 (N.D. 
Ill.);
    Jones v. Rory Vohwinkel*, 1:10-CV-07954 (N.D. Ill.);
    Julks v. Atlantic Funding Group, L.L.C., 1:06-CV-11704 (D. 
Mass.);
    Kadlec v. Weltman, Weinberg & Reis Co., L.P.A., 3:10-CV-00223 
(W.D. Tex.);
    Kalish v. Kapp & Kalamotousakis, L.L.P., 1:06-CV-04933 
(S.D.N.Y);
    Keck v. Bank of America, 3:08-CV-01219 (N.D. Cal.);
    Kern v. LVNV Funding L.L.C., 1:09-CV-02202 (N.D. Ill.);
    Kight v. Eskanos & Adler, P.C., 3:05-CV-01999 (S.D. Cal.);
    Kindler v. Mitsubishi Motors Credit of America, Inc., 4:09-CV-
00315 (W.D. Mo.);
    King v. United SA Federal Credit Union, 5:09-CV-00937 (W.D. 
Tex.);
    Kiousis v. Encore Receivable Management, Inc., 1:11-CV-00033 
(N.D. Ill.);
    Kirk v. Gobel, 2:08-CV-00344 (E.D. Wash.);
    Kish v. Suntrust Banks, Inc., 1:06-CV-00968 (N.D. Ga.);
    Kistner v. Law Offices of Michael P. Margelefsky, L.L.C., 3:05-
CV-07238 (N.D. Ohio);
    Krech v. Efunds Corp., 1:08-CV-00985 (N.D. Ill.);
    Lacour v. Whitney Bank, 8:11-CV-01896 (M.D. Fla.);
    Lagana v. Stephen Einstein & Associates, P.C., 1:10-CV-04456 
(S.D.N.Y);
    Landrum v. Meadows Credit Union, 4:08-CV-00441 (W.D. Mo.);
    Langendorfer v. Kaufman, 1:10-CV-00797 (S.D. Ohio);
    Lantrip v. Dodeka L.L.C., 2:08-CV-00476 (E.D. Tex.);
    Larsen v. Union Bank, N.A. (In re Checking Account Overdraft 
Litig.)**, 4:09-CV-3250 (N.D. Cal.);
    Lau v. Arrow Financial Services, L.L.C., 1:06-CV-03141 (N.D. 
Ill.);
    Laura Hoffman v. Citibank (South Dakota) N.A., 8:06-CV-00571 
(C.D. Cal.);
    Layman v. Forster, 1:09-CV-00733 (S.D. Ind.);
    Lefoll v. Key Hyundai of Manchester L.L.C., 3:08-CV-01593 (D. 
Conn.);
    Lemieux v. Global Credit & Collection Corp., 3:08-CV-01012 (S.D. 
Cal.);
    Lewis v. Northeast Credit & Collections, Inc., 7:07-CV-11593 
(S.D.N.Y);
    Lige v. Titanium Solutions Inc., 2:06-CV-00400 (N.D. Ind.);
    Limpert v. Cambridge Credit Counseling Corp., 2:03-CV-05986 
(E.D.N.Y.);
    Lofton v. Bank of America Corp., 3:07-CV-05892 (N.D. Cal.);
    Lopez v. JPMorgan Chase Bank (In re Checking Account Overdraft 
Litig.)**, 1:09-CV-23127-JLK (S.D. Fla);
    Louie v. Weltman, Weinberg & Reis Co., L.P.A., 1:11-CV-01758 
(N.D. Ill.);
    Luxford v. Resurgent Capital Services, L.P., 4:09-CV-02809 (N.D. 
Cal.);
    Makson v. Portfolio Recovery Associates, L.L.C., 3:07-CV-00582 
(E.D. Va.);
    Margulin v. Trojan Professional Services Inc., 1:08-CV-07052 
(N.D. Ill.);
    Markey v. Robert Joseph Williams Co., L.L.C., 1:08-CV-04304 
(D.N.J.);
    Marshall-Mosby v. Blitt & Gaines, P.C., 1:08-CV-00758 (N.D. 
Ill.);
    Martin v. Cavalry Portfolio Services, L.L.C., 1:07-CV-04745 
(N.D. Ill.);
    Martin v. J.C. Christensen & Associates, Inc., 1:09-CV-05726 
(N.D. Ill.);
    Martinez v. Elite Recovery Services, Inc., 3:08-CV-00967 
(D.N.J.);
    Martinez v. FMS, Inc., 3:07-CV-01157 (M.D. Fla.);
    Martsolf v. JBC Legal Group, P.C., 1:04-CV-01346 (M.D. Pa.);
    Mathena v. Webster Bank N.A., 3:10-CV-01448 (D. Conn.);
    Matthew v. Premium Asset Recovery Corp., 1:07-CV-04306 (N.D. 
Ill.);
    Mayfield v. Memberstrust Credit Union, 3:07-CV-00506 (E.D. Va.);
    Mckenna v. Pollack & Rosen, P.A., 0:11-CV-62134 (S.D. Fla);

[[Page 32932]]

    Mcnulty v. Edwin A. Abrahamsen & Associates. P.C., 2:08-CV-00422 
(W.D. Pa.);
    Meselsohn v. First National Collection Bureau, Inc., 1:06-CV-
03324 (E.D.N.Y.);
    Meselsohn v. Lerman, 2:06-CV-04115 (E.D.N.Y.);
    Mesick v. Freedman, Anselmo, Lindberg & Rappe, L.L.C., 1:08-CV-
02695 (N.D. Ill.);
    Mikovic v. Financial Medical Systems, Inc., 2:10-CV-02457 
(E.D.N.Y.);
    Milam v. Credigy Receivables, Inc., 1:07-CV-04417 (N.D. Ill.);
    Miller v. Midland Credit Management, Inc., 1:08-CV-00780 (N.D. 
Ill.);
    Milo v. Barneys New York, Inc., 1:10-CV-03133 (S.D.N.Y);
    Mitchem v. Illinois Collection Service, Inc., 1:09-CV-07274 
(N.D. Ill.);
    Mitchem v. Northstar Location Services L.L.C., 1:09-CV-06711 
(N.D. Ill.);
    Moorehead v. Franklin Collection Service, Inc., 1:11-CV-05936 
(N.D. Ill.);
    Muha v. Encore Receivable Management Inc., 2:05-CV-00940 (E.D. 
Wis.);
    Mund v. EMCC, Inc., 0:08-CV-00936 (D. Minn.);
    Murphy v. Capital One Bank, 1:08-CV-00801 (N.D. Ill.);
    Navarrette v. TD Banknorth, N.A., 5:07-CV-02767 (N.D. Cal.);
    Nobles v. MBNA Corp., 3:06-CV-03723 (N.D. Cal.);
    Noel Frederick v. FIA Card Services, N.A., 2:09-CV-03419 (C.D. 
Cal.);
    Norman v. Franklin Collection Services, Inc., 1:08-CV-00177 
(N.D. Miss.);
    O'Connor v. AR Resources Inc, 3:08-CV-01703 (D. Conn.);
    Pabon-Aponte v. Empresas Berrios, Inc., 3:06-CV-01865 (D.P.R.);
    Palmer v. Far West Collection Services, Inc., 5:04-CV-03027 
(N.D. Cal.);
    Parlier v. LVNV Funding, L.L.C., 1:11-CV-01586 (N.D. Ill.);
    Pascal v. Feigelson, 7:08-CV-00550 (S.D.N.Y);
    Passafiume v. National Recovery Agency, Inc., 2:10-CV-00796 
(E.D.N.Y.);
    Pawelczak v. Bureau of Collection Recovery, L.L.C., 1:11-CV-
01415 (N.D. Ill.);
    Perez v. Complete Collection Service of South Florida, Inc., 
0:09-CV-61124 (S.D. Fla);
    Perry v. Harris Financial Management, L.L.C., 1:07-CV-05177 
(N.D. Ill.);
    Peterson v. Resurgent Capital Services L.P., 2:07-CV-00251 (N.D. 
Ind.);
    Philip Rannis v. Fair Credit Lawyers Inc., 5:06-CV-00373 (C.D. 
Cal.);
    Poet v. Security Credit Systems, Inc., 1:10-CV-01068 (D.N.J.);
    Powell v. Procollect, Inc., 3:11-CV-00846 (N.D. Tex.);
    Pozzuolo v. NCO Financial Systems, Inc., 2:07-CV-01295 (E.D. 
Pa.);
    Prescott v. Autovest, L.L.C., 2:11-CV-00219 (E.D. Tex.);
    Prieto v. HBLC, Inc., 1:08-CV-02718 (N.D. Ill.);
    Quesenberry v. Alliant Law Group P.C., 4:09-CV-00414 (E.D. 
Tex.);
    Quinones-Malone v. Pellegrino & Feldstein, L.L.C., 2:08-CV-03295 
(D.N.J.);
    Quiroz v. Revenue Production Management, Inc., 1:08-CV-00879 
(N.D. Ill.);
    Radicchi v. Palisades Collection L.L.C., 1:08-CV-02607 
(E.D.N.Y.);
    Ramirez v. Green Tree Servicing L.L.C., 1:09-CV-01195 (N.D. 
Ill.);
    Ramirez v. Palisades Collection, L.L.C., 1:07-CV-03840 (N.D. 
Ill.);
    Rayl v. Moores, 1:09-CV-00554 (S.D. Ind.);
    Reed v. Icon Fitness & Arvest Bank & Dent-A-Med, 3:08-CV-00677 
(E.D. Va.);
    Reeves v. New Horizons Financial Services, Inc., 0:08-CV-04866 
(D. Minn.);
    Reichel v. Academy Collection Service Management, L.L.C., n/k/a 
Monarch Recovery Management, Inc., 1:10-CV-01119 (C.D. Ill.);
    Rice v. Praxis Financial Solutions, Inc., 1:11-CV-08488 (N.D. 
Ill.);
    Richard v. West Asset Management, Inc., 1:09-CV-03864 (N.D. 
Ill.);
    Richardson v. Allied Interstate, Inc., 3:09-CV-02265 (D.N.J.);
    Ritthaler v. Riddle & Associates, P.C., 1:08-CV-06920 (N.D. 
Ill.);
    Robinson v. Thompson, 3:10-CV-04143 (D.N.J.);
    Rodriguez v. Sallie Mae (SLM) Corp., 3:07-CV-01866 (D. Conn.);
    Rosenau v. Unifund Corp., 2:06-CV-01355 (E.D. Pa.);
    Rubinstein v. Department Stores National Bank, 1:08-CV-01596 
(S.D.N.Y);
    Russo v. Puckett & Redford P.L.L.C., 2:09-CV-00433 (W.D. Wash.);
    Ruth v. Triumph Partnerships L.L.C., 3:06-CV-50042 (N.D. Ill.);
    Rutha Smith v. Heritage Financial Recovery Services, 2:10-CV-
03922 (D.N.J.);
    Ryder v. Diversified Ambulance Billing L.L.C., 8:09-CV-02058 
(M.D. Fla.);
    Ryder v. Equifax Information Services, L.L.C., 1:09-CV-07626 
(N.D. Ill.);
    Sachar v. Iberiabank Corp. (In re Checking Account Overdraft 
Litig.)**, 1:11-CV-22844-JLK (S.D. Fla);
    Sadler v. Midland Credit Management, Inc., 1:06-CV-05045 (N.D. 
Ill.);
    Sanchez v. Northstar Location Services, L.L.C., 1:08-CV-04885 
(N.D. Ill.);
    Santoro v. Aargon Agency, Inc., 2:07-CV-01003 (D. Nev.);
    Sargent v. Hibbard, 1:08-CV-01463 (S.D. Ind.);
    Sargent v. St. Vincent Hospital & Health Care Center, Inc., 
1:08-CV-01464 (S.D. Ind.);
    Savedoff v. Access Group, Inc., 1:06-CV-00135 (N.D. Ohio);
    Scally v. Hilco Receivables, 1:04-CV-03035 (N.D. Ill.);
    Schulte v. Fifth Third Bank, 1:09-CV-06655 (N.D. Ill.);
    Seawell v. Universal Fidelity Corp., 2:05-CV-00479 (E.D. Pa.);
    Sergio Cedeno v. Bureau of Collection Recovery Inc., 8:10-CV-
01960 (C.D. Cal.);
    Serren v. LVNV Funding, L.L.C., 1:06-CV-03574 (N.D. Ill.);
    Shane v. Ferrucci, 1:11-CV-00946 (S.D. Ind.);
    Shelton v. Crescent Bank & Trust, 1:08-CV-01799 (D. Md.);
    Shippey v. Weltman, Weinberg & Reis Co., L.P.A., 3:10-CV-00303 
(W.D. Pa.);
    Short v. Anastasi & Associates, 0:11-CV-01612 (D. Minn.);
    Silva v. Patenaude & Felix, 5:08-CV-03019 (N.D. Cal.);
    Sims v. Cellco Partnership*, 3:07-CV-01510 (N.D. Cal.);
    Skusenas v. Linebarger, Goggan, Blair & Sampson, L.L.P., 1:10-
CV-08119 (N.D. Ill.);
    Slade v. Law Offices of Daniel C Consuegra P.L., 4:11-CV-00005 
(N.D. Fla.);
    Smith v. Allied Interstate, Inc., 1:08-CV-06986 (S.D.N.Y);
    Smith v. GB Collects, L.L.C., 1:09-CV-05917 (D.N.J.);
    Smith v. Lyons, Doughty & Veldhuis, P.C., 1:07-CV-05139 
(D.N.J.);
    Smith v. Professional Billing & Management Services, Inc., 1:06-
CV-04453 (D.N.J.);
    Smith v. Syndicated Office Systems, Inc., 3:07-CV-00131 (W.D. 
Tex.);
    Soutter v. Equifax Information Services, L.L.C., 2:10-CV-03574 
(E.D. Pa.);
    Starzynski v. Friedman & Wexler, L.L.C., 1:07-CV-01254 (N.D. 
Ill.);
    Steele v. Paypal, Inc., 1:05-CV-01720 (E.D.N.Y.);
    Stern v. Cingular*, 2:05-CV-08842 (C.D. Cal.);
    Swain v. Cach, L.L.C., 5:08-CV-05562 (N.D. Cal.);
    Sylverne v. Data Search N.Y., Inc., 1:08-CV-00031 (N.D. Ill.);
    Sypniewski v. NCO Financial Systems, Inc., 1:08-CV-00239 (N.D. 
Ill.);
    Taylor v. Apex Financial Management L.L.C., 2:09-CV-00229 (E.D. 
Tex.);
    Tenerelli v. Cardworks Servicing, L.L.C., 1:09-CV-02651 (N.D. 
Ill.);
    Thomas v. CitiFinancial Auto Ltd., 1:07-CV-00721 (D. Md.);
    Thornton v. Belkin, Burden, Wenig & Goldman, L.L.P., 1:09-CV-
05901 (S.D.N.Y);
    Thornton v. Midland Credit Management, Inc., 1:09-CV-05685 (N.D. 
Ill.);
    Tidwell v. Asset Recovery Solutions, L.L.C., 1:09-CV-04022 
(E.D.N.Y.);
    Tornes v. Bank of America (In re: Checking Account Overdraft 
Litig)**, 1:08-CV-23323-JLK (S.D. Fla);
    Trempe v. HBLC, Inc., 1:07-CV-05945 (N.D. Ill.);
    Trombley v. National City Bank, 1:10-CV-00232 (D.D.C.);
    Urbaniak v. Asset Acceptance, L.L.C., 1:08-CV-00551 (N.D. Ill.);
    Urbaniak v. Credigy Receivables, Inc., 1:07-CV-06326 (N.D. 
Ill.);
    Utility Consumers' Action Network v. Sprint Solutions*, 3:07-CV-
02231 (S.D. Cal.);
    Valdez v. Sprint Nextel*, 3:06-CV-07587 (N.D. Cal.);
    Vallejo, Jr. v. National Credit Adjusters L.L.C., 2:10-CV-00103 
(N.D. Ind.);
    Varela v. Moskowitz, Mandell, Salim & Simowitz, P.A., 0:07-CV-
61143 (S.D. Fla);
    Vasilas v. Subaru of America*, 1:07-CV-02374 (S.D.N.Y);
    Villaflor v. Equifax Information Services, L.L.C., 3:09-CV-00329 
(N.D. Cal.);
    Villasenor v. American Signature, Inc., 1:06-CV-05493 (N.D. 
Ill.);
    Vincent v. Wolpoff & Abramson, L.L.P., 2:08-CV-00423 (W.D. Pa.);
    Voris v. Resurgent Capital Services L.P., 3:06-CV-02253 (S.D. 
Cal.);
    Walker v. Discover Financial Services, Inc., 1:10-CV-06994 (N.D. 
Ill.);
    Wang v. Asset Acceptance L.L.C., 3:09-CV-04797 (N.D. Cal.);
    Wanty v. Messerli & Kramer P.A., 2:05-CV-00350 (E.D. Wis.);
    Washington v. Unifund CCR Partners, 1:07-CV-00150 (N.D. Ill.);

[[Page 32933]]

    Watts v. Capital One Auto Finance, Inc., 1:07-CV-03477 (D. Md.);
    Weinstein v. Asset Acceptance L.L.C., 1:07-CV-05967 (N.D. Ill.);
    Werts v. Midland Funding, L.L.C., 1:09-CV-02311 (D.D.C.);
    Wess v. Storey, 2:08-CV-00623 (S.D. Ohio);
    Whelan v. Keybank U.S.A., N.A., 1:03-CV-01118 (N.D. Ohio);
    Whitehead-Bey v. Advantage Assets II, Inc., 2:11-CV-05199 (E.D. 
Pa.);
    Wilfong v. National Capital Management, L.L.C., 1:12-CV-02979 
(N.D. Ill.);
    Wilhelm v. Allied Interstate, Inc., 1:07-CV-01497 (N.D. Ill.);
    Williams v. Brock & Scott, P.L.L.C., 1:09-CV-00722 (M.D.N.C.);
    Williamson v. Unifund CCR Partners, 8:08-CV-00218 (D. Neb.);
    Wilson v. Cybrcollect, Inc., 5:09-CV-00963 (N.D. Cal.);
    Woldman v. Chase Bank U.S.A., N.A., 1:10-CV-00865 (N.D. Ill.);
    Wysocki v. City National Bank, 1:10-CV-03850 (N.D. Ill.);
    Ybarrondo v. NCO Financial Systems, 3:05-CV-02057 (S.D. Cal.);
    Zirogiannis v. Professional Recovery Consultants, Inc., 2:11-CV-
00887 (E.D.N.Y.);
    Zugay v. Professional Recovery Consultants, Inc., 1:10-CV-01944 
(E.D.N.Y.).

Appendix B to Section 1022(b)(2) Analysis--Cases Not Used in Projecting 
Incremental Costs From Proposal

    Adighibe v. Clifton Telecard Alliance (CTA), 2:07-CV-01250 
(D.N.J.);
    Angela Minor v. Real Page, Inc., 4:09-CV-00439 (E.D. Tex.);
    Anthony v. Fifth Third Bank, 1:08-CV-04359 (N.D. Ill.);
    Barandas v. Old Republic National Title Insurance Co., 2:06-CV-
01750 (D.N.J.);
    Barlo v. First Financial Bank N.A., 2:10-CV-00235 (N.D. Ind.);
    Barreto v. Center Bank, 1:10-CV-06554 (N.D. Ill.);
    Bernal v. American Money Centers Inc., 2:05-CV-01327 (E.D. 
Wis.);
    Blaylock v. First American Title Insurance Co., 2:06-CV-01667 
(W.D. Wash.);
    Boecherer v. Burling Bank, 1:08-CV-01332 (N.D. Ill.);
    Bowen v. Groome, 3:11-CV-00139 (S.D. Ill.);
    Brake v. Highland Corp., 3:11-CV-00620 (M.D. Tenn.);
    Bruner v. America United Bank & Trust Co., 1:08-CV-00124 (N.D. 
Ill.);
    Castro v. Old Republic National Title Insurance Co., 3:06-CV-
00784 (D. Conn.);
    Charles v. Lawyers Title Insurance Corp., 2:06-CV-02361 
(D.N.J.);
    Chernyavsky v. Inland Bank & Trust, 1:08-CV-04009 (N.D. Ill.);
    Clay William Fisher v. Finance America, 8:05-CV-00888 (C.D. 
Cal.);
    Cole v. Automated Financial, L.L.C., 1:11-CV-03299 (N.D. Ill.);
    Couch v. Indians, Inc., 1:11-CV-00963 (S.D. Ind.);
    Cummings v. Resource Federal Credit Union, 1:10-CV-01309 (W.D. 
Tenn.);
    Donald R Chastain v. Union Security Life Insurance Co., 2:06-CV-
05885 (C.D. Cal.);
    Dover v. GNC Community Federal Credit Union, 2:09-CV-00810 (W.D. 
Pa.);
    Dragotta v. Northwest Bancorp, Inc., 2:09-CV-00632 (W.D. Pa.);
    Dragotta v. West View Savings Bank, 2:09-CV-00627 (W.D. Pa.);
    Drexler v. George Loukas Real Estate, Inc., 1:07-CV-05471 (N.D. 
Ill.);
    Ellens v. Genworth Life & Annuity Insurance Co., 1:08-CV-02640 
(N.D. Ohio);
    Escalante v. Lincoln Park Savings Bank, 1:08-CV-06152 (N.D. 
Ill.);
    Escalante v. Travelex Currency Services, Inc., 1:09-CV-02209 
(N.D. Ill.);
    Estate of Frank Townsend v. Protective Life Insurance Co., 1:10-
CV-02365 (N.D. Ohio);
    Evans & Green, L.L.P. v. Mortgage Depot, L.L.C., 6:07-CV-03275 
(W.D. Mo.);
    Ewing v. Administrative Systems Inc., 2:08-CV-00797 (W.D. 
Wash.);
    Flores v. Bank, 1:07-CV-06403 (N.D. Ill.);
    Gaylor v. Comala Credit Union, 2:10-CV-00725 (M.D. Ala.);
    Gendernalik v. Fred Hunter Memorial Sevices, Inc., 0:08-CV-60274 
(S.D. Fla);
    Gibilante v. Wachovia Mortgage Corp., 2:07-CV-02236 (E.D. Pa.);
    Goldshteyn v. Argonne Credit Union, 1:10-CV-05402 (N.D. Ill.);
    Greiff v. First Commonwealth Bank, 2:10-CV-01224 (W.D. Pa.);
    Greiff v. Jamestown Area Community Federeal Credit Union, 1:10-
CV-00404 (W.D.N.Y);
    Hall v. Vitran Express, Inc., 1:09-CV-00800 (N.D. Ohio);
    Hamilton v. Wells Fargo Bank, N.A., 4:09-CV-04152 (N.D. Cal.);
    Hansen v. Monumental Life Insurance Co., 3:05-CV-01905 (D. 
Conn.);
    Harrison v. First Independence Bank, 5:09-CV-12684 (E.D. Mich.);
    Harrison v. Flagstar Bank F.S.B., 5:09-CV-12687 (E.D. Mich.);
    Hart v. Guardian Credit Union, 2:10-CV-00855 (M.D. Ala.);
    Hays v. Commonwealth Land Title Insurance Co., 3:10-CV-05336 
(N.D. Cal.);
    Helkowski v. Clearview Federal Credit Union, 2:09-CV-00609 (W.D. 
Pa.);
    Howard v. Canandaigua National Bank & Trust, 6:09-CV-06513 
(W.D.N.Y);
    Hrnyak v. Mid-West National Life Insurance Co. of Tennessee, 
1:08-CV-02642 (N.D. Ohio);
    In Re: Trans Union Corp. v. Trans Union L.L.C., 1:00-CV-04729 
(N.D. Ill.);
    Jackman v. Global Cash Access Holdings, Inc., 2:09-CV-00897 
(W.D. Pa.);
    Katz v. Palisades Federal Credit Union, 7:09-CV-01745 (S.D.N.Y);
    Kinder v. Elga Credit Union, 5:10-CV-11549 (E.D. Mich.);
    Kinder v. Lenco Credit Union, 5:11-CV-11655 (E.D. Mich.);
    Kistner v. Corus Bank, N.A., 1:08-CV-02797 (N.D. Ill.);
    Lengrand v. Wellpoint, Inc., 3:11-CV-00333 (E.D. Va.);
    Lentini v. Fidelity National Title Insurance Co. of New York, 
3:06-CV-00572 (D. Conn.);
    Lindsey v. American Security Insurance Co., 2:08-CV-00126 (E.D. 
Ky.);
    Lindsey v. Unitrin Auto & Home Insurance Co., 2:08-CV-00127 
(E.D. Ky.);
    Lockwood v. Certegy Check Services, Inc., 8:07-CV-01434 (M.D. 
Fla.);
    Louisma v. Automated Financial, LLC, 1:11-CV-02104 (N.D. Ill.);
    Mains v. DB Direct, 2:07-CV-02037 (C.D. Ill.);
    Markoff v. Independent Bank Corp., 2:09-CV-12639 (E.D. Mich.);
    Marsh v. ATM Capital Management, Inc., 1:07-CV-05808 (N.D. 
Ill.);
    Marsi Zintel v. Pacific Community Federal Credit Union, 2:09-CV-
05517 (C.D. Cal.);
    Mathias v. Carver Federal Savings Bank, 1:08-CV-05041 
(E.D.N.Y.);
    McCormick v. 7-11, Inc., 3:06-CV-00127 (N.D. Tex.);
    McGill v. Parker Centennial Assurance Co., 1:08-CV-02766 (N.D. 
Ohio);
    McKinnie v. JP Morgan Chase Bank N.A., 2:07-CV-00774 (E.D. 
Wis.);
    Mendelovits v. Albany Bank & Trust Co., N.A., 1:08-CV-03870 
(N.D. Ill.);
    Mills v. HEB Grocery Co., L.P., 4:10-CV-04974 (S.D. Tex.);
    Neals v. Mortgage Guarantee Insurance Corp., 2:10-CV-01291 (W.D. 
Pa.);
    Nguyen v. South Central Bank, 1:11-CV-02612 (N.D. Ill.);
    Nicholas v. RBS Citizens, N.A., 2:09-CV-01697 (E.D.N.Y.);
    Nolf v. Allegheny Valley Bank of Pittsburgh, 2:09-CV-00645 (W.D. 
Pa.);
    Ori v. Fifth Third Bank, 2:08-CV-00432 (E.D. Wis.);
    Orser v. Select Portfolio Servicing Inc., 2:05-CV-01507 (W.D. 
Wash.);
    Pamela Phillips v. Accredited Home Lenders Holding Co., 2:06-CV-
00057 (C.D. Cal.);
    Parker v. First-Citizens Bank & Trust Co., 3:09-CV-00588 (M.D. 
Tenn.);
    Patrick Mahoney v. Fidelity National Title Co., 8:08-CV-00561 
(C.D. Cal.);
    Paul Zintel v. Ironstone Bank, 8:09-CV-00867 (C.D. Cal.);
    Pavle v. Arizona Central Credit Union, 4:10-CV-00234 (D. Ariz.);
    Perez v. First American Title Insurance Co., 2:08-CV-01184 (D. 
Ariz.);
    Piontek v. Baltimore County Savings Bank, F.S.B., 1:10-CV-03101 
(D. Md.);
    Piontek v. CU Service Network, L.L.C., 8:10-CV-01202 (D. Md.);
    Piontek v. Frederick County Bank, 8:10-CV-01912 (D. Md.);
    Piontek v. VIST Financial Corp., 5:10-CV-02715 (E.D. Pa.);
    Polevoy v. Devon Bank, 1:08-CV-04822 (N.D. Ill.);
    Popovic v. Dollar Bank, 2:10-CV-00432 (W.D. Pa.);
    Popovic v. USX Federal Credit Union, 2:09-CV-00631 (W.D. Pa.);
    Press v. Catskill Hudson Bank, 7:08-CV-11335 (S.D.N.Y);
    Reich v. GCM Federal Credit Union, 0:10-CV-00606 (D. Minn.);
    Richardson v. Harris County Federal Credit Union, 4:11-CV-01550 
(S.D. Tex.);
    Richardson v. Houston Federal Credit Union, 4:10-CV-03768 (S.D. 
Tex.);
    Rodriguez v. Corus Bank, N. A., 1:08-CV-03511 (N.D. Ill.);
    Rodriguez v. United Title Co., 3:05-CV-01019 (S.D. Cal.);
    Rushton v. First National Bank in Cooper, 4:11-CV-00038 (E.D. 
Tex.);
    Ryals v. Hireright Solutions, Inc., 3:09-CV-00625 (E.D. Va.);

[[Page 32934]]

    Ryan v. ATM Link, Inc., 1:09-CV-07747 (N.D. Ill.);
    Sebrow v. HSBC Bank, U.S.A., N.A., 2:08-CV-03162 (E.D.N.Y.);
    Shaked v. Wachovia Bank, N.A., 7:08-CV-06984 (S.D.N.Y);
    Shelton v. Crescent Bank & Trust, 1:08-CV-01799 (D. Md.);
    Siragusa v. Advance Financial Federal Credit Union, 2:09-CV-
00328 (N.D. Ind.);
    Siragusa v. Corporate America Family Credit Union, 1:08-CV-04007 
(N.D. Ill.);
    Siragusa v. North Community Bank, 1:09-CV-02687 (N.D. Ill.);
    Smith v. Credit Union 1, 1:07-CV-05939 (N.D. Ill.);
    Stone v. Corus Bank, N.A., 1:08-CV-01746 (N.D. Ill.);
    Stone v. Marquette Bank, 1:08-CV-06388 (N.D. Ill.);
    Syran v. LexisNexis Group, 3:05-CV-00909 (S.D. Cal.);
    Taylor v. Apex Financial Management L.L.C., 2:09-CV-00229 (E.D. 
Tex.);
    Tedrow v. Cowles, 2:06-CV-00637 (S.D. Ohio);
    Thomas v. Investex Credit Union, 4:11-CV-00354 (S.D. Tex.);
    Thomas v. Mid-Missouri Bank, 6:10-CV-03139 (W.D. Mo.);
    Tovar v. Plaza Bank, 1:08-CV-04008 (N.D. Ill.);
    Vasuki Parthiban v. GMAC Mortgage Corp., 8:05-CV-00768 (C.D. 
Cal.);
    Webb v. Cleverbridge, Inc., 1:11-CV-04141 (N.D. Ill.);
    Wike v. Vertrue, Inc., 3:06-CV-00204 (M.D. Tenn.);
    Williams v. Staffing Solutions Southeast, Inc., 1:10-CV-00956 
(N.D. Ill.);
    Witriol v. LexisNexis Group, 3:06-CV-02360 (S.D. Cal.).

[FR Doc. 2016-10961 Filed 5-23-16; 8:45 am]
BILLING CODE 4810-AM-P